Fraud and the Director

With the economy still struggling, dubious business practices can be expected to be more common than normal, as is evidenced by the expulsion from the Institute of Chartered Accountants in England and Wales of two members who have each recently been convicted of a fraud involving more than £1 million.



Directors who suspect that the activities of fellow directors or managers may have crossed the line of illegality may be facing a dilemma as to what their course of action should be.



In such circumstances, it is important to understand one’s obligations. Fraudulent trading is an offence under the Companies Act 2006, carrying a maximum sentence of ten years’ imprisonment. It occurs when a person is knowingly party to the carrying on of a company’s business with intent to defraud creditors or for any other fraudulent purpose.



It is important to note that the offence does not just occur when the intent is to defraud creditors: it is the intent to defraud anyone that is in point. ‘Shutting your eyes’ to the fraudulent activity of others or failing to make enquiries if the reason for not investigating is that you are fearful that the outcome will be the discovery of fraudulent activity is unlikely to be an adequate defence.



In principle, a single fraudulent act may be sufficient to justify a charge of fraudulent trading.