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What is fraudulent trading for a limited company?

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Fraudulent trading explained for company directors

Cases of fraudulent trading may become known if a company enters liquidation and the subsequent investigation reveals that directors have acted with the intent to defraud. Fraudulent trading differs from wrongful trading in its deliberate nature and is a criminal offence under the Insolvency Act, 1986, rather than a matter for the civil courts. 

It carries severe penalties and sanctions for directors. Under the corporate structure, directors enjoy legal separation from their company’s financial affairs. They typically benefit from limited liability for business debts, but this can change under certain conditions.

The ‘veil of incorporation’ may be lifted in situations where directors have acted inappropriately, or with the intent to defraud - if limited company directors set out to deliberately worsen the financial losses of creditors, for example.

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Uncovering fraudulent trading

If the company declines to the point of liquidation, the office-holder (which may be an insolvency practitioner or an appointed Official Receiver) is obliged to conduct an investigation into its failure and report their findings to a specialist team within the Insolvency Service.

This requirement upon the insolvency practitioner to investigate is in place to protect the public at large from unscrupulous directors – those who set up a business under the corporate structure purely to deceive and defraud.

Directors accept statutory duties when they take on the role, and their priorities have to change if their company enters insolvency. The interests of creditors must be prioritised by law to minimise their financial losses.

So what are some examples of fraudulent trading for a limited company?

Limited company fraud

These are just a few director actions that could result in accusations of fraudulent trading:

  • Continuing to accept customer orders and financial deposits with no intention of fulfilling those orders
  • Accepting additional credit from suppliers in the full knowledge that the company cannot make the required repayments
  • Deliberately worsening the financial losses for creditors
  • Deliberately continuing to trade, even when the company is clearly insolvent
  • Hiding company assets or selling them for less than their true value (transaction at undervalue)
  • Misappropriating company funds to benefit the director personally, or benefit their family members/friends

There’s a key difference between fraudulent trading and wrongful trading, and that lies in the intent behind director actions – when they knew how adversely their actions will impact customers or suppliers, and they carry on regardless.

Long term and short-term fraud within a limited company

Long-term fraud

Long-term fraud can occur if a company is set up to deliberately perpetrate fraud. The directors may initially pay their suppliers on time, for example, but eventually seek to defraud their creditors by accepting increasingly higher levels of credit, making larger orders, and then failing to repay.

Short-term fraud

Not necessarily set up for nefarious purposes, the company may trade ‘by the book’ for some time. Eventually, they start making large credit orders from suppliers with no intention of repaying, and potentially create serious financial difficulties for their creditors.

The knock-on effect of fraudulent trading by one company can cause rapid decline and potentially further insolvencies throughout a supply chain. It’s a ripple effect that impacts other businesses, suppliers, and customers alike.

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What are the implications of fraudulent trading for company directors?

Fraudulent trading must be clearly proven by the Insolvency Service, and carries more serious ramifications than cases of wrongful trading. These can include:

  • Heavier fines
  • A longer term of disqualification – potentially up to 15 years
  • Higher levels of personal liability for company debts
  • A prison sentence of up to 10 years

Clearly, a director who has been found guilty of fraud will also suffer serious reputational damage, which may hinder their attempts to find employment and other official roles in the future.

The onus is on the Insolvency Service to prove intent to defraud. If proven, and a director breaches the terms of a court order, such as a disqualification or compensation order, a prison term may be handed down, as this is a criminal offence.

If you would like more information and professional guidance on what constitutes fraudulent trading for a limited company, please get in touch with our expert team. UK Liquidators offers same-day consultations free-of-charge, and operates a broad network of offices around the UK.

Jonathan Munnery
Insolvency & Restructuring Expert

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