Fraudulent Trading - the Companies Act, the Fraud Act and Conspiracy to Defraud
Types of Fraudulent Trading
Fraudulent trading investigations typically arise as a result of complaints to various government agencies, including the police, by creditors who have lost money as a result of a business ceasing trading, disappearing, or simply going into liquidation leaving unpaid debts. Some of these situations can arise when otherwise bona fide businesses have got into difficulties and traded too long on their credit accounts.
At the other extreme is the so-called ‘long firm fraud', in which companies are set up for the single purpose of defrauding creditors, often by buying high value electrical goods products which can be easily sold. These companies either set up small credit accounts and pay them at first to establish trust and a good credit rating, before buying large quantities of goods and then disappearing with the goods.
Fraudulent Trading How the Law Works
According to section 993 of the Companies Act 2006, if any business of a company is carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, every person who is a knowing party to that activity commits an offence. This applies to wound up companies and active ones.
The Fraud Act 2006, s. 9 is the counterpart to section 993 which criminalises fraudulent trading when committed by unincorporated businesses such as those operated by sole traders or partnership firms, or by other people, such as employees, connected with such businesses.
These cases will often involve a company which has become insolvent. The prosecution will allege that the company has continued to obtain credit when the director or directors knew that there was little or no chance of the creditors being paid.
The Prosecution Proving Dishonesty and The Intention to Defraud
It is the jury, and not the judge, who have to decide whether the defendant (s) acted dishonestly, and they must be sure beyond reasonable doubt. This applies to all Crown Court criminal cases. There is no jury in the Magistrates' Court and in cases fought there the judge decides whether a defendant was dishonest.
The test for dishonesty is that the action must be regarded by everyday people as dishonest. So it's not enough for a fraudulent trading solicitor to say on behalf of his or her client that the client thought what he or she was doing was not dishonest.
To prove the offence, the prosecution doesn't have to prove that the defendant intended to cause financial loss to another. Simply turning a blind eye to the fact that someone else's financial interests could be at risk will be enough, even if the allegation is not as obviously criminal as a long firm fraud. So a director who obtains credit believing that the creditor will eventually be paid through the insolvency process may still be convicted.
The Trading Itself ‘carrying on of the business'
The offence is not aimed at a one-off fraud committed by a director where it is separate from the usual company business. That type of fraud could amount to another offence. However, a single action could provide reason to charge under s. 993 of the Companies Act if it can properly be said to be carrying on the company business. In one Court of Appeal case an application for a licence from the Civil Aviation Authority did amount to carrying on the company business as the licence was an integral aspect of the running of the business.
Who can be guilty of fraudulent trading?
Case law has asserted that fraudulent trading can only be committed by someone who has a controlling or managerial function in the company. However, there seems nothing to stop more junior staff being charged with aiding and abetting (which effectively means assisting) the offence, or conspiracy. This could put employees, such as branch managers, in a very difficult position if they are aware of the fraudulent activities of their supervisors and feel unable to do anything about it.
Sentences for Fraudulent Trading and Long Firm Frauds
This is an offence that can be dealt with both in the Magistrates Court and in the Crown Court. The vast majority of the cases are dealt with in the Crown Court because of the large amounts of money involved.
The maximum sentence is ten years in prison. For offences which are alleged to have taken place before January 15th 2007, the maximum is 7 years.
Only the most serious and blatant cases will result in sentences approaching the maximum. To attract this length of sentence, the offending must have been carried out over a long time, and be for a very large amount (at least several million), and be shown to be either blatant and reckless, or a long firm fraud, set up specifically for fraudulent purposes.
At the other end of the spectrum there will be cases where there had been a viable business which ran into financial problems, and the directors had attempted to trade themselves out of trouble, but not for overtly dishonest purposes. These kind of cases will attract less serious penalties. Sentences of 1-3 years are, however, common, even for offending which results in a loss of less than a million. Of course, a guilty plea at the first Crown Court hearing, a defendant with no previous convictions, and other mitigating circumstances can result in a substantial reduction in the sentence.
Where there has been a conviction, legal confiscation proceedings for the lost assets may be brought by the prosecution.
Evidence and Strategy in Prosecutions for Fraudulent Trading
A Proactive Defence Case
A competent fraudulent trading solicitor should always be aware not only of the need to challenge the prosecution case, but also of the importance of building a proactive defence case. Knowing and being able to challenge the prosecution material is a good foundation, but it is only half the job, and preparing just this part of the case is to play a dangerous game. The defence case preparation should include substantial work focused on two areas, the client and the company. If a long firm fraud is alleged, the legitimacy of the company may be a factor.
The Background of the Client
Of course, every case is different, but in many cases, the prosecution will attempt to describe reckless, irresponsible and dishonest behaviour. It may be the defence's job to proactively tell a different, more positive story to the jury. The client's position in the company, in terms of his or her responsibilities and role in relation to other key members must be explained in full detail.
Serious time must be spent by the solicitor and barrister on the defence team with the client. This will not only help with obtaining this important background information, but will help the fraudulent trading solicitors portray the client in the best light during the trial. Simply by knowing the client well, they are in a much better position to sell the client to the jury. If the jury like the client, the benefit of the doubt may be given, the client may be viewed as naive rather than dishonest, and may be found not guilty.
When a company has not fulfilled its obligations, it is easy to criticise in hindsight. However, the judgment of directors and managers may have been clouded by their sense of responsibility for the survival of the business, especially if other staff will lose their jobs if the business fails. Managers making orders may not know of the company's inability to pay, or they may be naive about the future prospects.
Alternatively, unforeseen financial problems can spiral before management have an opportunity to properly address their spending, optimistically hoping they will be able to trade out of the difficulties. Risks can be taken in business, but it is only when those risks are taken dishonestly that fraudulent trading can be proven.
A jury may be more sympathetic in any of the above circumstances; for example, if the director or directors hoped or expected to be able to pay the creditors a few days or even weeks after the debt was due to be repaid. However, the longer the directors expect to be unable to pay the money owed, the more likely it may be that the jury will consider the directors to have been dishonest.
Knowing the Financial Position
The defence preparation should also result in a very clear understanding of the company affairs as the client saw them at the time. This will include a valuation of realisable assets or future profits which might have a bearing on whether the business was arguably solvent.
For this to happen, the fraudulent trading solicitors need to request access to as much of the company's financial information as possible, and of course, have a detailed knowledge of the books. A forensic accountant should often be instructed to produce a report to assist the defence. Of course, this should be someone with relevant experience.
It is also worth noting that he or she may be required to give live evidence before a jury and his or her ability to do this effectively may turn out to be as important as the quality of the forensic accountant's report. Showing solvency and that a business was bona fide may be especially relevant in cases where long firm fraud is alleged.
The law in this area can be complicated, and arguments can be presented in different ways. Having an experienced fraudulent trading solicitor is important, and seeking guidance and even free legal advice in the early stages should always be the first step.
Being caught up in an investigation for fraud by misrepresentation can feel stressful and confusing. The fraud act offences have a wide scope and can affect ordinary, law abiding people. That particularly applies to section 2.
Cases of fraud, counterfeit goods and false documents can range from low scale fraud such as using a stolen cheque to large and organised, professional counterfeiting operations such as MTIC Carousel Fraud and large counterfeiting operations.
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