What is the difference between fraudulent trading and wrongful trading?

Any company directors need to be well aware of the duties required 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 previous 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. If any conclusion finds the directors guilty of fraudulent trading, it can lead to direct disqualification as a director for up to 15 years.

What is fraudulent trading?

A company is trading fraudulently under section 214 of the Insolvency Act 1986, if it carries on its operations with the purpose of deceiving and defrauding creditors and customers; it is a criminal offence for any business and/or director to trade in this way. The key point to fraudulent trading, is the intent that directors have behind their actions.

See more on the causes and repercussions of fraudulent trading

What is wrongful trading?

A company is wrongfully trading when directors continue to trade, regardless of being aware (or when they should have been aware) that the company was going out of business. Wrongful trading is a civil offence and any director found guilty of this is at risk of being held personally liable for any debts of the company. Directors should have a good understanding of what’s happening within their company, particularly the accounts and should be able to know when they are trading wrongfully.

See more on the consequences and causes of wrongful trading

What are the likely consequences?

There are some significant consequences for both wrongful and fraudulent trading, with the latter having more serious repercussions.

Fraudulent trading

• Directors being held personally liable for company fines and debts
• Disqualification for a company director for up to 15 years
• Potential jail sentences – Fraudulent trading is a criminal offence

Wrongful trading

• Directors being held personally liable for company fines and debts
• Disqualification for a company director for up to 15 years

Director responsibility

As mentioned previously, directors have specific responsibilities concerning the running of their company. By being honest, truthful and by not continuing to trade whilst knowing the company can no longer do so, is the best way to prevent any accusations of wrongful trading or fraudulent trading.

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, especially when they are sold for a lower price than market value as this will be seen as a transaction undervalue.

In summary

Directors can be guilty of wrongful trading, if they continue trading whilst being aware that a company has very little chance of success. It can result in directors being held personally for responsible company debts, as well as seeing them banned as being a director. Fraudulent trading is a criminal offence, which involves the deliberate deceiving or defrauding creditors and clients.

How we can help

If you’re worried about any trading laws or are unsure what you could be held responsible for, it’s important to act as quickly as possible. We have the experience and expertise to help guide you in the right direction and give the best advice on what trading is acceptable. We offer free face-to-face consultations nationwide.

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Lisa Hogg

Director & Licensed Insolvency Practitioner

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