Fraudulent Trading
Sally Ramage
The DTI brought a case against an accountant, a
solicitor and a farmer in 2003 for fraudulent trading contrary to section 458
of the Companies Act 1985.
They were all involved in running three haulage companies in the Midlands and in Kent. The companies went into administration owing factoring companies two million pounds. The companies had been financed almost entirely from factored funds and false invoices had been raised and passed to the factoring companies to generate cash-flow.
The Prosecution were able to ascertain these facts from old computer disks of the companies. From the financial data on the disks the prosecution team were able to recreate the management information that was available to the directors and produce for the court management accounts that formed an audit trail by analysing the movement of debtors, creditors, cash and the movement of balances with factoring companies. Far from being invisible, each disk left electronic fingerprints that led to conviction.
It is to be noted that a director’s liability for fraudulent trading can only arise if the company is in administration or liquidation.
Directors have duties to act in the company’s best interests, to be diligent, to take early legal advice if the company gets into financial difficulty, to avoid conflicts of interest, to hold regular board meetings and to keep proper minutes, to satisfy themselves about administration and financial information.
The penalties for breaches of duties and responsibilities are criminal penalties, civil penalties and disqualification, as in this case. It is a criminal offence to be involved in fraudulent trading and to recklessly make misleading statements in or omissions from public documents such as in filed accounts.
The breach of directors duties to creditors that cause these creditors to suffer loss as a consequence, enables the creditors to sue for damages. The courts will disqualify a person for acting as a company director if he commits the offence of fraudulent trading because such a director is considered unfit for office., although disqualification is discretionary and the maximum period of disqualification is fifteen years,
The Court has a duty to disqualify a director for fraudulent trading under section 6 of the Company Directors Disqualification Act 1986, which reads as follows:
“The court shall make a disqualification
order for a period of not less than two years nor more than fifteen years against
a person if, on application by the Secretary of State or at his discretion by
the Official Receiver where a company is being wound up by the court in England
and Wales, the court is satisfied that –
(a) such person is or has been a director of a
company which has at any time become insolvent (whether while he was a director
or subsequently); and
(b) his conduct as a director of the company
(taken alone or together with his conduct as a director of any other company or
companies) makes him unfit to be concerned in the management of a company.”
Unfitness of a director is determined by the above section of the Company Directors Disqualification Act 1986 and other facts such as outstanding debts for VAT, PAYE and NIC , are considered important in determining unfitness.
The courts have seen cases where unfitness was determined by a breach of commercial immorality, by really gross incompetence, by recklessness and when a director was seen as a danger to the public if he were allowed to continue to be involved in the management of companies
Important factors in determining unfitness are:
- The amount of debts outstanding and not paying debts so as to continue trading;
- The number of companies that the director has been involved in and the number of liquidations he has been involved in;
- To what extent the accounts have been kept up to date and returns made to Companies House;
- The personal circumstances of the director.
Finally, it must be stated that there is an objective standard of unfitness, as per the dicta of Justice Gibson in the case Re Bath Glass [1988], when he said
“To reach a finding of unfitness the court
must be satisfied that the director has been guilty of a serious failure or
serious failures, whether deliberately or through incompetence, to perform
those duties of a director which are attendant on the privilege of trading
through companies with limited liability.
Any misconduct of the respondent qua director may be relevant.”
This is an objective test because serious failure of a company can occur due to a director’s incompetence. If a person is incapable of performing the duties of a director through incompetence, the standard will be breached and he will be disqualified similar to a competent but fraudulent director.
Companies House keeps a register of disqualified
directors and this can be consulted by anyone.
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