What is fraudulent trading?

Fraudulent trading is the most serious trading-related liability a director can face, because it crosses the line into dishonesty and crime. This guide explains the intent that must be proved, the civil and criminal consequences, and exactly how it differs from wrongful trading.

What fraudulent trading means

Fraudulent trading occurs where the business of a company has been carried on with intent to defraud creditors, or for any other fraudulent purpose. The defining feature is dishonesty. This is what separates it sharply from wrongful trading: it is not merely poor judgement, over-optimism or pressing on too long in the hope of a recovery, but a deliberate intent to deceive or cheat those the company owes money to. The bar is deliberately high, because a finding of fraudulent trading carries the most serious civil and criminal consequences in insolvency law, and the courts will not make such a finding lightly or on the basis of incompetence alone.

The civil and criminal sides

Fraudulent trading is unusual in that it sits in two places in the law at once — the same conduct can give rise to a civil claim by a liquidator under section 213 of the Insolvency Act 1986 and a separate criminal prosecution. The two routes have different purposes: the civil claim seeks to recover money for creditors, while the criminal offence exists to punish and deter dishonest conduct. They can be pursued independently of one another.

Examples of fraudulent purpose

Fraudulent trading covers a range of dishonest conduct, but the common thread is always a deliberate intent to deceive or cheat creditors rather than mere mismanagement. The dishonesty can be aimed at existing creditors, future creditors, or both, and a single transaction entered into with intent to defraud can be enough — it does not require a sustained pattern. Common examples include:

• Taking deposits or pre-payments for goods or services the company never intends to provide.
• Ordering on credit with no intention of paying, knowing collapse is imminent.
• Deliberately misleading creditors or lenders about the company’s true financial position.
• Stripping assets out of the company to put them beyond creditors’ reach before failure.

How it differs from wrongful trading

The line between the two is intent. Wrongful trading is about a failure to stop trading in time and needs no dishonesty whatsoever; it is purely a civil matter. Fraudulent trading requires a dishonest intent to defraud and is also a crime. Because dishonesty must be proved to a high standard, claims brought after a company fails are far more often for wrongful than fraudulent trading — but where genuine fraud exists, the consequences are correspondingly severe.

How a claim is brought and proved

The civil claim under s.213 can only be brought once a company is in liquidation, and it is the liquidator who brings it on behalf of the general body of creditors. Because the allegation is one of dishonesty, the evidential bar is high: it is not enough to show that the company traded while insolvent or that creditors lost money. The liquidator or prosecution must establish an actual intent to defraud or a fraudulent purpose. This is why findings of fraudulent trading are comparatively rare, and why liquidators more often pursue the lower-threshold civil remedy of wrongful trading where the evidence of dishonesty is not clear-cut.

Wider consequences

A finding of fraudulent trading almost inevitably leads to director disqualification, often for a long period at the top of the range, and may sit alongside other personal claims and asset-recovery actions. It is treated as conduct of the most serious kind by both the Insolvency Service and the courts, and the reputational damage is lasting.

Frequently asked questions

Sources & further reading

• Insolvency Act 1986 — s.213 (fraudulent trading)
• GOV.UK — Director responsibilities and insolvency
• The Insolvency Service — guidance for company directors
• Company Directors Disqualification Act 1986

This guide is general information, not formal insolvency advice. Your situation must be assessed by a licensed insolvency practitioner before you act.