A fraudulent trading investigation can expose a director to criminal prosecution, personal financial liability, confiscation proceedings and director disqualification. Understandably, directors want to know what happens next, who will investigate, whether the amount involved affects the likelihood of being charged and whether the matter can be resolved without a trial.
Early legal advice can materially affect the outcome. Statements made to a liquidator, insolvency investigator, HMRC or the police may be used in other proceedings, making it important to coordinate the criminal, insolvency and commercial response from the outset.
Specialist fraudulent trading defence from Taylor Rose
Taylor Rose has a multidisciplinary team with the combined expertise needed to manage the overlapping issues commonly arising from fraudulent trading allegations.
Our team includes:
Business crime defence specialists experienced in fraud investigations, interviews under caution, pre-charge representations, false accounting and related company offences.
Commercial litigation and insolvency specialists who deal with claims by liquidators, misfeasance, breach of duty, preferences, transactions at an undervalue and personal claims against directors.
Director disqualification specialists who can respond where the same conduct results in disqualification proceedings or a proposed undertaking.
Specialist insolvency defence solicitor Richard Cole, who has approximately 23 years’ insolvency experience. Richard began his career investigating failed companies for the Insolvency Service. He now specialises in insolvency litigation, director disqualification defence and related claims against directors.
This combination is particularly valuable because a director may face several connected processes at the same time. An explanation intended to resolve a civil claim could damage the criminal defence if the wider implications are not considered.
We can assess the overall exposure, establish what happened and coordinate one defence strategy across the different investigations and claims.
What conduct may lead to an investigation?
Fraudulent trading allegations can arise where a company is suspected of the following conduct. The criminal offence (section 993 of the Companies Act 2006) can apply whether or not the company is insolvent, in administration or being wound up. A separate civil claim (section 213 of the Insolvency Act 1986, or section 246ZA where the company is in administration) can only be brought by a liquidator or administrator once the company has entered a formal insolvency process:
accepting deposits when those operating the business allegedly knew that the goods or services would not be supplied;
ordering goods on credit without an honest intention or realistic prospect of payment;
making false statements about the company’s financial position;
diverting revenue or assets away from creditors;
transferring a viable business to a connected company while leaving its debts behind;
creating false invoices or fabricated transactions;
manipulating company accounts;
using new customer payments to meet historic liabilities while concealing the true position;
favouring connected parties with money obtained from other creditors; or
operating principally as a vehicle for fraud.
A liquidator may also examine payments to directors, connected-company transfers, repayment of director guarantees, asset disposals and transactions shortly before insolvency.
Fraudulent trading is often considered alongside wrongful trading (section 214 of the Insolvency Act 1986). Wrongful trading does not require dishonesty: it applies where, before insolvent liquidation, a director knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation and failed to take every step to minimise loss to creditors. Liquidators frequently plead wrongful trading as an alternative, less onerous claim alongside or instead of fraudulent trading.
Who can be investigated?
The offence is not restricted to formally appointed directors. Depending on the facts, an investigation may extend to:
de facto or shadow directors;
senior managers;
employees involved in relevant transactions;
shareholders controlling the company;
connected businesses;
professional advisers; and
external parties who allegedly participated in the fraudulent activity.
Being connected to the company is not enough by itself. The prosecution must prove that the particular defendant knowingly participated in carrying on the business fraudulently, and that the conduct was actually dishonest – involving, by the standards of fair trading amongst commercial people, real moral blame (Re Patrick and Lyon Ltd [1933] Ch 786).
Who investigates fraudulent trading?
The investigating body will depend on how the allegation arose and the suspected underlying conduct.
The Insolvency Service - Where concerns emerge from a liquidation or another formal insolvency process, the liquidator or official receiver may report the director’s conduct to the Insolvency Service. The Insolvency Service may obtain records, take witness statements and invite a director to an interview under caution. It may consider criminal enforcement, director disqualification or referral to another investigating authority. The liquidator may separately bring civil proceedings seeking a personal contribution to the company’s assets.
The police - The police may investigate following a report from customers, creditors, investors, employees, a liquidator or another regulator. The case might be handled by a local economic crime team, regional organised crime unit or another specialist fraud team. Investigators can obtain production orders or search warrants, seize electronic devices, interview witnesses and question directors under caution. A director may be invited to attend a voluntary interview rather than arrested. A voluntary interview is still a formal criminal interview and anything said may be used in evidence.
