Director fraud is a term that most people in certain areas of the business world are likely to have come across at least once or twice. Whether in newspapers or compliance documentation, it’s an important concern that relatively few have in-depth insights into.
In situations where you find yourself personally embroiled in a criminal investigation, it suddenly becomes substantially more important that you develop a more comprehensive understanding of the legal nuances.
In this article, we provide an outline of the main legal concerns of company director fraud, from the legal definition to sentencing guidelines. It is in no way a substitute for expert legal advice from a criminal defence solicitor. If you are currently the subject of an investigation, you must reach out for legal counsel at the earliest opportunity available.
Legal definition
Technically speaking, there is no single offence called company director fraud. Rather, it refers to instances of fraudulent activity that are carried out by someone who is acting in their capacity as a company director.
Fraud in these contexts is usually defined under the Fraud Act 2006, but the Companies Act 2006 can also apply in certain situations, as can the Insolvency Act 1986.
The Fraud Act 2006
Fraud in most legal contexts is defined through the Fraud Act 2006. According to the act, someone is guilty of the offence if they act dishonestly with the intent to either make a gain for themselves, or another, or to cause a loss to another party.
There are three different ways in which fraud can be carried out under the Fraud Act 2006, which are outlined in sections 2, 3 and 4 respectively.
Fraud by false representation
Fraud by false representation refers to instances in which individuals misrepresent a situation. With a company director, this could include lying about a company’s financial situation to creditors, to get access to funds that would otherwise not be available.
Fraud by failing to disclose information
In these types of fraud, someone will have dishonestly failed to disclose information that they had a legal duty to provide, with the intention to make a gain or cause loss.
In the context of a company director, this could include neglecting to provide information to parties, including Companies House, shareholders, or HMRC. In contexts of insolvency, this might fall under the Insolvency Act 1986.
Fraud by abuse of position
This type of fraud is perhaps particularly applicable to company directors. It applies in contexts in which someone occupies a position where they have a duty to safeguard or protect the interests of another person or persons, and then abuses that position.
This could include directors awarding contracts at inflated rates to related parties, or diverting funds from company accounts to their own personal accounts.
Companies Act 2006
The Companies Act 2006 specifically outlines a range of duties that apply to company directors. Section 993 of the Act, however, sets out a specific offence of fraudulent trading.
According to this act, someone is guilty of the offence if they carry on with the business with the intent to defraud members, creditors, or other involved parties. It will often also be used in combination with the Fraud Act 2006.
Insolvency Act 1986
Section 213 of the Insolvency Act 1986 outlines the offence of fraudulent trading. This is committed in instances where the company continues to trade during the course of winding down.
This won’t always result in criminal charges, although it is possible. At the very least, the court can force anyone in the business to make contributions to the company’s assets in order to ensure that creditors and other relevant parties can be properly repaid.
The importance of intent
One critical nuance to understand in fraud cases is the importance of intent. Under the Fraud Act 2006, it does not matter whether a gain or loss is actually materialised.
All that matters is that the defendant, in this context, a company director, intended to act dishonestly to cause this gain or loss to occur. This mens rea component can also be used in a defence.
Namely, in situations where a gain or loss does materially occur, but where it can be proven that the defendant acted neither dishonestly nor with criminal intent, they should not be found guilty of fraud.
Sentencing guidelines
Fraud is an incredibly serious criminal offence to be found guilty of, a fact that is clearly illustrated in the severity of the sentencing guidelines.
Those found guilty under the Fraud Act 2006 can face a maximum sentence of up to 10 years in prison, with an offence range of between discharge and 8 years’ custody.
In practice, only those who are leading a larger criminal conspiracy, targeting multiple victims in a broad operation, will face a custodial sentence towards the upper end of this range. This is, however, absolutely a position in which a company director could find themself.
Under the Companies Act 2006, in the case of a guilty verdict, the courts can impose unlimited fines and ban directors from holding that position. In cases where the Fraud Act 2006 is also used, a maximum sentence of 10 years in prison may also apply.
The importance of early legal advice
Company director fraud is clearly an incredibly serious offence to be accused of. Not only can you be disqualified from acting as a director for up to 15 years, but you can also go to prison for an extended period of time.
It is imperative that you seek expert legal advice from a criminal defence solicitor as soon as reasonably possible. They will be able to advise you before and during any interviews you need to attend with the police or other agencies.
They will also help you to limit any further damage you might do, and build a defence that can then be presented in a court of law. The more time that you and your legal team have available to you to take care of this, the better the outcome will likely be.
If you have further questions you can contact our team of criminal defence solicitors on 0161 234 0020 (Manchester) /0203 053 8625 (London) / 07956 555979 (24 hour).
