The Law Commission

PART VIII

FRAUDULENT TRADING

8.1      Fraudulent trading by an individual may involve numerous separate deceptions against numerous victims. Where fraudulent trading is carried out by a company, prosecution for a single offence under section 458 of the Companies Act 1985 may be possible. This avoids the difficulties that would arise otherwise where separate specific counts are needed for each individual offence.
8.2      The extension of the current provisions relating to fraudulent trading by companies to non-corporate fraudulent traders, irrespective of whether they are in any relationship as a partner or otherwise, would, in our view, be a logical and useful step in allowing certain multiple offences of fraud to be prosecuted within a single count.

The present law

8.3      Section 458 of the Companies Act 1985 provides:

If any business of a company is carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, every person who was knowingly a party to the carrying on of the business in that manner is liable to imprisonment or a fine, or both.

This applies whether or not the company has been, or is in the course of being, wound up.

The offence is punishable on conviction on indictment with seven years' imprisonment.^[1]

8.4      The reference to a "company" means a company incorporated in England and Wales or in Scotland.^[2] It does not include a company incorporated elsewhere, even if it trades here, and even if it is registered here as an overseas company. For the purposes of section 458, however, a company also includes a limited liability partnership^[3] or a European Economic Interest Grouping,^[4] and a parallel offence is committed where the business in question is that of an open-ended investment company.^[5]
8.5      In Kemp,^[6] the Court of Appeal referred to Professor Glanville Williams' comments that this offence is doubly anomalous because

(1) it does not extend to partnership or individual traders; (2) in theory it is totally unlimited as to the types of fraud though in practice it probably adds nothing to the rest of the criminal law.^[7]

8.6      The court then explained that

while each individual transaction in this carbon paper fraud could perfectly well have been the subject of a separate count, prosecutors in order to avoid multiplicity of counts often use this procedure without distinguishing whether the defrauded were creditors or not. Now if this course is permissible under the section which is for decision in this case, it is clearly a much less cumbersome procedure and much easier for the jury if indictments may be so drafted.^[8]

8.7      Due to the limited application of this provision, there is an illogical dichotomy between the fraudster who chooses to operate by means of a £10 shelf company which is no more than his alter ego and a mechanism for fraud and, on the other hand, the fraudster whose conduct is the same as the first but who either does not feel the need for such a device, or who seeks to give the appearance that he is trading through a company but does not go through any of the formalities of acquiring one. Similarly, the fact that a company is registered in, for example, the Isle of Man and doing business in London would place any fraudulent trading by that company outside the control of section 458.

Extending section 458 of the Companies Act 1985

8.8      In 1982 the Cork Committee^[9] recommended that the offence of fraudulent trading, created by section 458 of the Companies Act 1985, be extended to apply to individuals. The Company Law Review Steering Group also addressed the issue of whether or not the section should be extended to non-corporate traders and offered their strong support for any changes that would allow individuals and partnerships to be prosecuted under the provision.
8.9      We considered the issue in Working Paper No 104 on Conspiracy to Defraud, and invited views on whether, in principle, the offence of fraudulent trading should be limited to companies. The working paper acknowledged the differences between companies with limited liability and individuals or partnerships, who cannot limit their liability, but pointed out that the detriment that may be caused to others is the same whether or not a company is involved.
8.10      The respondents to the paper who offered their support for the idea of extending the offence were similarly persuaded by the position of the victim in these situations. The status of the trader is of little relevance to the person who has suffered a loss as a result of fraudulent trading. The large majority of those who considered this issue were in favour of extending the offence to cover individuals and partnerships, but a minority took the opposite view. They reasoned, conversely, that the differences between the status of companies and non-corporate traders are sufficiently important to justify restricting the ambit of the offence to companies. One respondent thought that the creation of a general deception offence would cover the sorts of situations in which fraudulent trading is not carried out by a company.
8.11      In our view it is anomalous and illogical that fraudulent trading should be an offence where it is done through the medium of a British company, a limited liability partnership, a European Economic Interest Grouping or an open-ended investment company but not where the individual who is trading fraudulently does not do so through the medium of such a body. We therefore recommend that the offence should be extended so as to apply to individuals irrespective of whether the enterprise in question is a company incorporated in Great Britain,^[10] a company incorporated elsewhere, a partnership or a sole trader.
8.12      We think this objective can be most simply achieved by amending section 458, rather than repealing it and replacing it with a wider provision outside the Companies Act.
8.13      This extension of the scope of the offence is the only change that we recommend. It is not our intention that the words "any fraudulent purpose" should be redefined in accordance with our recommended new fraud offence. Neither do we recommend that fraudulent trading should be brought within Part I of the Criminal Justice Act 1993, which extends the jurisdiction of the English courts over certain fraud offences committed abroad.^[11]
8.14      Also, we do not recommend any change to the related civil provisions. In particular, we do not recommend

