What is the Difference Between Wrongful Trading and Fraudulent Trading?

What is the Difference Between Wrongful Trading and Fraudulent Trading?
Legally reviewed by: Laura Smith Updated: In: Corporate & Financial Crime

Both wrongful trading and fraudulent trading are offences relating to the liquidation process of a business which is being wound up. Fraudulent trading is considered a more serious criminal offence in comparison to wrongful trading which is considered a less serious civil offence. However, both can lead to disqualification from a company directorship for up to fifteen years. When discussing the difference between wrongful trading and fraudulent trading, the level of intent in deception is what differentiates the two.

What are Trading Offences?

When a business goes into liquidation after becoming insolvent, the conduct of the director(s) will be investigated in the three-year prior to the liquidation. Investigation will be carried out whether the liquidation was involuntarily entered or not. The investigating body will search for evidence of any wrongdoing, surrounding the trading practices. This is to determine whether any wrongful or fraudulent trading played a part in the company’s insolvency.

What is Wrongful Trading?

Wrongful trading can encompass a few examples. It’s classed as wrongful trading where the director(s) of a company continue to trade after they’re aware the company is going out of business. It also applies if the director(s) were not aware but should have been aware of the company going out of business. If you are a director and are found guilty of wrongful trading, you may be liable for the debt of the company after it goes out of business. Wrongful trading can be avoided by directors being completely aware of what is happening across the businesses’ accounts at any point.

Examples are:

  • Paying yourself a high salary which the company is unable to afford.
  • Entering into any credit agreements with knowledge that the repayment terms cannot be honoured.
  • Not filing annual returns at Companies House
  • Failing to file annual or audited accounts at Companies House
  • Not correctly operating the PAYE scheme or failing to pay PAYE and NIC when due and building up arrears.
  • Failing to operate the VAT scheme correctly and building up arrears.
  • Taking excessive salaries that the company can’t afford.
  • Repaying a director loan made to the company while other creditors were not paid.
  • Trading while the company is insolvent.
  • Taking credit from suppliers where there was ‘no reasonable prospect’ or paying the creditor on time.
  • Consciously building up debt.
  • Taking deposits from customers when the directors know the product or service will not be delivered.

What is Fraudulent Trading?

Fraudulent trading is defined under the Insolvency Act 1986 as a company carrying on its operations with the full intention of deceiving or defrauding creditors or customers.

Fraudulent trading is determined by the level of deception of the director(s) and is the main determining factor for whether the trading is wrongful or fraudulent.

Directors can be found guilty of fraudulent trading where they have attempted to maximise the amount of money coming into the business prior to it going into liquidation.

What’s the Difference Between Wrongful Trading and Fraudulent Trading?

The main difference between these offences is that wrongful trading is a civil offence while fraudulent trading is a criminal offence. Being found guilty of fraudulent trading is an offence which may be triable in a criminal court. However, both carry severe consequences.

What are the Legal Consequences?

If you are found guilty in a wrongful trading case, you may:

  • Be held personally responsible for any fines and debts that have accumulated by the company before liquidation.
  • Disqualification from being a company director for up to 15 years.

The implications of a guilty verdict regarding a fraudulent trading case are much more serious and often include:

  • Being held personally responsible for any fines and debts that have accumulated by the company before liquidation.
  • Disqualification from being a company director for up to fifteen years.
  • A prison sentence of up to ten years, and/or fine.

What to Do if You Have Been Accused of Wrongful Trading or Fraudulent Trading

Seeking support from experienced legal experts can be pivotal in navigating a wrongful or fraudulent trading matter. Reach out to Cartwright King today at 03458 941 622 for a discreet discussion with our corporate and financial crime team.

Frequently asked questions.

Can I Trade While My Business Is in Liquidation?

You cannot trade while your business is in liquidation. Liquidation means the end of the company, including the sale of its assets and the end of the businesses’ status as a company on Companies house.

What Is Trading Insolvently?

Trading insolvency is when the company director becomes aware of the company’s insolvency and still trades in despite of this.

Is it a Criminal Offence Wrongfully Trade?

While not classified as a criminal offense, wrongful trading holds significant weight as a civil offense in the eyes of the courts. Directors who plead ignorance to their company’s financial distress risk being perceived as negligent. This defense not only strengthens allegations of unfit director conduct but also increases the seriousness of the case.</p>

Who is Responsible for Wrongful or Fraudulent Trading?

Directors are responsible where evidence of fraudulent trading or wrongful trading is found. Directors may be found personally liable for some or all the company debts.

Legal Disclaimer.

All advice is correct at time of publication.