What is the difference between wrongful and fraudulent trading?

7th May 2021

In Brief

Wrongful and fraudulent trading are both trading offences relating to the liquidation process of a business which is being wound up. As a criminal offence rather than a civil offence, fraudulent trading is the more serious of the two, and both can lead to disqualification from company directorship for up to 15 years. The level of intent and deception behind the trading is what tends to differentiate the two in the eyes of the law.

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All forms of business-related offences carry the risk of serious consequences, and a trading-related conviction can cause irreversible damage not only to your career and reputation, but to those of others too. Companies built over many years can be brought into disrepute by a single offence, so as a business professional it is of crucial importance that you fully understand the different types of crimes that can be committed relating to trading. 

At Lawtons we have the experience and expertise to guide you through the legal process if you are accused of wrongful trading or fraudulent trading. With a team specialising in regulatory offences including Trading Standards breaches, fraud offences and corporate crimes, we will closely examine the facts of your case, working with you at every step to establish the most robust defence possible, in order to achieve the best outcome that we can.

If you have been accused of fraudulent trading or wrongful trading, do not hesitate to contact the team at Lawtons by calling 0333 577 0522.

What are trading offences?

If a business goes through the liquidation process after becoming insolvent, the conduct of the director(s) over the preceding three years is investigated as a matter of course. This applies whether the liquidation process was entered voluntarily or not. The investigation body generally looks for any evidence of wrongdoing specifically around trading practices, to ascertain whether any wrongful or fraudulent trading may have played a role in the company’s insolvency. 

What is the difference between wrongful trading and fraudulent trading? 

The main difference between these two types of trading offence is that wrongful trading is a civil offence while fraudulent trading is a criminal offence. This makes fraudulent trading a significantly more serious offence to be found guilty of, as it is an offence which may be triable in a criminal court, but both carry severe consequences. 

What does wrongful trading mean?

If the directors of a company continue to trade, despite being aware that the company is going out of business, this is considered wrongful trading. This also applies if the directors were not aware, but should have been aware, of the company’s imminent fate. Directors found guilty of wrongful trading may be liable for the debts of the company after it goes out of business, so it is vital to be completely across what is happening with your business accounts at any stage.

Examples of wrongful trading include:

  • Paying yourself a high salary which the company cannot afford
  • Purposefully amassing high debts to the possible detriment of creditors
  • Entering into credit agreements despite knowing that repayment terms cannot be honoured
  • Taking deposits from customers when the order will not be fulfilled
  • Taking delivery of goods which the company cannot pay for

What does fraudulent trading mean? 

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

The intent behind the actions, and the level of deception involved, are key to proving that directors are liable for fraudulent trading, and represents the main difference between wrongful and fraudulent trading. 

In many cases, directors can be found guilty of fraudulent trading if they have attempted to maximise the amount of money coming into the business before it went into liquidation. 

What are the consequences of wrongful and fraudulent trading?

The implications of a guilty verdict in a wrongful trading case include:

  • Being held personally responsible for any fines and debts accumulated by the company prior to liquidation
  • Disqualification from being a company director for a period of up to 15 years

The implications of a guilty verdict in a fraudulent trading case – the much more serious offence – include:

  • Being held personally responsible for any fines and debts accumulated by the company prior to liquidation
  • Disqualification from being a company director for a period of up to 15 years
  • A prison sentence of up to 10 years, a fine or both

What should you do if you are accused of wrongful or fraudulent trading?

Having the assistance of experienced and highly respected legal professionals can make all the difference in a wrongful or fraudulent trading case. Call Lawtons on 0333 577 0522 today for a confidential consultation with one of our friendly team and we will establish the best course of action for you. 

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