Fraudulent Trading in Insolvency Explained

In our last article we discussed ways to avoid accusations of wrongful trading in insolvency. We said that whilst wrongful trading is a result of negligence, fraudulent trading is more about dishonesty. Fraudulent trading occurs when a director purposely sets out to deceive or defraud creditors, or acts unethically or recklessly. It is a very serious offence that leads to criminal proceedings.

Fraudulent trading is covered by Section 213 of the Insolvency Act 1986. Where a company is entering into insolvency, it will find itself in the midst of a very in-depth investigation by the liquidator, during which the liquidator will look to ascertain whether any of the directors were guilty of wrongful or fraudulent trading at the time of being insolvent.

If the liquidator finds any evidence that could imply that the directors we operating outside of their official duties then this evidence will form part of the report they submit to the Secretary of State.

What is fraudulent trading?

If it can be proved that a director did any of the following, it is likely they will be subject to a fraudulent trading claim:

  • Accepted payments from customers for orders they knew they would not be able to fulfil
  • Made attempts to maximise income in advance of liquidation
  • Used credit facilities in the knowledge that the debts incurred could not be paid
  • Sold company assets under market value
  • Placed a particular creditor or creditors in a preferential position, for example by paying one creditor but not another (preferences)

What is misfeasance?

Any director or manager of a company entering liquidation who uses funds for an unauthorised or improper purpose; who makes or takes unauthorised loans or remuneration to other directors or who takes improper dividends is likely to be investigated under Section 212 of the Insolvency Act.

If found guilty, the director in question could well be forced to repay or restore any funds or property that has been misapplied, or pay the sum involved into the assets of the company.

How to deal with financial challenges in business

There is plenty of help available to businesses facing financial difficulties. The thing NOT to do is ignore what is going on and use hope as a tactic or, worse still, any of the actions listed above. Instead, be open and upfront with everyone. Talk to your creditors. Discuss things with your bookkeepers and accountant. Ask the bank for advice. No one will want to see you fail and will be ready and willing to help, as long as you just ask.

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