Fraudulent Trading

Title: Fraud
Offence: Fraudulent Trading
Legislation: s. 993 Companies Act 2006 (re-enacting s.458 Companies Act 1985)
Commencement Date: 1.10.2007
Mode Of Trial: Either Way
Statutory Limitations & Maximum Penalty: 10 years (under s. 458 CA 85  it is10 years  for offences committed on or after 15.1.2007 and  7 years prior to that- see s. 10 Fraud Act 2006)
Sentencing Range: Variable

Aggravating and Mitigating Factors

• The amount involved
• The use to which money was put (spending on luxuries more venal than on necessities)
• Targeting of vulnerable victims
• Extent of Loss - Intended and Actual
• Extent of Gain - Intended and Actual
• The period over which and the persistence with which the fraud was carried out
• Guilty Plea
• Voluntary repayments
• Personal factors such as illness, disability, family difficulties, etc

Relevant sentencing Guidelines

Fraudulent Trading Guideline Case

PALK AND SMITH [1997] 2 CR.APP.R.(S) 167

A charge of fraudulent trading resulting in a deficiency of a certain amount was less serious than a charge of theft or fraud to an equivalent amount. Because of the wide spectrum covered by fraudulent trading offences with regard to both the amounts and the level of criminality involved, varying sentences would be appropriate. At one end there may have been reckless trading on a large scale aimed at raid return, with no genuine intention to discharge the company's debts; at the other a properly funded business which has run into financial problems where the directors have attempted to save their own and their employees' jobs but should have faced up to reality and ceased to trade. (Potter LJ)

COMMENT: In view of the increase in maximum sentence for Fraudulent Trading offences occurring after 15.1.7 it may be arguable that, contrary to what was said in Palk and Smith, such offences are now to be treated equally as seriously as comparable Theft and Fraud offences.

Relevant Sentencing Case Law

General Commercial Fraud

Feld [1999] 1 Cr.App.R.(S) 1

The following factors were to be taken into consideration when sentencing for fraud:

• The amount involved and the manner in which the fraud was carried out
• The period over which and the persistence with which the fraud was carried out
• The position of the offender within the company and the measure of control over it
• The consequences of the fraud
• Any abuse of trust which is revealed
• The effect of the public confidence on the City and the integrity of commercial life
• The loss to small investors
• The personal benefit derived by the offender
• The plea
• The age and character of the defendant

LEAF [2007] EWCA CRIM 802

A sentence of 12 years, 6 months was reduced on appeal to 10 years on appeal following convictions for 13 counts of fraudulent trading. An unusual case where the appellant had conducted a tax avoidance scheme through unlawful means and thereby extracted large sums of money from those companies for his own benefit. The 13 counts on the indictment related to 13 different companies acquired in this way. The aggregate corporation tax liability of the companies was GBP 55 million and the Crown asserted that L had benefited by approximately GBP 22 million, the whereabouts of which were unknown.

THOBANI [1998] 1 CR.APP.R.(S) 227

A sentence of 9 months for a plea of guilty to an attempt to defraud creditors was upheld on appeal where the appellant had initially traded honestly but then sold goods he obtained during the course of that legitimate business to two other companies in both of which he was a director. He owed £165,000 and the total loss to creditors was £79,000. He was disqualified from acting as a director for 3 years. The prosecution costs of £5,000 were quashed but the sentence was upheld as it was within the range appropriate and an element of deterrence was required.

ELCOCK AND MANTON [1998] 2 CR.APP.R. (S) 126

Long Firm Fraud
Sentences of 21 months to pleas of guilty to fraudulent trading were upheld on appeal where the appellants had operated a long firm fraud with companies purporting to deal in import/export, office supplies and other trades. They had obtained £56,000 and had continued trading after arrest, which was deemed an aggravating feature. Elcock had previous convictions for dishonesty.

ATTORNEY-GENERAL'S REFERENCE NOS 80 AND 81 OF 1999 [2000] 2 CR. APP. R.(S.) 138

The offenders were respectively managing director and chairman of a company which sent invoices to a factoring company, on terms that the factoring company would advance three-quarters of the face value of the invoices to the offenders' company and would then recover the full invoice sum from the debtors. When the full sum was recovered from the debtors, the factors would pay the balance to the offenders' company, less a percentage. The prosecution case was that the offenders sent a number of bogus invoices relating to bogus claims and bogus companies to the factors, and thereby dishonestly obtained a substantial sum from the factors. Over a period of about 17 months, 159 false invoices with a face value of over £1 million were raised. This was not a scheme which was a swindle from the beginning. It was accepted that the motive of the offenders was to enable the company to weather its difficulties in the short term with the hope that if it did so it could trade out of its difficulties. The offenders had, however, resorted to a simple, bare-faced and deliberate fraud on the factors who were induced to advance substantial sums of money on the basis of dishonest misrepresentations. It had to be understood that if businessmen facing financial difficulties resorted to practices of this kind they would in all probability end up in prison. An appropriate sentence for the first offender would have been about 12 months' imprisonment. In the case of the second offender a short custodial sentence, possibly suspended by reason of his age and health, might have been appropriate.

WARD [2001] 2 CR.APP.R.(S) 146

After convictions of 2 counts of fraudulent trading the sentence was reduced on appeal from 4 years to 3 years where the appellant, who had been in control of 2 companies, had either failed to pay creditors properly or at all, and continued trading and buying goods on credit knowing the company was insolvent. He had also misappropriated company assets. He had also set up a third company and sold assets to that company at half of their value. The debt to creditors for the two companies was £684,000. A lack of remorse and the fact that he had lied consistently led to the sentence being upheld.

MCHUGH [2001] EWCA CRIM 1857

3 years was upheld on appeal for pleas of guilty to 3 counts of fraudulent trading, 2 counts of acting as an insolvency practitioner without qualification and breach of bail. He and his wife were directors of an accountancy firm which was wound up owing £374,000, but had misrepresented itself as a chartered accountancy firm. He had misrepresented his wife's job, and lied to the DTI. He had previous convictions for false accounting and obtaining by deception.

GIBSON [1999] 2 CR.APP.R.(S) 52

Investors, cheating, Clark guidelines not relevant to Independent Financial Advisers

After pleas of guilty to 3 counts of fraudulent trading (where pleas of not guilty to conspiracy to steal, falsifying documents, procuring valuable securities by deception and theft were accepted) a sentence of 5 years was reduced on appeal to 3 years 6 months. The appellant was an IFA dealing with investments and pensions who over a 19 month period accepted over £1million worth of investment money from mainly the elderly and redundant employees. Some of the money he spent on himself and friends. Most of the £780,000 loss was in the event compensated through the Investors Scheme. He was of good character. There was a delay of over 6 years between the offence and arrest. The sentencing Judge relied on Clark and on appeal that was held to be an error. The reduction was afforded because of mitigation.

Ancillary Orders

(Archbold paragraph references in brackets )

• Compensation Orders: (5-411)
• Deprivation Orders: (5-439)
• Disqualification from acting as a Company Director: (5-851)
• Financial Reporting Orders: (5-886c)
  

Consider Also 

• Confiscation
• Attorney General's Guidelines on plea discussions in cases of serious or complex fraud
  

Links 

Archbold 30-115