Limited liability exists to enable those who own and run businesses to limit their personal liability to the money they put into them, thereby protecting themselves from bankruptcy if the business fails. Companies fail every day in the United Kingdom but what happens when a company fails largely because those in charge of the company’s assets and income have been treating them as their own? Office Holders will usually turn to civil remedies available to them to recoup money from directors on the company’s behalf; however, there may be circumstances where the actions of the company directors have been so grave that they leave themselves open to being prosecuted for criminal offences.
Following successful private prosecutions in the matter of R v Lawless and R v Asplin and others both brought by private companies against persons of significant influence within those companies, we look at the four main offences associated with such conduct.
(i) Fraudulent trading
S.993 of the Companies Act 2006 provides::
(1) 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 is knowingly a party to the carrying on of the business in that manner commits an offence.
(2) This applies whether or not the company has been, or is in the course of being, wound up.
This offence includes causing a company to incur obligations (to creditors or customers) when those doing so know it has no reasonable prospect of meeting them. It also covers stripping the remaining assets of a failing company to prevent their eventual distribution among its creditors on insolvency. The test to prove what constitutes a ‘fraudulent purpose’ is a wide one and comprises conduct which goes beyond the bounds of what ordinary decent people engaged in business would regard as honest.
If a director, without authority from fellow directors or shareholders, simply helps himself to assets belonging to the company, he will likely commit theft contrary to s.1 of the Theft Act 1968:
(1) A person is guilty of theft if he dishonestly appropriates property belonging to another with the intention of permanently depriving the other of it.
In the above case, the director is in the same legal position as a shop assistant helping themselves from the till. The position is complicated if the director controls the company and has induced it to transfer the property to him. The rules as to how a limited company authorises transfers of its property, and to whom, will depend on the constitution of the company as set out in its memorandum and articles of association. In most limited companies, this can be done by a resolution of the board; though this is subject to a statutory exception in s.190 of the Companies Act 2006, which requires the transfer of a “substantial non-cash asset” to a director to be ratified by a resolution of shareholders.
Where directors who wish to release the assets of the company for their personal benefit control the board, and they (or their associates) are also majority shareholders, then the above criteria will no doubt be fulfilled. In these circumstances then, can an allegation of theft ever be substantiated when the payment or transfer of property was sanctioned by adherence to the company constitution?
Surprisingly, a theft charge is a possibility even where the owner has chosen to give the property to the alleged thief. This was the principle decided by the House of Lords in Hinks ( 2 AC 241). In this case it was held that an indefeasible title to property acquired by means of taking a gift from a person who was easily influenced could constitute “appropriation” under the Act. “Appropriation” for the purposes of s.3(1) Theft Act 1968 was held not to be interpreted too strictly and was an objective term relating to any adoption of an owner’s rights. It was not dependent on the consent of the owner.
Directors who therefore persuade the company to transfer its assets to them, or to enrich themselves or their families by paying excessive dividends, are potentially guilty of theft if their behaviour was “dishonest”. The issue of dishonesty is discussed below but it will be necessary to convince a tribunal that the conduct of the director fell short of the objective standards of ordinary decent people. It goes without saying that it would be easier to convince a tribunal that the individual had acted dishonestly, had company policy and procedures not been followed.
The main duties of directors are set out in Part 10 (Chapter 2) of the Companies Act 2006. Of these, three are particularly relevant: the duty to act within their powers (s.171), the duty to exercise reasonable care and skill (s.174) and the duty “to act in the way he considers, in good faith, would be most likely to promote the success of the company as a whole” (s.172). The duty to act within their powers includes the duty to respect the constitutional rules governing decisions to dispose of company property. More generally, it also includes the duty to respect any specific rules of law, which prescribe the manner in which the business of limited companies is to be conducted.
Notwithstanding the possibility of founding a theft charge in circumstances where the owner has chosen to give the property to the alleged thief, problems with proving dishonesty in relation to a specific appropriation may still arise. This issue may be overcome if the acquisitive director were prosecuted for fraud by abuse of position, addressed below.
