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Chapter 203 4

Wrongful and fraudulent trading

4.1 Fraudulent trading

Fraudulent trading is where a company carries on a business with the intention of
defrauding creditors or for any other fraudulent purposes.

This would include a situation where the director(s) of a company continue to trade
whilst insolvent, and enter into debts knowing that the company will not be in a
position to repay those debts.

The Insolvency Act 1986 (s.213) governs situations where, in the course of a winding
up, it appears that the business has been carried on with the intent to defraud
creditors, or for any other fraudulent purpose.

Fraudulent trading is also a criminal offence under the Companies Act 2006.

4.2 Wrongful trading

Wrongful trading (s.214 1a of the Insolvency Act 1986) is when the director(s) of a
company have continued to trade when they: ‘knew, or ought to have concluded that
there was no reasonable prospect of avoiding insolvent liquidation’.

A director can defend an action of wrongful trading if they can prove that they have
taken sufficient steps to minimise the potential loss to creditors.

Wrongful trading is an action that can be taken only by a company's liquidator, once it
has gone into insolvent liquidation (either voluntary or compulsory liquidation).

Wrongful trading needs no finding of 'intent to defraud', unlike fraudulent trading.

Wrongful trading is a civil offence (fraudulent trading is a criminal offence), it only
needs to be proven ‘on the balance of probabilities’ (i.e. it is more likely than not that
the director(s) are guilty of wrongful trading).

Fraudulent trading needs to be proven ‘beyond reasonable doubt’ (i.e. it is almost
certain that the director(s) are guilty of fraudulent trading).

For these reasons, wrongful trading is more common than fraudulent trading.

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