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What is the difference between fraudulent trading and wrongful trading?

As a director of a limited company, you will be aware of the many duties you have and the possible consequences of failing to adhere to them. Fraudulent and wrongful trading are particular examples of director conduct which carry stiff penalties despite being seen as quite distinct in the eyes of the law.

When a company is insolvent and it goes through the liquidation process, voluntarily or not, there will be an investigation into the conduct of the director(s) over the last three years. The liquidators will look for any wrongdoing including whether there has been any fraudulent or wrongful trading that led to the company’s insolvency.

What is fraudulent trading?

A company is trading fraudulently if it carries on its operations with the purpose of deceiving and defrauding creditors and customers; it is a criminal offense for any business and/or director to trade in this way.

What is wrongful trading?

A company is wrongfully trading when directors continue as normal regardless of being aware (or when they should have been aware) that the company was going out of business. Wrongful trading is a civil offense and any director found guilty of this is at risk of being held personally liable for any debts of the company.

wrongful trading

What are the likely consequences?

The likely consequences of being found guilty of fraudulent or wrongful trading are:

  • Significant fines
  • Being held personally liable for a company’s debts
  • A ban for up to 15 years as director of a limited company
  • Jail sentences for more serious offenses

Director responsibility

As mentioned previously, directors have certain responsibilities with regard to the running of their company. The best way to prevent being accused of the above or falling foul of the responsibilities of a director is to get in contact with us as soon as you know that your company can no longer keep up with its financial obligations.

You should also:

  • Keep, update and preserve any and all documentation with regards to company income and expenditure.
  • Be honest with your creditors at all times.
  • Act in the best interests of your creditors and the business; you should not show any preference to one creditor over another.
  • Refrain from attempting to or selling company assets, particularly when they are sold for a lower price than market value as this will be seen as a transaction under value.

If you are concerned that your company is guilty of fraudulent or wrongful trading or you are worried about being able to afford to pay back company debts, get in touch with us on 0800 901 2475 as soon as possible to obtain best advice on a no-obligation basis.

Authored by Phil Meekin

Phil Meekin

Senior Consultant

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