HMRC - HMRC is more likely to become involved where the allegations concern VAT or PAYE fraud, fraudulent tax returns, false invoices, missing trader arrangements, concealed company income, improper tax repayments or reliefs; or deliberate non-payment or evasion of tax. HMRC may investigate suspected fraud using either civil or criminal procedures. A civil tax investigation does not necessarily prevent separate criminal, insolvency or disqualification proceedings.
The Serious Fraud Office - The Serious Fraud Office generally investigates only the most serious or complex fraud cases. It may become involved where there are particularly substantial losses, international transactions, several companies or significant public interest considerations.
More than one authority can investigate different aspects of the same conduct.
Civil and criminal fraudulent trading are legally distinct. A liquidator's civil claim under section 213 of the Insolvency Act 1986 seeks a contribution to the company's assets and is decided on the balance of probabilities, whereas the criminal offence under section 993 of the Companies Act 2006 is prosecuted by the state and must be proved beyond reasonable doubt. Section 215(5) of the Insolvency Act 1986 confirms that a civil claim may proceed notwithstanding that the same person may also be criminally liable for the same conduct, so both can run at the same time.
What actually happens during an investigation?
The precise process varies, but a fraudulent trading investigation will commonly involve the following stages.
Initial report or referral - Concerns may be raised by a liquidator, creditor, customer, employee, accountant, HMRC or another regulator. At this stage, the authorities may conduct preliminary enquiries to decide whether a full criminal investigation is justified.
Collection of company records - Investigators may obtain accounting records and bank statements, emails and messaging data, board minutes and management reports, contracts, orders and invoices, cash-flow forecasts, records of director payments, communications with creditors and advice received from accountants or insolvency practitioners. Investigators may also seize phones and computers or recover deleted material.
Witness interviews - Creditors, employees, accountants, other directors and advisers may be asked what they were told, who made decisions and how the company was operated.
Interview under caution - The director may be arrested or invited to a voluntary interview under caution. Questions are likely to focus on particular transactions, the company’s finances, warnings received and the director’s knowledge and intentions. A director should obtain legal advice before answering questions. An explanation given without access to the relevant records may later appear inconsistent with documents recovered by investigators.
Further investigation - Following interview, investigators may conduct further enquiries, obtain expert accounting evidence and test the director’s explanation against the records. The director may be released under investigation or placed on pre-charge bail. Document-heavy fraud investigations can take months and sometimes substantially longer.
Charging decision - An evidence file may eventually be referred to a prosecutor. The prosecutor must be satisfied that there is sufficient evidence to provide a realistic prospect of conviction, and prosecution is required in the public interest. Possible outcomes include no further action, further investigation, civil or regulatory proceedings, more limited charges, or prosecution for fraudulent trading and related offences.
Risk factors for being charged
The risk depends upon the strength of the evidence, the seriousness of the alleged conduct and whether prosecution is considered proportionate. The risk of charge is likely to be higher where there is evidence of:
knowingly false statements to creditors;
fabricated invoices or accounting records;
money diverted for personal benefit;
repeated acceptance of deposits that could not be fulfilled;
concealed transfers to connected companies;
warnings from accountants or advisers being ignored;
records being destroyed or altered;
several creditors being treated in the same way; or
messages expressly discussing the dishonest purpose.
The risk may be lower where the evidence shows:
a genuine and reasonably supported rescue plan;
realistic expectations of funding or income;
open communication with creditors;
regular professional advice;
attempts to reduce creditor losses;
no personal benefit to the director;
limited involvement in the relevant decisions;
reliance on inaccurate information supplied by others; or
prompt action once the director learned of the problem.
A large financial loss does not compensate for weak evidence of dishonesty. Conversely, a smaller loss does not prevent prosecution where the conduct appears deliberate or repeated.
Does the amount of the alleged loss matter?
Yes. The actual, intended or risked loss is an important practical factor in the investigation, charging decision and any eventual sentence.
An alleged loss of £500,000 will ordinarily be treated more seriously than one of £50,000. A larger case may attract more extensive investigative resources and is more likely to be regarded as sufficiently serious to justify prosecution.
