Fraud if a director lies about being unable to pay
<p>Context: Canadian Law; contractor; fraud</p>

<p>Would it be considered fraudulence on behalf of the director (specifically CEO) of a company if they were to lie about being unable to pay a contractor, but instead chose to spend the money on other purchases? If that company later went bankrupt/insolvent,</p>

<ol>
<li>Could this impact pro-rata payment to creditors (i.e. give preference to the creditor)?</li>
<li>Make the director personally-liable (if this is considered fraud) and allow the contractor to sue the director personally?</li>
</ol>

<h2>Lying is not fraud</h2>

<p>There is no general law that prevents people from lying. Fraud is using deception to receive an advantage - if the director said the would pay by a certain date in order to get something from the contractor and <em>at that time</em> they had no intention of doing so, then that could be fraud. However, you can see how difficult it would be to prove that circumstances hadn't changed.</p>

<h2>Trading while Insolvent</h2>

<p>Its pretty much universal in insolvency law that trading while you are insolvent is unlawful and possibly criminal. In this context, "trading" means incurring debts an "insolvent" means being unable to pay your debts as and when they fall due. Again, unless it is egregious, its hard to prove. Insolvent trading only occurs when a reasonably prudent director knows that the company is insolvent. Marginally solvent companies can slip over the edge into insolvency due to any number of factors beyond the company's control - a bad debt, an audit, litigation, a denied insurance claim etc.</p>

<p>This doesn't usually expose the director to the creditors but it does open them up for prosecution.</p>

<h2>Preferential payments</h2>

<p>A liquidator has the power to claw back payments that have been made preferentially <em>while the company was insolvent</em>. Enforcement is difficult because most creditors won't hand the money back voluntarily and most companies in liquidation don't have the financial resources to pursue them in court.</p>

<h2>Write it off and move along</h2>

<p>From personal experience, unsecured creditors in a liquidation usually receive nothing or maybe 4 cents in the dollar three years latter. Details vary by jurisdiction but in <a href="/questions/tagged/australia" class="post-tag" title="show questions tagged &#39;australia&#39;" rel="tag">australia</a> the distribution is 1) liquidator's fees, 2) employee wages &amp; entitlements, 3) secured creditors, 4) unsecured creditors and 5) shareholders. The money usually runs out at step 1) or 2).</p>

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