Trading with the intent to defraud creditors is an offence under the Insolvency Act 1986 (Section 213). Proceedings can be brought against the directors (including ‘shadow directors’ – people who run the company but are not formally directors) of an insolvent company by the liquidator. Conviction of a director for ‘fraudulent trading’, as it is termed, can lead to an order that the director makes a contribution to the company’s assets in such amount as the court decides.
Recently, a prosecution for fraudulent trading was defended by the directors of a holding company. The company was incorporated in Switzerland and owned a UK subsidiary which became insolvent. The directors opposed the proceedings, arguing that the Act was limited in scope and could not have effect outside the UK.
However, the liquidators were successful in persuading the court that references in the Act to ‘any business’ and ‘any person’ mean that the Act is not subject to national boundaries.
If you continue to run a company which you know, or have reason to believe, cannot pay its debts, you should take advice as soon as possible. A conviction for fraudulent trading can lead to financial penalties and being banned from holding the office of Director for a period of years.