Fraudulent trading is a criminal offence that is taken very seriously by the law. This type of trading differs from wrongful trading because it involves intentional deception by the directors of a company. When a company goes into liquidation, an investigation may uncover the evidence of fraudulent trading, leading to severe penalties and sanctions for those involved.
Under the laws of incorporation, directors are typically protected from financial responsibility by limited liability. However, if they are found to have acted inappropriately or with the intention of committing fraud, the legal veil of protection can be lifted. For instance, if the directors of a limited company actively take steps to worsen the financial losses of creditors, they may face legal consequences.
Detecting fraudulent activities within a company
If a company reaches the stage of liquidation, the responsible party, which may be an insolvency practitioner or an appointed Official Receiver, is obligated to investigate the reasons for its failure and report the findings to a team within the Insolvency Service. This investigation serves to protect the public from directors who use the corporate structure for fraudulent purposes.
As directors take on statutory responsibilities when they assume their role, their priorities shift if their company becomes insolvent. By law, they must prioritise the interests of creditors to reduce their financial losses.
It is worth noting that fraudulent trading in a limited company is a criminal offence under the Insolvency Act, 1986 and carries severe penalties for directors. If it is discovered that directors acted with the intent to defraud, the veil of incorporation may be lifted and they may lose the benefit of limited liability for business debts.
The occurrence of fraud in limited companies
Fraudulent trading by limited company directors is a criminal offence under the Insolvency Act 1986. In order to protect the public from unethical practices, the office-holder, who may be an insolvency practitioner or an appointed Official Receiver, is obligated to conduct an investigation into the company’s failure and report their findings to a specialist team within the Insolvency Service.
As a director, you accept statutory duties and your priorities must change if your company enters insolvency. By law, the interests of creditors must be prioritised to minimise their financial losses.
Here are some actions taken by directors that may result in allegations of fraudulent trading:
- Accepting customer orders and financial deposits without any intention of fulfilling them
- Obtaining additional credit from suppliers while fully aware that the company cannot make the required repayments
- Deliberately worsening the financial losses of creditors
- Continuing to trade even when the company is insolvent
- Concealing company assets or selling them for less than their true value
- Diverting company funds for personal benefit or the benefit of family members or friends
It is important to note the difference between fraudulent trading and wrongful trading lies in the intent behind director actions. Fraudulent trading involves knowingly carrying out actions that will negatively impact customers or suppliers.
Identifying the types of fraud in limited companies – both long-term and short-term
A company that was established with the intent to commit fraud can experience long-term fraudulent activities. At first, the directors might pay their suppliers promptly, but eventually, they may aim to deceive their creditors by taking on larger amounts of credit, placing larger orders, and failing to repay the debts.
Initially, a company may conduct its business operations in an honest manner. However, over time, the directors may take advantage of the trust placed in them by suppliers by making large credit orders with no intention of repaying, which can lead to severe financial difficulties for creditors. The aftermath of fraudulent trading by a single company can quickly spiral and result in a chain reaction affecting other businesses, suppliers, and customers alike.
The consequences faced by company directors in cases of fraudulent trading
Fraudulent trading is a serious offence that carries more severe penalties compared to wrongful trading. It is a criminal act under the Insolvency Act 1986 and must be proven by the Insolvency Service. The consequences of being found guilty of fraudulent trading can include:
- Significant fines
- Long-term disqualification, up to 15 years
- Increased personal liability for company debts
- A prison sentence of up to 10 years
In addition to the legal ramifications, a director found guilty of fraudulent trading will also experience significant damage to their reputation, which may impact their ability to find employment or hold official positions in the future.
The burden of proof is on the Insolvency Service to demonstrate the director’s intent to defraud. If the intent is proven and a director violates a court order, such as a disqualification or compensation order, they may face a prison sentence.
For more information on what constitutes fraudulent trading for a limited company, you can reach out to the expert team at InsolvencySupport.co.uk. They offer same-day consultations for free and have a broad network of offices throughout the UK.