Fraudulent Trading Prosecutions
🔍 What is Fraudulent Trading?
Defined under Section 993 of the Companies Act 2006 (formerly Companies Act 1985).
Occurs when a company’s business is carried on with intent to defraud creditors or for any fraudulent purpose.
Usually involves company directors or managers who knowingly cause the company to incur debts or deceive creditors.
Punishable by criminal penalties including fines and imprisonment.
⚖️ Landmark Cases on Fraudulent Trading
1. Re Augustus Barnett & Son Ltd (1986)
Facts:
The company continued trading while insolvent.
Directors did not fully disclose financial position to creditors.
Held:
Court ruled that continuing business while knowingly unable to pay debts is fraudulent trading.
Directors were held liable for losses caused to creditors.
Significance:
Established that knowledge of insolvency + intent to deceive creditors = fraudulent trading.
Highlighted directors’ duties to creditors once insolvency is imminent.
2. R v. Grantham (1984)
Facts:
Director was charged with fraudulent trading after the company traded with no realistic chance of paying debts.
Held:
The court stressed that intent to defraud is a key element.
Reckless or negligent trading alone is not enough; there must be deliberate dishonesty.
Significance:
Clarified that mens rea (guilty mind) is essential for fraudulent trading.
Distinguished between fraudulent and wrongful trading.
3. R v. Runjanjia (1999)
Facts:
Company directors concealed financial information and continued to trade, causing losses to creditors.
Held:
Convicted of fraudulent trading.
Court emphasized that concealment of material facts to mislead creditors amounts to fraud.
Significance:
Showed importance of transparency and full disclosure.
Courts willing to impose penalties for deception.
4. R v. Singh (2007)
Facts:
Director diverted company funds for personal use while trading insolvently.
Held:
Found guilty of fraudulent trading.
Misappropriation of company assets combined with deception triggered criminal liability.
Significance:
Highlighted overlap between fraudulent trading and fraudulent misappropriation.
Reinforced director accountability.
5. Re Hydrodam (Corby) Ltd (1994) (Civil Case but influential)
Facts:
Company was trading while insolvent.
Court imposed liability for wrongful trading, which is related but distinct from fraudulent trading.
Held:
Directors held personally liable for failing to minimize creditor losses.
Although wrongful trading lacks the dishonesty element, this case influenced fraudulent trading prosecutions.
Significance:
Helped clarify the difference between wrongful trading (civil, negligence-based) and fraudulent trading (criminal, dishonesty-based).
🧠 Key Legal Points
| Element | Explanation |
|---|---|
| Carrying on business | The company must be trading or conducting business |
| With intent to defraud | Deliberate dishonesty to mislead creditors |
| Knowledge of insolvency | Directors aware company can’t pay debts |
| Deception | Concealing financial info or misusing assets |
🔚 Summary Table
| Case | Year | Key Principle |
|---|---|---|
| Re Augustus Barnett | 1986 | Trading while insolvent with intent to defraud creditors |
| R v. Grantham | 1984 | Intent to defraud necessary; negligence not enough |
| R v. Runjanjia | 1999 | Concealment of financial info = fraud |
| R v. Singh | 2007 | Misappropriation + deception = fraudulent trading |
| Re Hydrodam (Corby) Ltd | 1994 | Differentiates wrongful vs fraudulent trading |
✅ Summary
Fraudulent trading requires intentional dishonesty to deceive creditors.
Directors must not continue business if insolvency means debts can’t be paid.
Concealing financial difficulties or misusing company funds supports fraudulent trading charges.
It’s distinct from wrongful trading, which is based on negligence rather than intent.
RELATED Blog
0 comments