Fraudulent trading

Solicitor advice on fraudulent trading

Fraudulent trading is a serious business crime that occurs when a company’s directors knowingly carry on business with the intention of defrauding creditors. This typically involves concealing the company’s true financial position or trading while insolvent.

In our experience it can have very serious consequences for the directors if it is not dealt with correctly. If there are criminal proceedings it is vital that a highly professional legal team acts for the director in what frequently complicated proceedings. The stakes can be very high.

Our insolvency lawyers advise company directors worried about or facing allegations of fraudulent trading. Based in Central London, we have many years of experience, which is key in this specialist area. Please do call or email to discuss your situation in strict confidence.

Fraudulent trading – the legal test

The primary legislation governing fraudulent trading in the UK is the Insolvency Act 1986. Section 213 of this Act sets out the specific criteria for fraudulent trading, including:

• Knowingly carrying on business when insolvent or likely to be insolvent –  The directors must be aware of the company’s financial situation; and
• Intention to defraud creditors – the director(s) must have a deliberate intention to mislead or deceive creditors.

Civil and Criminal Aspects

Fraudulent trading can have both civil and criminal consequences:

• Civil law consequences – directors may be personally liable to contribute to the company’s debts. This can result in significant financial loss.
• Criminal law consequences – fraudulent trading can be a criminal offence, leading to imprisonment, fines, or both.

If the company is wound up the Official Receiver will be appointed to deal with the company and then an insolvency practitioner. It is very important to co-operate with them as far as possible. At the end of the process the insolvency practitioner will report to the government whether the directors should be prosecuted and struck off as directors and or fined.

Defences

Directors can potentially defend themselves against allegations of fraudulent trading by demonstrating:

• Lack of knowledge – being unaware of the company’s financial situation.
• Honest belief in the company’s solvency – genuine belief the company was solvent.
• Reasonable steps to prevent insolvency – the director asserts that he/she took appropriate measures to avoid insolvency.

We always work exhaustively with our clients to ensure that they fully understand the defences open to them. It can be the case that once the true facts are established that the case can fall away.

Penalties

The penalties for fraudulent trading can be severe, including:

• Personal liability for debts – directors may be held personally responsible for the company’s debts.
• Fines – significant fines can be imposed.
• Imprisonment – in serious cases, directors may face imprisonment.
• Disqualification as a director – this can be for many years.

How we can help

A qualified lawyer can provide invaluable assistance in matters involving fraudulent trading by:

• Advising on legal rights and obligations – we advise on the legal implications of fraudulent trading allegations and provide guidance on potential defences.
• Representing clients in court – if legal proceedings are necessary, we can represent you in court and advocate for your rights.
• Negotiating with creditors – we can help negotiate with creditors to reach settlement agreements.
• Investigating allegations – we conduct investigations to gather evidence and identify potential defences.

Where there has been fraud the director cannot hide behind the company but can become personally liable for debts. This can be very helpful for a victim and for the director it is vital to ensure that the allegation of fraud is not made out.

The allegation of fraud is a demanding one to prove and there are strict court rules when making such an allegation. Advice must be taken to ensure that the correct course of action is taken.

Director vicarious liability for employee fraud

While a director is generally not personally liable for the debts of a company, they can be held vicariously liable for the fraudulent trading of their employees if they have authorised or participated in the fraudulent activity. This means that the director can be held responsible for the actions of their employees even if they were not directly involved.

It’s important to note that vicarious liability is a complex area of law, and the specific circumstances of each case will determine whether a director can be held liable. If you are facing allegations of vicarious liability for fraudulent trading, it is strongly recommended to seek legal advice from a qualified lawyer.

Our team have over 35 years of experience. We have acted for numerous clients facing these issues and can represent you to ensure that you obtain the best possible result.