(iii) Fraud by abuse of position
Section 4 of the Fraud Act 2006 reads as follows:
(1) A person is in breach of this section if he–
(a) occupies a position in which he is expected to safeguard, or not to act against, the financial interests of another person,
(b) dishonestly abuses that position, and
(c) intends, by means of the abuse of that position to (i) make a gain for himself or another, or
(ii) to cause loss to another or to expose another to a risk of loss
(2) A person may be regarded as having abused his position even though his conduct consisted of an omission rather than an act.
As far as acquisitive directors are concerned there is a major overlap between this offence and theft. A director occupies a position in which he is expected, “to safeguard and not to act against the financial interests of the company“. If he steals property belonging to the company, he will likely commit fraud by abuse of position too.
Fraud by abuse of position, however, goes far wider. In particular, it extends to cover the case, potentially problematic for theft, of the director who strips the assets of the company with the connivance of the board and majority shareholders, but to the detriment of other people whose financial interests “he is expected to safeguard, or not to act against“.
Examples of positions given in the explanatory notes to the Act include the relationship between director and company as well as employee and employer. Such a position will involve either a fiduciary duty, or an obligation that is akin to one so that the breach can conveniently be described as a breach of trust or of a privileged position in relation to the financial interests of another person.
In Valujev  EWCA Crim 2888 the issue was whether the offence applied to an unlicensed gangmaster who provided foreign labourers for farmers. He was accused of fraud by abuse of position on the basis of his having undertaken the payment of the labourers’ wages, from which he had been making extortionate deductions. The Court of Appeal held that he potentially fell within the scope of the offence. It therefore follows that a director who had appropriated the property of the company in a way that damaged the interests of creditors or employees would not have a defence available to him by simply stating his duties as a director were owed solely to the company as represented by the shareholders, who had willingly consented.
(iv) Conspiracy to defraud
Conspiracy to defraud is a common law offence. The definition is “an agreement by two or more people dishonesty to deprive a person of something which is his or to which he is or would be or might be entitled and an agreement by two or more by dishonesty to injure some proprietary right of his, suffices to constitute the offence of conspiracy to defraud” (Scott v Metropolitan Police Commissioner  AC 910).
Conspiracy to defraud necessarily requires an intention to defraud, because a party’s intention is inherent in the requirement of an agreement to defraud. Intention, in this context, is something different from the fraudsters’ purpose or objective:
“Generally the primary objective of fraudsmen is to advantage themselves. The detriment that results to their victims is secondary to that purpose and incidental. It is ‘intended’ only in the sense that it is a contemplated outcome of the fraud that is perpetrated.” (R v Allsop (1977) 64 Cr. App. R. 29 at 31).
The offence will clearly be committed in the following instances:
- A dishonest agreement between directors to misapply the assets of the company without the consent of the shareholders, and to their detriment;
- A dishonest agreement between directors to misapply the assets of the company – even with the consent of the shareholders – in a way that makes it impossible for the company to meet liabilities to creditors;
- A dishonest agreement between directors to raid the pension-fund, to the detriment of its pensioners, present and future.
All four offences share a common element and that is dishonesty. After the decision in Ivey v Genting Casinos Limited  UKSC 67, which was confirmed beyond doubt to apply to the criminal courts in R v Barton  EWCA Crim 575, the question whether the conduct was dishonest was to be determined by applying the objective standards of ordinary decent people, based on the defendant’s subjective knowledge or belief as to the facts. The test is derived from Royal Brunei Airlines Sdn Bhd v Tan  2 A.C. 378, a civil case. There is no longer a requirement that the defendant must appreciate that his conduct was dishonest by the standards of ordinary decent people.
Company director fraud is unfortunately one area which is consistently under-investigated by police despite often overwhelming evidence suggesting that a criminal offence has taken place. Indeed, it is quite often the case for private prosecutions to be spawned from a police refusal to investigate the matter, often claiming that the matter is a civil dispute. Private prosecutions have therefore become a more utilised tool as a means of achieving justice, whilst restoring assets back to the company, particularly when state authorities have declined to take action, and as an alternative to costly civil proceedings often pursued by Office Holders.
Drafted by Fani Gamon