Understanding the difference between wrongful and fraudulent trading

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Updated: 28th April 2021

On 28 March 2020, the Government announced new insolvency measures to support businesses under pressure as a result of the coronavirus outbreak. The Government will amend insolvency law to give companies breathing space and keep trading while they explore options for rescue and temporarily suspending wrongful trading provisions retrospectively from 1 March 2020 for three months. You can find out more here. Directors must still be mindful of their fiduciary duty to creditors and shareholders and early advice is always the best protection against any criticism.

Wrongful Trading vs Fraudulent Trading

Companies that have been served with a winding up petition are at increased risk of being accused of wrongful trading if they continued to carry on business whilst insolvent. If you are in the process of being wound up, you may need to understand the difference between wrongful trading and fraudulent trading. They are quite distinct in regards to the law and of course one carries stiffer penalties than the other. Rather than work yourself into a frenzy, understand wrongful trading vs. fraudulent trading.

Wrongful Trading

According to the Insolvency Act 1986, wrongful trading refers to companies that continued to carry on their daily business trading insolvent, that is, unable to pay their debts as they fall due. It is usually a case of hoping that things will improve even though they continue to spiral downward. In wrongful trading there is no intent to defraud the company’s creditors but merely a case of poor judgement or the failure of directors to carry out their responsibilities.

Fraudulent Trading

An order of fraudulent trading is much more difficult to obtain because of what is known as “the burden of proof.” If it can be proven that directors knowingly, carried on business affairs with no intent to pay their debts, then the court may find them guilty of fraudulent trading. During the process of winding up and liquidating assets, a liquidator may report their findings of wrongful trading to the court long before they would accuse the director/s of fraudulent trading. Evidence must be weighed heavily before the court would even consider such an order.

Pre Pack Administration and Fraudulent Trading

There are times when directors may be accused of fraudulent sale during a pre pack administration. Wrongful trading is, once again, the act of trading whilst insolvent. A number of directors are known to trade insolvent with the intent of selling their company as a new entity (phoenixing) when the debts are too high to pay. This maybe considered fraudulent trading if the directors have no intention of paying their debts. They are looking to have them set aside during the pre pack sale.

If your company has been served with a winding up petition, contact our insolvency practitioners before it becomes a winding up order. We believe if you are asking for assistance then you are probably just a misguided director who wasn’t aware of your responsibilities. We can help you save your company and also protect you from being accused of wrongful trading. The number to call is 0800 644 6080 to speak with a knowledgeable insolvency specialist.

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