Fraudulent Trading

Fraudulent Trading

A person who knowingly carries on the business of a company with fraudulent intent is guilty of a serious criminal offence. It may be tried summarily or on indictment. Any person who is knowingly a party to the carrying on of a business with intent to defraud creditors, or for a fraudulent purpose is guilty of the offence.  He is liable on summary conviction to 12 months and/ or a fine or on conviction on indictment to up to ten years’ imprisonment and/ or a fine up to €500,000 (a category 1 offence).

The criteria in respect of civil fraudulent trading and criminal fraudulent trading are similar. However, in the case of criminal fraudulent trading, the criminal standard of proof applies.  Each element of the offence must be proved beyond a reasonable doubt.

It is not necessary that the company is insolvent or in liquidation, in order for the provision to apply.  The category of persons who may be guilty of the offence is not defined or limited.  It most commonly applies to directors, shadow directors and de facto directors.

The offence may be committed in some circumstances by shareholders and others.  Any person who exercises control and management within the company may be guilty of the offence.


Elements I

The “carrying on of the business of the company” is not synonymous with trading.  It is not necessary that all aspects of the business are carried on with fraudulent intent. There need not be a course of dealings or a series of transactions. Although the offence refers to “carrying on the business”, a single transaction, if it is shown to be fraudulent, may constitute the offence.

In order commit the offence, the person must be knowingly a party to or have participated in the fraudulent trading.  The person concerned must participate, take part or concur in the relevant trading or trading transactions, which are the subject of the prosecution. It appears that he must take some positive step.

The person must be knowingly a party to the fraudulent conduct or transactions.  Knowledge includes deliberately shutting one’s eyes to the obvious.  However, it must be shown that there is a suspicion of fraud, firmly grounded on particular facts to which the person concerned has been wilfully blind.


Elements II

It is not necessary to show an intention to cause financial loss to another.  It is enough, deliberately and dishonestly to put another’s asset and financial interests in jeopardy.  It need not be shown that the directors or all the person’s charged, have a common fraudulent intent.  If each is proved to have the requisite intention, each may be convicted.

There must be an intent to defraud. There will usually be an element of dishonesty. If a person honestly believes that can repay credit from funds which he will have when the debt becomes due, then even though funds are not immediately available, there is no intent to defraud.  If, however, he obtains credit where he knows there is no reasonable basis to believe that that funds will be available, the requisite intent to defraud will exist.

The persons defrauded are usually the creditors of the company. They may be the creditors of another company. They may be persons to whom a debt is owed, whether or not the debt is immediately enforceable.


Elements III

There may be a conviction for fraudulent trading on the grounds that there has been a fraudulent purpose, where persons other than creditors or others are defrauded.  This “leg” of the offence extends to fraud affecting persons with whom the company deals, but who are not technically creditors. This would cover persons whose claim is uncertain/unliquidated and can only be established by court action.

Where a company continues to carry on business and incurs debts, when to the knowledge of the directors, there is no reasonable prospect of the creditor’s receiving payment for the debts, trading with intent to defraud may be inferred.

The directors must have actual knowledge that there was no reasonable chance that the creditors would be paid.  It would be a defence that they reasonably believe that there will be a recovery. Liability may be imposed on directors and other controllers of the company who participate in the fraudulent trading.


Civil Liability

If in the course of the winding up of a company it appears that any person was knowingly a party to the carrying on of any business of the company with the intent to defraud the creditors of the company or creditors of any other person or for any fraudulent purpose, then the court, on application of a receiver, examiner, liquidator or other creditor or contributory, may if it thinks proper, declare that such person shall be personally responsible without limitation for all or part of the debts or other liabilities of the company, as the court may direct.

A director (or other party) may be declared to be personally liable without limitation for any or all of the company’s debts, where it is proved that while he was a director or secretary,  he was knowingly a party to the carrying on the business with intent to defraud creditors or for any fraudulent purpose.

Where a person conducts the business of the company with the intent to defraud the creditors or for a fraudulent purpose, he may be held personally liable on the basis of the fraudulent trading  This is broader and applies to not just to officers of the company, but to any person who is actually, a party to the fraudulent trading.

The extent of personal liability imposed by the courts will depend on the circumstances.  In some cases, full liability for the debts has been imposed on persons who participated in a serious fraud, from start to finish.  In other cases, the courts have imposed different degrees of liability on different persons, having regard to their culpability and participation.


Beneficiary of Order

The court makes an order, in the case of reckless or fraudulent trading, that the officer, etc.  pay the company a specified sum. The company usually becomes entitled to this sum, which is thereby available for distribution to the creditors.

Alternatively, the court may order that a sum or sums be paid to specified persons, who have been particularly affected by the reckless or fraudulent trading in such proportions and on such terms as to priority as it may order.  The court has an element of discretion. It is not necessary to show that the victim relied on the fraud.

The court may charge the liability of the persons concerned against security which they may hold from the company.


Reckless Trading Contrasted

The remedy for civil fraudulent trading has been largely overtaken by the civil remedy for reckless trading. The “bar” to prove civil reckless trading is lower so that it is more readily available as a means to impose personal liability on directors.  The civil provisions correspond to the provisions for criminal fraudulent trading and are in broadly similar terms.

A director (or other party) may be declared to be personally liable without limitation for any or all of the company’s debts, where it is proved that while he was a director or secretary he was knowingly a  party to the carrying on of the business in a reckless manner (reckless trading). The offence is limited to officers.

Fraudulent trading will commonly involve the deliberate syphoning off of assets, keeping duplicate books, destruction of records and the transfer of assets.  In the case of persons other than directors, some positive action would generally be required. In contrast, reckless trading may more readily arise


References and Sources

Primary References

Companies Act 2014 (Irish Statute Book)

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016)  Ch.16  Courtney

Keane on Company Law 5th Ed. (2016)Ch.33  Hutchinson

Other Irish Sources

Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury

Introduction to Irish Company Law    4th Ed. (2015) Callanan

Bloomsbury’s Guide to the Companies Act 2015      Courtney & Ors

Company Law in Ireland 2nd Ed. (2015) Thuillier

Pre-2014 Legislation Editions

Modern Irish Company Law   2nd Ed. (2001) Ellis

Cases & Materials Company Law 2nd Ed. (1998) Forde

Company Law 4th Ed. (2008)  Forde & Kennedy

Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy

Companies Acts 1963-2012   (2012)  MacCann & Courtney

Constitutional Rights of Companies   (2007)  O’Neill

Court Applications Under the Companies Act (2013) Samad

Shorter Guides

Company Law – Nutshell 3rd Ed. (2013) McConville

Questions & Answers on Company Law (2008)        McGrath, N & Murphy

Make That Grade Irish Company Law 5th Ed. (2015) Murphy

Company Law BELR Series (2015)   O’Mahony

UK Sources

Companies Act 2006 (UK) (Legilsation.gov.uk)

Statute books Blackstone’s statutes on company law (OUP)

Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington

Company Law in Context 2nd Ed. (2012) D Kershaw

Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam

Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington

 

UK Practitioners Services

Tolley’s Company Law Handbook

Gore Browne on Companies

Palmer’s Company Law