F4 – Corporate Fraudulent and Criminal

Behaviour
Tutor Question

The multi-task questions that appear in Section B of the exam contain several tasks based on the same scenario.
This question includes two tasks, each with two sub-tasks. Read through the background and the two sub-tasks
that make up Task 1.

Background for Tasks 1 and 2 Task 1

Frank and Leo registered a private limited company, (i)

Red Ltd, in January 2011, with each of them becoming Which type of action can be taken in relation to
a director of the company. Although the company did fraudulent trading?
manage to make a small profit in its first year of trading,
it was never a great success and in its second year of A. Civil action only
trading it made a loss of £10,000. B. Criminal action only
At that time Frank said he thought the company should C. Both civil action and criminal action
cease trading and be wound up. Leo, however, was
insistent that the company would be profitable in the
long term so they agreed to carry on the business, with (ii)
Frank taking less of a part in the day-to-day Which type of action can be taken in relation to
management of the company, although retaining his fraudulent trading?
position as a company director.
In the course of the next three years Leo falsified Red A. Civil action only
Ltd’s accounts to disguise the fact that the company B. Criminal action only
had continued to suffer losses, until it became obvious C. Both civil action and criminal action
that he could no longer hide the company’s debts and
that it would have to go into insolvent liquidation, with
debts of £100,000.
Although the scenario provides context, both sub-tasks from Task 1 are able to be answered from knowledge
covered in our course, without any need to apply this knowledge to the scenario.

As we covered during the course, fraudulent trading is a criminal offence and a civil offence. Therefore, the correct
answer to part (i) is Both civil action and criminal action. Wrongful trading is a civil offence only, so the correct
answer to part (ii) is Civil action only.
Moving on to task 2. The same background applies.

Background for Tasks 1 and 2 Task 2

Frank and Leo registered a private limited company, (i)

Red Ltd, in January 2011, with each of them becoming Which of the following applies to Frank?
a director of the company. Although the company did
manage to make a small profit in its first year of trading, A. Fraudulent trading (s.213 Insolvency Act 1986)
it was never a great success and in its second year of B. Wrongful trading (s.214 Insolvency Act 1986)
trading it made a loss of £10,000.
At that time Frank said he thought the company should
cease trading and be wound up. Leo, however, was (ii)
insistent that the company would be profitable in the Which of the following applies to Leo?
long term so they agreed to carry on the business, with
Frank taking less of a part in the day-to-day A. Fraudulent trading (s.213 Insolvency Act 1986)
management of the company, although retaining his B. Wrongful trading (s.214 Insolvency Act 1986)
position as a company director.
In the course of the next three years Leo falsified Red
Ltd’s accounts to disguise the fact that the company
had continued to suffer losses, until it became obvious
that he could no longer hide the company’s debts and
that it would have to go into insolvent liquidation, with
debts of £100,000.

Task 2 has two sub-tasks. To answer each sub-task you need to apply your knowledge of fraudulent trading and
wrongful trading to the situation described in the scenario. Fraudulent trading involves carrying on business with
an intent to defraud. Wrongful trading involves carrying on business when the directors knew, or should have
known, that the company will be unable to avoid insolvency.

Looking at the scenario, Frank believed the company should be wound up but allowed it to continue trading. Frank
has allowed the company to continue trading although he knew it was likely the company would become insolvent.
This wrongful trading, so the correct answer to sub-task (i) is wrongful trading.

Leo has falsified accounts to hide the extent of the company’s financial problems and to enable the company to
continue trading. This is fraudulent trading, so the correct answer to sub-task (ii) is fraudulent trading.