(1) that, on the bankruptcy of an individual, there should be power (by analogy with section 213 of the Insolvency Act 1986) to order another person to contribute to the bankrupt's assets on the ground that that person has knowingly been party to the carrying on of business by the bankrupt for a fraudulent purpose, and is therefore guilty of the offence as extended; nor

(2) that there should be power under the Company Directors Disqualification Act 1986 to make a disqualification order against a person convicted of knowingly being party to the carrying on of business for a fraudulent purpose by a foreign company, a partnership or a sole trader.

Recommendation

8.15      We recommend that section 458 of the Companies Act 1985 be extended to non-corporate traders.

Note 1    Companies Act 1985, Sched 24. On summary conviction it carries six months’ imprisonment or a fine of the statutory maximum or both.    [Back]

Note 2    Companies Act 1985, s 745.    [Back]

Note 3    Limited Liability Partnership Regulations 2001 (SI 2001 No 1090) reg 4.    [Back]

Note 4    European Economic Interest Grouping Regulations 1989 (SI 1989 No 638) reg 18.    [Back]

Note 5    Open-Ended Investment Companies Regulations 2001 (SI 2001 No 1228) reg 64.    [Back]

Note 6    [1988] QB 645.    [Back]

Note 7    Ibid at p 652G–H.    [Back]

Note 8    [1988] QB 645 at pp 652H–653A.    [Back]

Note 9    Insolvency Law and Practice: Report of the Review Committee, Cmnd 8558 (1982) para 1890.    [Back]

Note 10    For the purposes of section 458, this includes limited liability partnerships, European Economic Interest Groupings or open-ended investment companies.    [Back]

Note 11    Law Commission recommendations led to the implementation of the Part which classifies certain fraud offences as “Class A” offences. By way of exception to the general rule, these offences may in certain circumstances be indictable in England and Wales even if the conduct constituting them is completed outside the jurisdiction. We did not think that fraudulent trading was suitable for inclusion as a Class A offence, since the rule is based on the occurrence in England and Wales of at least one of the events required for conviction, notwithstanding that other events took place elsewhere. The conduct proscribed by section 458, however, does not appear to be susceptible of such a division: it is difficult, for example, to envisage what would constitute knowingly being a party in part to particular acts of fraudulent trading. Our second reason concerns the context of the section. By contrast with the listed offences, this provision (like its predecessors) forms part of the body of legislation relating to the carrying on of business by English or Scottish companies. In our view, it would not be desirable to consider the jurisdictional rules relating to the offence under section 458 in isolation from other offences in that area of the law (Jurisdiction over Offences of Fraud and Dishonesty with a Foreign Element (1989) Law Com No 180, para 3.14). The second reason arguably loses some of its force now that we recommend applying the offence to all fraudulent businesses, whether corporate or not; but the first reason continues to apply, and indeed gains force from the decision in Miles [1992] Crim LR 657 that a person cannot be party to the carrying on of a business unless he is himself carrying on the business.    [Back]