Fraudulent trading explained

• ›Section 213 Insolvency Act 1986 — civil liability for fraudulent trading. The Court can order the director to make ‘such contributions to the company’s assets as the court thinks proper’.
• ›Section 993 Companies Act 2006 — criminal offence of fraudulent trading. Maximum 10 years’ imprisonment plus fine.

Civil claims are brought by the liquidator or administrator. Criminal prosecutions are brought by the Crown Prosecution Service following a referral — typically by the Insolvency Service after section 7A CDDA 1986 reporting from the IP.

The key test for fraudulent trading is the subjective intent of the director — did they carry on business with intent to defraud creditors? This is a high bar. The Court requires evidence of:

• ›Conscious knowledge that creditors would not be paid.
• ›Intent to obtain goods/services/credit despite that knowledge.
• ›Or actual deception of creditors about the company’s position.

Honest but misguided continuation of trading is wrongful trading (section 214), not fraudulent trading. The director who reasonably believed the company would recover — even where wrong — is not fraudulent. The director who knew the company would fail but continued trading to extract value, deceive specific creditors, or strip assets is fraudulent.

Five patterns the Court has historically treated as fraudulent trading:

• ›Continuing to take credit from suppliers when the director knew the company could not pay — particularly where new suppliers were taken on after the position became hopeless.
• ›Deceiving specific creditors about the company’s position — false representations about ability to pay, false financial statements, fabricated reassurances.
• ›Asset stripping — transferring valuable assets to connected parties at undervalue while continuing to take credit from creditors.
• ›Phoenix abuse — deliberately running the company into insolvency to strip value, then continuing the business through a new entity with the same activities and creditors.
• ›VAT carousel fraud — participation in trading patterns designed specifically to evade VAT (often involving missing trader fraud).

• ›Wrongful trading — objective test (should have known); civil liability only; lower bar to establish.
• ›Fraudulent trading — subjective test (knew and intended); both civil and criminal exposure; higher bar to establish but more serious consequences.

In practice, claims for fraudulent trading are relatively rare — the evidential bar is high. Wrongful trading claims are far more common. But where fraudulent trading is established, the consequences are severe — including potential imprisonment.

Civil consequence under section 213: the Court orders contribution to the company’s assets. The director makes good the losses caused by the fraudulent trading. Contribution orders of £100,000–£5,000,000+ are not uncommon for substantial fraudulent trading.

Criminal consequence under section 993 CA 2006: maximum 10 years’ imprisonment plus unlimited fine. Section 993 prosecutions are rarer than civil claims but do occur — particularly where the conduct involved direct deception or substantial dishonesty.

Additional consequences:

• ›Director disqualification under CDDA 1986 — typical disqualification periods 8–15 years for fraudulent trading.
• ›Bankruptcy — if the civil contribution order is large and the director cannot pay, bankruptcy follows.
• ›Loss of regulated status — directors with professional qualifications (solicitor, accountant, financial adviser) typically lose their professional status.

For wrongful trading, section 214(3) IA 1986 provides a defence where the director took ‘every step with a view to minimising the potential loss to the company’s creditors’. This defence does not apply to fraudulent trading — because fraudulent trading requires intent, the defence is structurally inapplicable. Directors facing fraudulent trading allegations cannot rely on the ‘every step’ defence.

• ›Don’t continue taking credit when you know it cannot be repaid — this is the core of fraudulent trading. Stop taking new credit when the company’s position is hopeless.
• ›Don’t make false statements to creditors about the company’s position — even in informal conversations.
• ›Don’t transfer assets to connected parties at undervalue — even where you believe the company will recover.
• ›Don’t use phoenix structures abusively — new companies are lawful, but new companies that continue the previous business with the same customers, employees, and counterparties while leaving creditors stranded are abusive.
• ›Take advice early — an IP, solicitor, or insolvency-experienced accountant can help you identify whether continuing trading is reasonable or whether the position has crossed into fraudulent territory.

For the objective wrongful trading framework, see Wrongful trading. For the broader director duties framework, see Director duties in financial difficulty. For disqualification risks, see Director disqualification.