A guide, not advice. This explains how things generally work. A licensed insolvency practitioner will tell you what applies to your company or to you.
What Is Fraudulent Trading?
Fraudulent trading is a serious offence under Section 213 of the Insolvency Act 1986. It occurs where a company carries on business with intent to defraud creditors - for example, by taking deposits for goods the directors know will never be supplied, or incurring debts with no intention of paying them.
Unlike wrongful trading, which is based on what a director should have known, fraudulent trading requires actual dishonesty - intent to defraud. This makes it harder to prove but far more serious in its consequences.
The Consequences
If fraudulent trading is established, the consequences are severe:
- Personal liability - a court can order the director to contribute personally to the company's assets
- Criminal prosecution - fraudulent trading is a criminal offence, punishable by imprisonment and/or a fine
- Director disqualification - a finding of fraudulent trading can support disqualification proceedings
How It Differs from Wrongful Trading
| Wrongful Trading | Fraudulent Trading | |
|---|---|---|
| Mental element | Ought to have known there was no reasonable prospect | Actual intent to defraud |
| Nature | Civil claim | Civil claim + criminal offence |
| Seriousness | Serious | Very serious |
| Standard | Negligence | Dishonesty |
Examples of Fraudulent Trading
- Taking customer deposits with no intention of fulfilling orders
- Incurring credit when the company has no means and no intention to pay
- Transferring assets out of the company to avoid creditors
- Misrepresenting the company's financial position to obtain credit
How to Protect Yourself
- Keep honest, accurate records
- Do not incur debts you cannot realistically repay
- Do not make promises to customers you cannot keep
- Take professional advice as soon as the company is in difficulty
- Never misrepresent the company's financial position
Honest, responsible conduct - even where the business fails - almost never leads to a fraudulent trading finding. The offence is aimed at genuine dishonesty.
Speak to a Licensed IP
If you're concerned about your exposure, early, honest advice is the best protection. Our Manchester-based practitioners will assess your position confidentially and without judgment.