
Restructuring & Insolvency
Fraudulent Trading
Fraudulent trading is one of a number of claims that can be brought against directors, or former directors, of insolvent companies, whether in administration or liquidation. The offence of fraudulent trading does, therefore, arise in a corporate insolvency context and is a civil offence under sections 213 and 246ZA of the Insolvency Act 1986 (“IA 1986”).
Fraudulent trading is a claim arising under the IA 1986 with a view to recovering property and returning it to the insolvent company’s assets for the benefit of the company’s creditors.
A claim for fraudulent trading can be brought during the winding up or administration of a company and requires the office-holder to show that the business of the company was carried on with (i) the intent to defraud its creditors, and/or (ii) defraud creditors of any other persons and/or, (iii) for any other fraudulent purposes(s). Negligence or incompetence on the part of any director(s) or former director(s) of the company will not be sufficient, an intention to defraud must be proved.
Fraudulent trading claims can also be brought in a commercial context, pursuant to section 993 of the Companies Act 2006. Fraudulent trading is a criminal offence under the Companies Act.
Should you require assistance in bringing or defending fraudulent trading proceedings, or should you want to discuss the risks of such proceedings being issued against you, please do not hesitate to contact our team for an initial discussion.
Edwin Coe’s restructuring and insolvency team are highly experienced and are able to assist with all aspects of advising on, as well as issuing and defending fraudulent trading proceedings. We frequently act for office-holders in issuing fraudulent trading claims, as well as for company directors in defending fraudulent trading claims. We are also experienced in issuing and defending enforcement proceedings should, when necessary.
Services we offer in this area include:
- Advising insolvency office holders in respect of issuing fraudulent trading claims and on all aspects of the process from drafting proceedings to settlement negotiations or trial
- Advising directors in relation to prospective fraudulent trading proceedings
- Advising directors in defending fraudulent trading claims, including advice on on the merits of defence, and, if appropriate, assisting with settlement negotiations where possible
Claims against Directors
- Fraudulent Trading
- Wrongful Trading
- Preferences
- Transactions at an Undervalue
- Directors’ Disqualification
- Overdrawn Directors’ Loan Accounts
- Misfeasance
Personal Insolvency
Corporate Insolvency
- Administration
- Individual Voluntary Arrangements
- Company Voluntary Arrangements
- Members Voluntary Liquidation
- Creditors Voluntary Liquidation
- Statutory Demands
- Winding Up Petitions: Guidance for Creditors
- Winding Up Petitions: Rescinding an Order
- Winding Up Petitions: Defending an Order
- Compulsory Liquidation
- Restructuring Plans
Other Contentious Insolvency Work
Key Information
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Who can bring a claim for fraudulent trading?
Since 1 October 2015, both liquidators and administrators can bring claims for fraudulent trading and can also assign fraudulent trading claims to third parties, for example, a creditor. Previously, fraudulent trading claims could only be brought by liquidators.
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Who might be liable for fraudulent trading?
Sections 213 and 246ZA IA 1986 are drafted in broad terms with a wide scope. As such, a fraudulent trading claim can be brought against current and former directors of a company, as well as shadow directors of the company.
Fraudulent trading claims are not limited to those involved in managing and controlling the business; they can also extend to any person(s) involved in the fraudulent carrying on of the business.
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How is a fraudulent trading claim brought?
A claim for fraudulent trading is brought by way of an application notice, the content of which is specified in rule 1.35 of the Insolvency (England and Wales) Rules 2016 (“IR 2016”).
In accordance with usual practice, a witness statement in support of the application, together with any supporting documents enclosed within an exhibit, should be filed with court and served on the respondent.
Edwin Coe is well placed to assist in relation to all aspects of applications for fraudulent trading.
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What are the consequences of fraudulent trading for directors?
Primarily, directors that are found to have been involved in and/or caused a company to trade fraudulently can be held personally liable for the company’s debts. The court may compel the respondent to make such contribution to the assets of the company as the court thinks proper, which is usually a financial contribution for which the respondent is personally liable.
