Fraudulent behaviour

Introduction

Fraud can be defined as an intentional deception designed for either personal gain. Fraudulent behaviour constitutes criminal activity and can lead to significant consequences, including imprisonment.

There are many types of fraudulent behaviour connected to companies. They include:

• insider dealing and market abuse
• money laundering 
• bribery
• fraudulent and wrongful trading, and
• general criminal activity in the management of a company

Criminal activity in the management of companies

There are a number of criminal offences that could be undertaken by individuals concerned in the operation, management or winding up of a company.

Failure to file accounts or annual returns

Failure to deliver accounts or annual returns on time is a criminal offence. All the directors of a company in default could be prosecuted. If convicted, a director could end up with a criminal record and a fine of up to £5,000 for each offence.

Providing misleading information to an auditor

Under s499 CA 2006, an auditor is entitled to require from the company's officers and employees such information and explanation as he thinks necessary for the performance of his duties as auditor. It is a criminal offence for an officer of the company to:

• provide misleading, false or deceptive information or explanations, or
• fail to provide information or explanations required by the auditor.

An individual can defend such as charge if he can prove that it was not reasonably practicable to provide the information or explanations required.

Business name

Under s82 Companies Act 2006 it is a criminal offence to use a business name that requires prior approval, if that approval has not been obtained.

It is also a criminal offence to fail to disclose the business details that the Act requires. These details include stating the company's corporate name and address for the service of documents.

Company Directors Disqualification Act 1986 (CDDA 1986)

Under s13 CDDA 1986, any person who acts in contravention of a disqualification order (or while an undischarged bankrupt) is guilty of an offence. The maximum penalty is:

• two years' imprisonment and/or a fine on conviction on indictment
• up to six months' imprisonment and/or a fine not exceeding the statutory maximum on a summary conviction.

S15 CDDA 1986, provides that anyone who is involved in the management of a company while disqualified, or who acts on the instructions of someone who is disqualified, shall be personally liable for the company's debts incurred during the time they acted.

Phoenix companies

S216 and s217 Insolvency Act 1986 (IA 1986) are aimed at so-called 'phoenix companies'. They apply where a person was a director or shadow director of a company at any time in the period of 12 months ending with the day before the company went into liquidation.

The provisions apply for the five years following liquidation. They prevent the person being a director of a company with a similar name, or a name which suggests an association with the previous company, without leave of the court.

It is a criminal offence to contravene the provisions, punishable by imprisonment and/or a fine. In addition, the director will be personally liable for any debts of the new company which are incurred when he was involved in its management.

The Fraud Act 2006

The Fraud Act 2006 radically changed the law of criminal fraud.

Before the Fraud Act came into force, the statutory fraud offences under the Theft Act 1978 were based on deception. They included:

• Obtaining property by deception.
• Obtaining a money transfer by deception.
• Obtaining a pecuniary advantage by deception.
• Obtaining services by deception.

The Fraud Act swept all of the old statutory deception offences away. Instead a new offence of fraud has been defined as follows:

The defendant must have been dishonest, and have intended to make a gain or to cause a loss to another; and the defendant must carry out one of these acts:

• making a false or misleading representation, this being where any person makes "any representation as to fact or law ... express or implied" which they know to be untrue or misleading
• failing to disclose information whereby a person fails to disclose any information to a third party when they are under a legal duty to disclose such information
• abuse of position where a person occupies a position where they are expected to safeguard the financial interests of another person, and abuses that position; this includes cases where the abuse consisted of an omission rather than an overt act.

The new offence of fraud is intended to be wide and also flexible. There is no reliance on the concept of "deception". It does not matter whether the false information actually deceives anyone, it is the misleading intention which counts.

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Tags:	Companies Act 2006;Fraud Act 2006