What Is Fraudulent Trading?
Fraudulent trading is a criminal offence outlined in the Insolvency Act 1986. It serves as a more severe form of wrongful trading, which is a civil offence.
When a company enters a state of insolvency, the Director has to place the interest of company creditors first, not the interest of the company. Acting in self-interest and knowingly damaging the position of creditors can warrant accusations of fraudulent trading.
In this article, we’ll be explaining what qualifies as fraudulent trading, what are the potential consequences, and how you can protect yourself.
Contents
What Qualifies as Fraudulent Trading?
There are a range of actions that can be considered fraudulent trading:
- Continuing to trade in the knowledge that your company is insolvent
- Accepting credit from suppliers with the awareness that you cannot repay them
- Taking payments from customers for good or services that know you can’t deliver
- Selling company assets below market value (in an attempt to divert them from your creditors)
- Hiding or failing to declare company assets so that creditors cannot use them to seek repayment
- Paying creditors preferentially for your own benefit (for example, only repaying a creditor with whom you have a personal guarantee to avoid taking on personal debt)
- Failing to make PAYE/NI payments while still paying yourself
Many of these actions also serve as the basis for wrongful trading. However, fraudulent trading is distinguished by proven dishonest and ill intent. Wrongful trading, on the other hand, is committed unwittingly or without malice.
What Are the Consequences for Fraudulent Trading?
If you’re found to be guilty, there are several potential punishments for fraudulent trading:
- Being made responsible for company debts – potentially resulting in personal bankruptcy
- Getting disqualified from directorship from anywhere between 2 to 15 years
- Court fines
- Imprisonment for up to 10 years
Again, the punishments for fraudulent trading are very similar to those for wrongful trading. Fraudulent trading is distinguished by its severity, however, and this is reflected in the increased severity of its punishments.
You’re likely to receive larger fines, be made responsible for a larger proportion of company debt, and be disqualified as a director for longer. The odds of a custodial sentence are also significantly increased.
What Is Wrongful Trading?
Wrongful trading occurs when a company continues to trade while insolvent. Unlike fraudulent trading, there is no proven dishonesty. It is a much more common offence, often a result of directors unwittingly making the positions of creditors worse in their attempts to rescue their company.
How Can I Avoid Fraudulent Trading?
Avoiding fraudulent trading relies largely on conduct. Even if you were to commit any actions that could be classed as fraudulent trading, you would normally be found liable for wrongful trading instead, provided that you weren’t deliberately trying to defraud.
The best way to avoid fraudulent trading is to be honest and forthcoming; nobody wants to lose their business, but acting fraudulently could result in losing your financial security or even your freedom.
If you’re facing insolvency or financial difficulty within your business, it’s always advisable to get in touch with an insolvency practitioner, like those of our team. We’ll help to ensure you act within the law, protecting you from any accusations of wrongdoing. With our help, the business can be closed safely or potentially returned back to solvency through administration or a CVA.
Get in touch to arrange a free consultation with one of our specialists today.
