Fraudulent trading is an incredibly serious charge. Fraud is a criminal offence; therefore, you must get expert legal advice if you are accused of fraudulent trading. Penalties for fraudulent trading include personal liability for the company's debts and imprisonment if you are convicted of a criminal offence. This guide provides everything you need to know about fraudulent trading. If you need legal advice, we are only a phone call or email away.
What is Fraudulent Trading?
Fraudulent trading occurs when, during the winding up or administration of a company, some or all of the company's business is conducted with the intent to defraud the entity's creditors.
What is Long-Term and Short-Term Fraud within a Limited Company?
Fraudulent trading can manifest in different ways, broadly categorised into long-term and short-term fraudulent activities.
Long-Term Fraudulent Trading
Long-term fraudulent trading involves sustained deceptive practices over an extended period. This can include falsifying financial records, creating fictitious transactions, or hiding company assets to mislead creditors and stakeholders. The intent is to create a false impression of the company's financial health.
Short-Term Fraudulent Trading
Short-term fraudulent trading is characterised by deceptive actions taken in the short term, often in the face of impending insolvency. This might include taking orders and accepting customer payments when the company has no intention or ability to fulfil them. The primary aim is to extract as much value as possible before the company collapses.
What is Wrongful Trading by Directors?
Wrongful trading occurs when company directors allow the business to continue operating despite knowing (or should have known) that insolvency is inevitable, without taking every possible step to minimise potential losses to creditors.
What Constitutes Wrongful Trading?
- Continuing to trade while insolvent.
- Incurring further debts, knowing the company cannot pay them.
- Failing to file for insolvency in a timely manner.
- Misleading creditors about the company's financial health.
Why are Directors Liable for Wrongful Trading?
Directors can be personally liable if they continue to trade while knowing the company is insolvent. The law requires directors to act in the best interests of the company's creditors once insolvency becomes apparent.
What is Meant by a Director Must Act in the Best Interests of the Company's Creditors?
In insolvency cases, the interests of creditors take precedence over those of shareholders. Directors must prioritise minimising losses to creditors over trying to save the company. This makes practical sense when you think about it. Imagine the commercial chaos if companies were permitted to keep trading even after directors knew insolvency was inevitable. In many cases, this would result in the collapse of not only the company in question but also many of its suppliers and partners. An example of this was when the construction giant Carillion fell into liquidation.
The Penalties for Wrongful Trading
Penalties for wrongful trading include personal liability for the company's debts, disqualification from serving as a director, and, in some cases, criminal charges if fraud or severe misconduct is involved.
Is Wrongful Trading a Criminal Offence?
Wrongful trading is not a criminal offence, but can lead to significant civil penalties and personal liabilities. Therefore, if you are accused of wrongful trading, you must take the matter seriously and get expert legal advice and representation.
Section 214 of the Insolvency Act 1986
Section 214 of the Insolvency Act 1986 deals explicitly with wrongful trading. It allows Insolvency Practitioners to apply to the Court to hold directors personally liable if they are found to have continued trading while knowing the company could not avoid financial collapse.
Fraudulent Trading vs Wrongful Trading
The key difference between wrongful and fraudulent trading is that the latter requires dishonest intent. For example, if you know your company is in financial strife but believe you can trade your way back to solvency and continue to accept credit from suppliers, this is wrongful trading. However, if you know the company cannot pay its debts and the Prosecution and/or liquidator can prove that you accepted credit with the intention of purchasing stock for a new company you planned to set up after the existing company inevitably collapsed, you could be liable for fraudulent trading.
How is Fraudulent Trading Determined by Law?
Section 213 and section 246ZA of the Insolvency Act 1986 provide the following definitions of fraudulent trading:
213.— Fraudulent trading.
(1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.
(2) The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company's assets as the court thinks proper.
246ZA Fraudulent trading: administration
(1) If while a company is in administration it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.
(2) The court, on the application of the administrator, may declare that any persons who were knowingly parties to the carrying on of the business in the manner mentioned in subsection (1) are to be liable to make such contributions (if any) to the company's assets as the court thinks proper.
Section 213 and section 246ZA of the Insolvency Act 1986.
Section 246ZA came into force on 1st October 2015.
What Actions May Be Considered Fraudulent Trading?
Actions that could be considered fraudulent trading include:
- Falsifying financial statements.
- Creating false invoices or transactions.
- Misrepresenting the company's financial health to secure credit.
- Hiding or dissipating company assets to defraud creditors.
Fraudulent trading can occur in conjunction with other criminal offences, such as false accounting and fraud by false representation.
A Recent Update on Fraudulent Trading Law by The Supreme Court
In a key ruling, the UK Supreme Court in Bilta (UK) Ltd (In Liquidation) v Tradition Financial Services Ltd [2025] UKSC 18 has provided essential clarity on the scope of section 213 in the Insolvency Act.
What Did the Supreme Court Decide?
The Court was tasked with determining whether liability for fraudulent trading applies solely to individuals directly involved in managing or controlling a company. The judgment definitively rejected this narrow view, confirming that section 213 extends liability to anyone who knowingly participates in fraudulent trading, whether they are insiders like directors or officers, or external parties such as advisers and financiers who facilitate wrongful conduct.
This broader interpretation means that external professionals who knowingly assist in fraudulent activities can also be held accountable for contributing to the company’s assets if fraudulent trading is proven.
Why Is This Important for Directors and Third Parties?