However, £50,000 remains a substantial sum. There is no minimum financial threshold below which fraudulent trading cannot be prosecuted.
Other relevant considerations include:
the number of victims;
whether vulnerable customers were affected;
the duration of the conduct;
whether it was an isolated incident or established practice;
the level of planning;
the director’s position and personal gain;
whether false records were produced;
whether money has been recovered; and
the effect on creditors and employees.
What are the potential defences?
No dishonest or fraudulent intention - The central defence may be that the director honestly believed the company could continue trading and meet its obligations. That belief might have been based on expected investment or refinancing, substantial orders or contracts, payment from a major debtor, a proposed asset sale, cost reductions, a restructuring plan or professional advice about the company’s options.
No knowledge of the fraudulent conduct - A director or manager may not have known about the transactions under investigation. Possible issues include information being concealed by another director. Investigators may allege that the director deliberately ignored obvious warning signs. The defence should test whether those warning signs were genuinely apparent at the time or have been identified only with hindsight.
Genuine intention to pay or perform - Where the allegation concerns unpaid suppliers, customer deposits or credit, the defence may show that the company genuinely intended to meet its obligations.
Reliance on professional advice - Advice from accountants, solicitors, auditors or insolvency practitioners may support the director’s position.
Can fraudulent trading allegations be settled?
There is no single settlement procedure because criminal, civil, tax and disqualification matters may be operating simultaneously. However, options which may assist or mitigate some potential liabilities for a director can include :
Repayment or compensation - Repaying creditors or returning company assets may reduce the loss, support a public-interest argument and mitigate any eventual sentence. However, repayment does not erase an offence. Payment must also be handled carefully to avoid an improper preference, misuse of company money or an allegation that witnesses have been influenced.
Settlement of a liquidator’s civil claim - A claim seeking a personal contribution from a director may sometimes be negotiated. Settlement might involve repayment, return of property or an agreed contribution to company assets. Any settlement should be coordinated with the criminal defence so that admissions made in civil proceedings do not cause unnecessary prejudice.
HMRC civil settlement - Where the underlying allegation concerns tax fraud, HMRC may use Code of Practice 9 and the Contractual Disclosure Facility. A complete and accurate disclosure of the matters disclosed may allow the tax fraud to be dealt with through tax, interest and financial penalties rather than criminal investigation. An inaccurate or incomplete disclosure can increase the criminal risk and specialist advice should be obtained before responding.
Director disqualification undertaking - Disqualification proceedings for fraud in a winding up may result in mandatory disqualification under section 4 of the Company Directors Disqualification Act 1986. Proceedings brought on the more general unfitness ground under section 6 of that Act may sometimes be concluded through an undertaking rather than a contested hearing. Neither route resolves any separate criminal allegation and both can have serious consequences for the director’s career and business interests.
What should a director do immediately?
Preserve the evidence - Do not delete, alter or retrospectively create documents. Preserve emails and messaging applications, accounting records, bank statements, board papers, forecasts and funding discussions, contracts and invoices, creditor communications, professional advice and information held on personal devices. Destroying or concealing evidence can substantially damage the defence and result in separate allegations.
Create a detailed timeline - The chronology should identify when financial difficulties emerged, what the director knew at each stage. what advice was received, when debts were incurred, what creditors were told, what rescue steps were attempted and when the director raised concerns or stopped participating.
Obtain advice before interview - An interview under caution is not an informal opportunity to explain matters. Before interview, a solicitor can examine the available disclosure, identify the issues, review relevant documents and advise how questions should be approached.
How Taylor Rose can help
Our multidisciplinary team can:
assess the immediate risk of charge and related civil claims;
advise from the beginning of an Insolvency Service, police or HMRC investigation;
prepare directors for an interview under caution;
review accounting records, communications and transactions;
work with forensic accountants to assess the alleged loss;
establish what the director knew and when;
challenge allegations of dishonesty or knowing participation;
make detailed pre-charge representations;
defend civil claims brought by liquidators;
negotiate appropriate commercial settlements;
respond to director-disqualification proceedings;
deal with restraint, confiscation and asset-recovery issues; and
defend criminal proceedings through to trial where necessary.
With business crime, commercial litigation and insolvency specialists working together, we can address both the allegation itself and its wider consequences for the director, the business and the director’s assets and career.
