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UK Limited Company Fraud

In the UK it is easy to setup a limited company in order to start a business. Limited companies offer its owners/directors limited liability protection. This restricts any monies owed to the amount of capital and assets that the company owns. This offers better protection over that of a sole trader. That said, there are known frauds that can occur with limited companies in the UK and this short article lists a few of them.

Company hijack

Similar to identity theft against an individual, a company hijack is where fraudsters attempt to steal an existing company as part of a fraudulent scheme. The fraudsters attempt to change the details of company directors and the company’s registered office so that they can pretend to be that company for the duration of their crimes and then disappear leaving the real owners to deal with any fallout.

The government offers a voluntary scheme called PROOF for limited company directors to sign up to in order to protect their company from company hijack.

Long firm fraud

This is a form of fraudulent trading whereby the fraudsters setup a company and operate it for a while in order to build a good reputation and credit history. This is a long-con in that the fraudsters are taking their time in order to gain a bigger payout at the end. After the company has a good reputation they disappear leaving unpaid debts for expensive products not yet paid for, unpaid services, and leaving no assets behind for any creditors.

Short firm fraud

Similar to long firm fraud except that the fraudsters do not bother setting up an established company with a known reputation. Instead they setup the company and start trading with no intention of paying for products and services received. They operate for a short period of time then disappear before anyone realises what is going on.

Long and short fraud is made more easy by service companies that offer to setup companies on your behalf, providing nominated directors so that your name never appears on the official company documentation. Shadow directors are directors that run a company but are not listed on the company documentation.

Phoenix companies

A phoenix company is one that emerges from the collapse of another company through insolvency. Sort of ‘rising from the ashes’. It works as follows: An existing company is declared insolvent in that it cannot pay it’s debts. The directors setup a new company and sell the assets of the first to it cheaply leaving nothing for any creditors to get their hands on. The first company then ceases to trade and is dissolved. The new company is not liable for any of the debts owed by the previous company.

The UK allows phoenix companies in order to promote entrepreneurism but it is easily abused. There are certain restrictions however such as the following:

  • The new company’s name cannot be too similar to that of the previous company
  • A director cannot register a new company if they are disqualified, declared bankrupt or subject to bankruptcy
  • They cannot transfer the assets of the previous company before declaring insolvency.

If you have any issues, suggestions or feedback for this article please email me.

Dave

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Last updated: 23rd August 2021

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