Fraudulent trading

Introduction

Fraudulent trading occurs where the company's business is carried on with intent to defraud creditors or for any fraudulent purpose.

Fraudulent trading can give rise to:

• civil liability under s213 Insolvency Act 1986 if the company is in the course of being wound up
• criminal liability under s993 CA06 whether or not the company is in the course of being wound up.

Establishing liability

It is necessary to establish dishonest intent. In Re William C Leith Bros (1932) it was said that if the directors carry on the business and cause the company to incur further debts at a time when they know that there is no reasonable prospect of those debts being paid this is a proper inference of dishonesty. The court also added that if the directors honestly believed the debts would eventually be paid there would be no intent to defraud.

The second point required to establish liability is that the person concerned shall be knowingly a party to the fraudulent trading.

In Re Maidstone Buildings (1971) it was established that a person is not 'party' merely by reason of knowledge. They must take some active step, such as the ordering of goods.

Consequences

Fraudulent trading can give rise to the following consequences:

• The court can order the individual to contribute to the company's assets.
• If a director, they may be disqualified for 15 years under CDDA86.
• If found guilty of the criminal offence, the individual can be fined and/or imprisoned for up to 10 years.

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Tags:	Insolvency Act 1986;Companies Act 2006