Directors may also be subject to civil fines and penalties, including the director being disqualified from acting as a company director, pursuant to a directors’ disqualification order. Directors are also likely to suffer damage to both their personal and professional reputation.
Directors may also be held criminally liable under s.993 CA 2006 leading to criminal charges, including a prison sentence of up to 10 years.
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What are the elements of a fraudulent trading claim?
In order to bring a successful fraudulent trading claim, the applicant must demonstrate the following elements to the satisfaction of the court:
- the carrying on of business with an intent to defraud the company’s creditors
- the respondent was knowingly party to carrying on such business; and
- the respondent acted dishonestly
The requirement is that the company or the respondent took positive steps to defraud creditors. The respondent must act knowingly with an intention to defraud and was either aware of, or was reckless to, the consequences. The applicant must establish the respondent’s state of knowledge to the satisfaction of the court.
As to dishonesty, this is a subjective test, but the respondent must be guilty of actual dishonesty capable of moral blame. The applicants must show that the respondent’s conduct was dishonest when applying the objective standard of ordinary, decent people.
The necessity to prove dishonesty makes it difficult to bring successful fraudulent trading claims in practice. Legal advice should, therefore, be sought whether you are bringing or defending a claim for fraudulent trading, and we are able to assist.
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Who benefits from any recoveries made by an insolvency office holder who brings a fraudulent trading claim?
If the cause of action is brought by the liquidator or administrator of a company, the claim is brought for the benefit of the creditor body as a whole. As such, any recovery is for creditors as a whole, who may benefit from such sums as are recovered. No individual creditor will be entitled to all of the sums recovered.
If the cause of action is assigned to a creditor, or a particular victim of dishonesty or deceit, it is for that individual to bring the claim. Pursuant to the decision in Re Totalbrand Limited, an officer-holder is entitled to assign a claim, including any proceeds, without a requirement that the company should receive a share of any proceeds, providing consideration is paid to the office-holder for the assignment. If a third party pursues the claim they may, therefore, be solely entitled to the proceeds of the claim, should it be successful.
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Does the pari passu principle apply to recoveries made by an insolvency office holder?
The pari passu principle, which is a fundamental principle of English law, applies. The principle states that, as far as possible, where a debtor enters a formal insolvency process unsecured creditors and, by extension, their interests in any proceeds should be treated equally.
In the event that there is a limited sum of money available for distribution amongst the creditors, which may include a sum recovered pursuant to a claim for fraudulent trading brought by an office holder, that sum of money will be divided between each of the debtor’s unsecured creditors. This means that each unsecured creditor will receive the same number of pence in the pound upon the distribution of the funds that are available. There is no special priority awarded to any unsecured creditor, even if they are the victim of dishonesty or deceit.
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What are the relevant statutory provisions?
S213 IA 1986 “Fraudulent trading”
- If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.
- The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company’s assets as the court thinks proper.”
s246ZA IA 1986 Fraudulent trading: administration :
- If while a company is in administration it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.
- The court, on the application of the administrator, may declare that any persons who were knowingly parties to the carrying on of the business in the manner mentioned in subsection (1) are to be liable to make such contributions (if any) to the company’s assets as the court thinks proper.
s993 Companies Act 2006 “Offence of fraudulent trading”
- 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 knowingly a party to the carrying on of the business in that manner commits an offence.
- This applies whether or not the company has been, or is in the course of being, wound up.
- A person guilty of an offence under this section is liable—
- on conviction on indictment, to imprisonment for a term not exceeding ten years or a fine (or both);
- on summary conviction—
- in England and Wales, to imprisonment for a term not exceeding twelve months or a fine not exceeding the statutory maximum (or both);
- in Scotland or Northern Ireland, to imprisonment for a term not exceeding six months or a fine not exceeding the statutory maximum (or both).
Contact our Restructuring & Insolvency Team
telephone: 020 7691 4000
or email: enquiries@edwincoe.com