Company director fraud

Different parties can bring fraud allegations against company directors, and this often impacts how cases are handled.

When companies discover fraud internally, they often prefer civil remedies like negotiated resignations and financial settlements rather than criminal prosecution. This approach can enable companies to resolve director fraud issues internal while protecting their reputation and business operations. However, once external bodies like regulators or law enforcement become involved, the company loses control over the process and outcomes.

Responding to suspected fraud by a director

When fraud is suspected within a company, prompt and appropriate action is essential:

• Secure evidence and maintain confidentiality - preserve all relevant documents and limit knowledge of the investigation to essential personnel only.

• Assemble proper expertise - engage independent legal counsel and forensic specialists (accountants/IT) as needed.

• Conduct thorough investigation - review documents, interview relevant individuals, and analyse financial records.

• Consider reporting obligations - assess requirements to notify regulators, insurers, or law enforcement.

• Take appropriate action - implement disciplinary proceedings if warranted, consider civil recovery options, and enhance internal controls.

• Director protection measures - non-involved directors should document concerns in writing, seek independent advice if necessary, and consider resignation only as a last resort after documenting all efforts to address the situation.

• External reporting - report to appropriate authorities such as Action Fraud, the Insolvency Service, or the Serious Fraud Office depending on the nature and scale of the fraud.

• Employment law compliance - if suspending an employee, ensure it is with full pay, properly documented, proportionate, and clearly communicated as a neutral act pending investigation rather than a disciplinary measure.

Key elements to prove director fraud

For most fraud offenses under UK law, the following essential elements must typically be established:

• False or misleading representation/statement - the director must have made a representation or omitted information that was false, misleading, or deceptive.

• Dishonesty - most fraud offenses require proof of dishonesty, assessed using the objective test established in recent case law. The court will consider whether the conduct was dishonest by the standards of ordinary, reasonable people.

• Intent - the director must have acted with intent to make a gain for themselves or another, or to cause loss to another or expose another to risk of loss. The intent element is crucial - it distinguishes fraud from mere negligence or incompetence.

• Legal duty (in certain cases) - for fraud by failing to disclose information, there must be a legal duty to disclose the information that was withheld.

Importantly, for criminal fraud prosecutions, it is not necessary to prove that any actual loss occurred or that anyone actually relied on the false representation. The offence is complete when the dishonest representation is made with the necessary intent. However, in civil fraud cases, proving actual reliance on the misrepresentation and resulting damages is typically required.

Types of company director fraud

• False and Misleading Statements - including financial misrepresentation such as falsifying accounts or overstating profits, false claims to potential investors or misleading information during public procurement processes or contract bids

• Fraud by False Representation - offence under Section 2 of the Fraud Act 2006 occurs when a director dishonestly makes a false representation intending to make a gain, cause a loss to another, or expose another to risk of loss. This representation can be express or implied, made through words, conduct, or omission.

• Fraud by Failing to Disclose Information - such as withholding material information from shareholders, regulators, or other stakeholders.

• Fraud by Abuse of Position

• Fraudulent Trading - insolvency related fraud

Directors may be liable for wrongful trading if they continue operating when they knew or should have known the company was insolvent, or for fraudulent trading if they conduct business with intent to defraud creditors.

Who can bring claims?

Various parties can bring claims against directors for fraud, which in criminal law may also involve a private prosecution :-

• The Company - can itself bring claims against directors who have breached their duties

• Shareholders - can bring derivative claims against directors on behalf of the company under Part 11 of the Companies Act 2006, even if the company remains under the control of the alleged fraudulent director.

• Liquidators and Administrators - Insolvency practitioners (office holders) can bring claims against directors for various acts of fraud against the company. Directors found guilty of fraudulent trading can be held personally liable for losses caused to creditors.

• Regulatory Bodies - The Insolvency Service, Financial Conduct Authority (FCA), Serious Fraud Office (SFO) or HMRC

Criminal Prosecution Authorities - Crown Prosecution Service (CPS)

Potential outcomes

The consequences for directors found to have committed fraud can be severe and wide-ranging:

1. Civil Liability

• Personal liability - directors may be ordered to compensate the company or creditors for losses

• Account for profits - directors can be required to return any personal gains made through fraudulent activities

2. Disqualification

Directors found guilty of fraudulent conduct may be disqualified for up to 15 years, during which time they cannot be a director of any UK-registered company, nor be involved in forming, marketing, or running a company. The most serious cases, such as deliberate fraud, typically receive the longest disqualification periods.

3. Criminal Prosecution

Directors convicted under the Companies Act, Insolvency Act, Fraud Act, or Theft Act likely face fines and, in serious cases, imprisonment.

Maximum penalties include:

• Theft Act 1968 offences - up to 7 years' imprisonment at Crown Court

• Fraud Act 2006 offences - up to 10 years' imprisonment at Crown Court

4. Confiscation Proceedings

In serious cases, confiscation proceedings may follow with the aim of stripping the director of criminal gains.