This ruling highlights the need for vigilance not only among company insiders but also for all parties engaging with businesses. It sends a clear message that anyone who knowingly participates in or enables fraudulent trading, even if they aren't directly controlling the company, could face legal action and be required to compensate creditors.
Directors, advisers, and third-party service providers should reassess their business dealings to ensure they comply with relevant legal obligations. It is advisable to seek legal counsel before entering into transactions with financially troubled companies to avoid potential exposure to liability under section 213.
Key Takeaways from the Recent Judgment
- Wider Liability: Section 213 now applies to anyone who knowingly participates in fraudulent trading, including third parties.
- Increased Risks for Third Parties: Professionals, advisers, and businesses must exercise extra caution and due diligence when working with companies that may be engaging in questionable practices.
- Setting a Precedent: This judgment sets a crucial precedent for future fraudulent trading cases, reinforcing that all parties involved in wrongful conduct can be held liable.
How are Directors Accused of Fraudulent Trading?
Investigations into fraudulent trading typically begin during insolvency proceedings. Liquidators and/or Insolvency Practitioners examine the company's financial records, conduct interviews with directors and employees and analyse transactions to identify any fraudulent activities.
What is the Burden of Proof Required for Fraudulent Trading?
If an Insolvency Solicitor brings a claim against you in the Civil Court to make you personally liable for some or all of the company's debts on the grounds of fraudulent trading, the burden of proof falls on them and they must prove that you conducted fraudulent trading on the balance of probabilities.
You must be a knowingly party to the fraudulent trading to be caught by section 213. Case law, such as Re Patrick and Lyon Ltd [1933] Ch 786, provides that it is not enough for fraudulent trading to show that the company continued to run up debts when the directors knew that it was insolvent; there has to be "actual dishonesty, involving... real moral blame". In Bilta (UK) Ltd (In Liquidation) v Natwest Markets Plc [2020] EWHC 546 (Ch) the Court has formulated a two-stage test: first, the liquidator has to demonstrate the director's subjective state of knowledge and, second, then show that the director's conduct was dishonest applying the objective standards of ordinary decent people
If criminal charges are brought, the Prosecution must prove, beyond a reasonable doubt, that you acted dishonestly and the fraudulent trading was done with the intention of making a gain for yourself or another, or to cause another person loss or expose them to the risk of loss.
The test for dishonesty, which must be answered by a Magistrate or, in the case of a Crown Court trial, the jury, is as follows:
- What was the Defendant's actual state of knowledge or belief as to the facts?
- Irrespective of the Defendant's belief about the facts, was their conduct dishonest by the objective standards of ordinary decent people?
To gain a conviction, the Prosecution does not have to prove that you actually benefited from the fraudulent trading or that your actions caused someone a loss, only that this was your intention. When it comes to 'risk of loss', exposing another to such a risk is sufficient.
Because the burden of proof is much higher in a criminal case, unless there is solid evidence against you, the Insolvency Solicitor will likely bring a civil claim against you. However, if you are convicted of fraudulent trading via the Criminal Court, the Prosecution can bring an application under the Proceeds of Crime Act 2002 (POCA) for a Confiscation Order.
The Implications of Fraudulent Trading for Company Directors?
The potential consequences for directors involved in fraudulent trading include:
- Personal liability for company debts.
- Disqualification from serving as a director.
- Civil fines and penalties.
- Criminal charges leading to imprisonment.
- Damage to personal and professional reputation.
How can a Director Avoid Wrongful or Fraudulent Trading Accusations?
If you know your company is likely to fall into insolvency, make sure you take the following actions:
- Maintain accurate and honest financial records
- Ensure transparency in all business dealings
- Avoid making misleading statements to creditors and stakeholders
- Seek professional advice when financial difficulties arise
- Act promptly when insolvency becomes apparent
- Avoid transferring or hiding assets
Working with an experienced Insolvency Solicitor who is on your side is the best protection you have against wrongful or fraudulent trading accusations. They will advise you every step of the way and help ensure you have adequate records to show you have acted honestly, transparently, and in the best interests of your creditors.
As experts in insolvency law, Witan Solicitors can provide expert advice and representation if you are being investigated for wrongful or fraudulent trading. Contact us on 0330 173 6983 or send us an email for more information.
FAQ
What should I do if I am worried about wrongful or fraudulent trading?
If you have any concerns, follow these five steps:
- Consult with an experienced Insolvency Solicitor immediately
- Review company financials regularly
- Document all decisions and actions taken to mitigate creditor losses
- Seek legal advice to understand your responsibilities and liabilities
- Communicate openly with creditors about the company's situation
Is wrongful trading a criminal offence?
While wrongful trading itself is not a criminal offence, it can result in significant civil penalties.
What is the definition of insolvent trading?
Insolvent trading means continuing business operations when a company cannot pay its debts as they fall due, or when its liabilities exceed its assets.
Can you trade while in liquidation?
Once a company enters liquidation, it typically ceases trading. The liquidator must manage any business continuation and is generally limited to activities necessary to wind up the company.
Can directors be personally liable in a limited company?
Yes, directors can be held personally liable for company debts if they engage in fraudulent trading, wrongful trading, or other misconduct. Personal guarantees and certain legal breaches can also result in personal liability.
Understanding fraudulent and wrongful trading is crucial for directors and shareholders. By adhering to legal requirements and maintaining transparent business practices, individuals can mitigate risks and avoid serious legal repercussions.
