What is the definition of a company trading illegally?

When a company becomes insolvent but carries on trading, there’s a chance that directors could be accused of trading illegally if the company subsequently has to be liquidated. The intentions of directors in this situation must be determined as far as possible, and used to establish whether illegal trading has actually taken place.

It can be a complex scenario when your business suffers such financial distress that insolvency seems inevitable, however, and you may feel that trading out of difficulty would ultimately benefit creditors.

If this train of thought has been documented – in the minutes of a board meeting, for example – it helps to prove your intentions were not to defraud creditors, and you can better defend yourself.

Begbies Traynor are insolvency specialists and can provide reliable information on the repercussions of illegal trading.

The difference between wrongful trading and illegal trading

Under the Companies Act, 2006, limited company directors are obliged to act in the best interests of creditors when their company is insolvent or approaching insolvency, and as we mentioned earlier, being unaware of the company’s financial situation is no defence.

If your business is liquidated, you may face accusations of wrongful trading if you continued to trade once the point of insolvency had been reached. Wrongful trading is a civil rather than a criminal matter, but what matters might be brought to the liquidator’s attention for further investigation, and to determine whether wrongful or illegal trading has taken place?

Here are a few examples:

• Carrying on trade when the company is insolvent, either in a negligent or irresponsible way, or with the specific intention to defraud
• Preference payments being made - to a director’s loan account, for instance, rather than paying creditors first
• Taking an excessively high director salary when the company is struggling financially
• Buying goods on credit that the company is unable to repay
• Taking deposits from customers to boost cash flow, knowing their orders cannot be fulfilled

When might you be regarded as trading illegally?

If you deliberately trade with a view to defrauding creditors, your actions as a director will be regarded as illegal. The intention behind your actions is the element that defines whether or not illegal trading has taken place, but the charge does carry severe repercussions if you’re found guilty.

When a business is liquidated the office-holder investigates director actions during the time leading up to insolvency, and makes a report to the Secretary of State. If illegal or fraudulent activity is suspected, the Insolvency Service will investigate further in an attempt to prove intent, and potentially bring a criminal prosecution against the director(s) involved. This applies to ‘de facto’ directors not formally appointed to office, and to shadow directors.  

Potential repercussions for trading illegally

Possible repercussions for directors found guilty of fraudulent trading include imprisonment, personal liability for some or all of the company’s debts, and disqualification from the office of director. Judges in cases where fraud is uncovered operate under a wide remit when it comes to punishment.

Repayment of fraudulent transactions might form part of their judgement, but they could also order directors to pay compensation to creditors along with court costs and significant fines, as a punishment and deterrent to others.

It’s crucial to seek professional guidance from licensed insolvency practitioners (IPs) when insolvency is a threat - you’ll be more aware of the possible repercussions and able to make an informed decision on whether to continue trading.

If you’re concerned about trading illegally or would like more information on what constitutes illegal trading, our experts at Begbies Traynor can help. We are the UK’s largest professional services consultancy and will be able to provide independent, reliable advice. Please contact one of the team to arrange a free same-day consultation – we operate a nationwide network of over 50 local offices.