Section 423 of the Companies Act 1997 is the criminal counterpart of the civil insolvent trading provisions.
Section 423(1) — carrying on business fraudulently
Every person who is knowingly a party to a company carrying on business with intent to defraud creditors of the company or any other person, or for a fraudulent purpose, commits an offence, penalty under section 413(4) — a fine not exceeding K200,000 or up to five years’ imprisonment, or both.
Subsection (1) reaches anyone knowingly a party to the fraudulent carrying on of business — a shadow director, a controlling shareholder, an outside adviser who structures the arrangement, a related company that participates. Compare section 107, which extends “director” to a person in accordance with whose directions the board is accustomed to act; section 423(1) does not even need that.
The elements are demanding. There must be an intent to defraud creditors or any other person, or a fraudulent purpose, and the accused must be knowingly a party to it. Trading on optimistically while insolvent is not fraudulent trading — it is dealt with civilly under section 348.
Note the words “or any other person”. The intended victim need not be a creditor of the company at all.
Section 423(2) — the director-specific offences
(a) by false pretences or other fraud induces a person to give credit to the company; or
(b) with intent to defraud creditors of the company —
(i) gives, transfers, or causes a charge to be given on, property of the company to any person; or
(ii) causes property to be given or transferred to any person; or
(iii) caused or was a party to execution being levied against property of the company,
commits an offence, penalty under section 413(4).
Causing, or being a party to, execution being levied against the company’s property with intent to defraud creditors is an offence. That is the arranged judgment — a friendly creditor obtains judgment and executes, with the director’s cooperation, so that assets leave the company under apparent legal compulsion.
The civil answer is section 340, whose definition of “transaction” expressly includes the acceptance by the company of execution under a judicial proceeding and a transaction required to be given effect to because of an order of a court. Section 423(2)(b)(iii) makes the same conduct criminal.
Every director who, with intent to defraud a creditor or creditors of the company, does anything that causes material loss to any creditor, commits an offence, penalty under section 413(4).
Subsection (3) has no list of prohibited acts: anything done with that intent that causes material loss to a creditor is enough. It closes the gaps left by the specific paragraphs in subsection (2).
Fraudulent trading and insolvent trading compared
| s 423 — fraudulent trading | s 348 — insolvent trading | |
|---|---|---|
| Nature | Criminal | Civil |
| Who | Any person (s 423(1)); a director (s 423(2), (3)) | A director or former director |
| Mental element | Intent to defraud, or a fraudulent purpose, knowingly | Awareness of reasonable grounds for believing the company fails the solvency test — or that a reasonable person in a like position would be aware |
| Requires a liquidation? | No | Yes — the creditor must have suffered loss because of the liquidation |
| Who brings it | The Registrar, or a person with the Registrar’s written consent (s 418) | The liquidator or the creditor |
| Outcome | Fine, imprisonment, and an additional penalty under s 415 stripping benefits derived | A declaration that an amount equal to the creditor’s loss is recoverable as a debt |
| Limitation | Seven years to lay an information (s 417(3)) | The ordinary limitation rules |
A conviction under section 423 has a lasting effect: under section 425, a person convicted on indictment of certain offences is prohibited from being a director or promoter of, or being concerned or taking part in the management of, a company. The Court may also disqualify under section 426, and the Registrar may prohibit under section 428.
A prohibited person is also disqualified from acting as a receiver under section 256(1)(j) and as a liquidator under section 328(2)(j).
Practical points
- Ordering goods you know the company cannot pay for, on the strength of a false account of its position, is section 423(2)(a) — obtaining credit by false pretences — not merely a bad commercial judgment.
- Granting security to a friendly creditor on the eve of failure risks both section 423(2)(b)(i) and the civil provisions in sections 340A, 345 and 347.
- Moving assets out of the company — to a related entity, to family, or to a new company — is section 423(2)(b)(ii), and may also be phoenix conduct.
- Section 417(4) prevents double conviction for the same conduct under this Act and the Criminal Code Act (Chapter 262), but either may be charged.
- If you are a creditor who suspects it, report to the Registrar — a private prosecution requires the Registrar’s written consent under section 418(1). A liquidation is often the better first step, since a liquidator must report suspected offences under sections 305(6) and 308A.
Sources
- Companies Act 1997 — ss 107, 256, 305, 308A, 328, 340, 340A, 345, 347, 348, 413, 415, 417, 418, 423, 425, 426, 428
- Criminal Code Act (Chapter 262)
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.