As a company director, there are many elements to think about. Occasionally, businesses may fail, and there are various reasons why this might occur, such as financial difficulties. Directors must be extremely careful when their businesses begin to struggle financially. In this blog, we’re answering the question, what is fraudulent trading?
What is fraudulent trading?
Fraudulent trading can essentially be described as a company continuing to trade and offer services without the intention of completing them. In most cases, this will involve promising services and taking deposits from customers with no intention of completing the job for them.
Committing fraudulent trading is very serious and could land you in a lot of trouble. This act comes under the label of ‘wrongful trading’.
Wrongful trading typically occurs as your business enters insolvency. Insolvency is a term used to describe a business that is struggling financially. Generally, insolvent businesses cannot pay company debts when they fall due, or their liabilities will be worth more than their assets. When you enter insolvency, you should cease trading. This will reflect positively on you when your company’s financial affairs are considered.
What is the Fraudulent Trading Insolvency Act?
When a business is struggling financially, it will usually be experiencing creditor pressure. This pressure could be in the form of emails, letters, phone calls and even visits. All of this can be extremely stressful for directors, and if the company’s creditors spend a long time waiting for their money, they may request a winding-up petition.
A winding-up petition is issued alongside a court date and is a last chance to pay back the money owed before your business is wound up in a compulsory liquidation. This type of liquidation is best avoided if possible, as it can lead to high levels of director scrutiny and a lack of control.
Fraudulent trading is outlined within the Insolvency Act 1986. It essentially states that if any further business or trading has taken place while a winding-up petition has been filed, then action can be taken against the company and its directors. It’s not a good idea to defraud creditors.
Fraudulent trading is a criminal offence that will not be taken lightly when evidenced by your licensed insolvency practitioner. If you enter a compulsory liquidation, you will have little say over who the insolvency practitioner is, and they will be assessing your director’s conduct for three years leading up to the insolvency. This is to find reasons for your business failures.
Entering a voluntary liquidation
If your business begins suffering from financial problems, you should consider entering a creditors’ voluntary liquidation process. This voluntary liquidation process will reflect positively on you as a director. A company’s insolvency and liquidation will result in company closure and removal from the Companies House register.
Wrongful trading examples
There are many different forms of wrongful trading that a director may have committed. If you are a director, it’s crucial that you avoid these examples to maintain your reputation and avoid further issues. Here are some wrongful trading examples that will all be labelled as a criminal offence.
- Using credit accounts to purchase goods with no intention of paying them off.
- Completing preferential payments – this can often be in the form of paying off personal guarantees to avoid personal liability, and it will be looked at extremely negatively when entering liquidation.
- Not paying HMRC despite paying other creditors – HMRC is one of the biggest creditors in the UK, and they will not stop chasing you for the money they are owed, so it’s best to be honest.
- Trading with VAT payments despite not being registered or paying it back to HMRC
- Paying a director’s salary and not the employees.
- Selling company assets under value – when selling the company’s assets, you must ensure that an independent valuation has been completed, and you must obtain evidence of this. All assets must be sold at market value.
These are just some examples of wrongful trading. The main difference between fraudulent and wrongful trading is that fraudulent trading is often completed with ill intent. An insolvency practitioner will carefully assess all of the evidence, and you will face the consequences they believe are right.
Wrongful trading consequences
You might wonder, what happens if I am found guilty of fraudulent trading?’ Here are some of the wrongful trading consequences you might face.
Of course, the consequences you will face as a director will vary depending on the severity of the actions you have taken. It’s always best to avoid wrongful or fraudulent trading altogether, as it will always be uncovered, and you will have to face the consequences.
Personal liability
As a director of a limited liability company, you are a separate legal entity from the company itself. However, if the director completes actions that worsen the situation of the company or its creditors, then they may be held personally liable for the company’s debts.
This can be extremely stressful for directors who are already facing pressure. Another way that you will be made personally liable is if you have signed personal guarantees on behalf of the company.
Director disqualification
A director of an insolvent company that has committed wrongful or fraudulent trading can be faced with director disqualification. The length of time you will be disqualified will vary depending on the severity of your actions.
This can be incredibly difficult to deal with, alongside losing your company. Directors can be disqualified for up to 15 years after a thorough investigation has taken place.
Criminal charges
A director can face criminal charges if found guilty of wrongful or fraudulent trading. These will usually include fines or even jail sentences. The fines will be the director’s responsibility to pay when accused of wrongful trading.
All of these consequences are very serious and are not something that you want to deal with when already experiencing financial difficulties and pressure from creditors. The company should always be working to meet the creditors’ interests.
At 1st Business Rescue, we offer honest advice to all directors regarding insolvent liquidation. We’re here to help you through these difficult times and hopefully provide you with a positive outcome. Please don’t hesitate to contact us if you have any questions. We’re more than happy to help.
I'm Chris Worden, Managing Director at 1st Business Rescue. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle.
I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.
I am proud to say that we are one of the only 5-star corporate insolvency companies on Trustpilot with hundreds of 5-star reviews, and we publish videos weekly on our YouTube channel. Our channel is designed to educate UK directors about insolvency and debt advice. Check it out here:
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