Do you suspect fraud? What next?

23rd March 2022

What should you do if you suspect fraud? This article gives an overview of what recourse you might have as the appointed liquidator or injured party, where a company or business has been involved in fraudulent activity.

There are numerous types of fraudulent activity, but here we will focus upon circumstances where companies have appeared to trade to create turnover without genuine underlying commercial transactions.

A recent example is the fraud on the COVID-19 Bounce Back Loans Scheme (BBLS). The Government loaned a total of £47 billion under this scheme, and the National Audit Office estimates up to £5 billion may have been lost to fraud. Due to the late introduction of counter-fraud measures within the BBLS, many individuals had already incorporated sham companies, or were untruthful about their business activity, and successfully claimed a BBLS loan.

The Government has elected to write off £4.3 billion of these fraudulent loans, however writing off debts does not prohibit a claim being pursued. A company’s debt may need to be written off for accounting purposes at year end, but this does not impact the liquidator’s or creditor’s ability to continue to pursue the debt at court. Limitation periods can do however, so it is important to check these.

If you are a creditor who has been defrauded by a company, and that company has no assets, a possible route to recovery is the appointment of a liquidator who could then bring a claim against the fraudulent director(s).

Civil proceedings

Where a fraud claim is initiated by an individual or a company, rather than the police, proceedings will take place in the civil courts.

Fraud is complex and it can be difficult to establish that there has been fraudulent activity. An alternative would be to bring a claim for misfeasance and/or breach of directors’ duties against the relevant director(s), using the fraud as a factual matrix to give context to the claim. This is an easier claim to prove.

For example, if you suspected there were a chain of companies created to defraud HMRC (e.g. MTIC fraud) it can be difficult to establish the actions and intentions of the entire network. But where a particular company has failed to submit VAT returns or pay VAT due to HMRC, a claim could be brought against the director(s) of that company arising from the HMRC debt.

Freezing injunctions

With claims involving fraud there is always a concern about recovering sufficient assets, even if the claim is successful, and these cases therefore often commence with a freezing injunction order. These orders are crucial to prevent defendants from moving their assets ‘out of reach’ before a trial can be held. A freezing injunction is usually obtained without notice to the defendant.

How we can help

Blake Morgan has a long track record of bringing successful fraud claims in the High Court to recover monies for companies in liquidation.

If we can be of any assistance, please contact Chris Potts or Abbie Coleman within our Commercial Litigation Team.

This article has been co-written by Chris Potts, Abbie Coleman and James Lamond.

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