Fraudulent trading explained

Fraudulent trading exists in two forms. Section 213 of the Insolvency Act 1986 creates a civil remedy: if a company's business is carried on with intent to defraud creditors, or for any fraudulent purpose, the court can order any knowing participant to contribute to the company's assets. Section 993 of the Companies Act 2006 creates a criminal offence with the same test, punishable by up to ten years' imprisonment on indictment.

Wrongful trading under s.214 IA 1986 is an objective test — a reasonable director in the same role should have known insolvent liquidation was inevitable. Fraudulent trading requires proof of dishonest intent to defraud creditors. Because intent must be proved to the criminal standard (or a heightened civil standard), fraudulent trading is rarer but the sanctions are far more severe.

Anyone 'knowingly a party' to the fraudulent carrying-on of business. That includes directors, shadow directors, senior managers and even third parties who participate knowingly. In Morphitis v Bernasconi [2003] EWCA Civ 289 the Court of Appeal confirmed s.213 catches non-directors who join in the fraudulent conduct.

The court applies the Ivey v Genting Casinos [2017] UKSC 67 test for dishonesty: what did the defendant subjectively know or believe, and would that conduct be dishonest by the objective standards of ordinary decent people? For the criminal offence under s.993 CA 2006 the standard is beyond reasonable doubt; for civil s.213 it is the ordinary civil balance, but the more serious the allegation, the more cogent the evidence needed.

Potentially yes. In Re Gerald Cooper Chemicals Ltd [1978] Ch 262, a company that accepted goods it could not pay for was held to be trading fraudulently even for a single transaction. Junior staff usually escape liability because they lack the requisite knowledge, but senior managers and finance leaders who processed knowingly-fraudulent transactions have been caught.

Under s.993 CA 2006: up to 10 years' imprisonment, an unlimited fine, or both on indictment; up to 12 months and/or the statutory maximum fine summarily. Civil s.213 IA 1986 exposes participants to contribution orders (no statutory cap) and disqualification under s.10 CDDA 1986 for up to 15 years.

Yes. Since the Small Business, Enterprise and Employment Act 2015, administrators can bring fraudulent-trading claims under s.246ZA IA 1986 (previously the power was limited to liquidators). Claims can also be assigned to third-party funders under s.246ZD IA 1986.

No. Directors' & officers' policies routinely exclude fraudulent, dishonest and criminal conduct. Some policies advance defence costs on a conditional basis, subject to a claw-back if the insured is ultimately proved to have acted dishonestly. Do not assume cover — read the policy carefully and notify the insurer at the first sign of a claim.

Placing large orders when the company plainly cannot pay; continuing to trade after receiving a professional opinion that liquidation is inevitable; asset-stripping into a phoenix entity; using customer prepayments to fund operating losses; and 'roll-over' Ponzi-style structures where new investor money pays existing creditors. Prosecutors focus on the paper trail — invoices, emails, board minutes — that shows knowledge of the fraud.

No. The Insolvency Service's annual disqualification statistics show a handful of s.993 CA 2006 prosecutions per year, compared with hundreds of disqualifications for unfit conduct and dozens of wrongful-trading civil claims. Fraudulent trading is the extreme end of the spectrum, reserved for cases where dishonesty is clearly provable.