Fraudulent Trading

Since 1 October 2015, both liquidators and administrators can bring claims for fraudulent trading. They can also assign fraudulent trading claims to third parties, for example, a creditor. Previously, fraudulent trading claims could only be brought by liquidators.

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.

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.

We can advise on all aspects of preparing, issuing and pursuing fraudulent trading claims.

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. If a director has traded fraudulently, they will 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.

In order to bring a successful fraudulent trading claim, the applicant must demonstrate the following elements to the satisfaction of the court:

1. the carrying on of business with an intent to defraud the company’s creditors;
2. the respondent was knowingly party to carrying on such business; and the respondent acted dishonestly
3. 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.

Proving dishonesty is essential to successfully bringing a fraudulent trading claim, which makes such cases challenging in practice. Therefore, whether you are pursuing or defending a claim, seeking legal advice is crucial – and we are here to help.

If the cause of action is brought by the liquidator or administrator of a company, the claim is brought for the benefit of the creditors of the company as a whole. As such, any recovery is for creditors as a whole, who may benefit from such sums 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.

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 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 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:
  1. on conviction on indictment, to imprisonment for a term not exceeding ten years or a fine (or both);
  2. on summary conviction:
     1. in England and Wales, to imprisonment for a term not exceeding twelve months or a fine not exceeding the statutory maximum (or both);
     2. in Scotland or Northern Ireland, to imprisonment for a term not exceeding six months or a fine not exceeding the statutory maximum (or both).