What is the difference between fraudulent and wrongful trading?

Julie Palmer

Regional Managing Partner

Updated

8 July 2026

Wrongful and fraudulent trading are two of the most commonly misunderstood areas of insolvency law, and the distinction between them matters enormously, both in terms of what they mean and how serious the consequences are.

Both offences are set out in the Insolvency Act 1986 and relate to the conduct of directors when a company is insolvent or heading towards insolvency. However, wrongful trading is a civil matter, while fraudulent trading is a criminal offence. The difference comes down to one word: intent.

“The distinction between fraudulent and wrongful trading matters enormously. Wrongful trading is about poor judgement, while fraudulent trading is about deliberate dishonesty. In our experience, the vast majority of directors we investigate have acted honestly but continued trading longer than they should have. That’s wrongful trading territory, not fraud, and the consequences, while serious, are very different.”
— Julie Palmer, Partner, BTG Begbies Traynor

Both wrongful trading and fraudulent trading are offences under the Insolvency Act 1986 and the Companies Act 2006 and directors must be particularly vigilant to both acts if their company is at risk of becoming insolvent. Trading while knowingly insolvent may lead to accusations of wrongful trading, or the more serious charge of fraudulent trading if you are thought to have deliberately attempted to deny creditors what they are owed.

If you fear that your company has reached a state of being insolvent, you must tread very carefully in order to ensure you do not inadvertently commit an act which could constitute wrongful trading. Insolvency is when you are unable to pay bills as they fall due, or when the total of company liabilities exceeds the total value of assets held.

It is incumbent on a director to be aware of their company’s financial position at all times, and putting forward a defence that you were unaware of the insolvent situation will carry little weight. Failing to realise that a company is in financial difficulties may be regarded as negligent, irresponsible, or proof of ‘unfit conduct’ of directors, which will add to the seriousness of the situation.

What is wrongful trading?

Wrongful trading is defined in section 214 of the Insolvency Act 1986. It occurs when a company director allows the business to continue trading when they knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation and they failed to take every step to minimise the potential losses to creditors.

It is important to understand that wrongful trading is not a criminal offence. It is a civil matter, and a claim can only be brought by a liquidator or administrator after the company has entered an insolvency process. Creditors cannot bring wrongful trading claims directly.

The key test has three parts. First, the company must have gone into insolvent liquidation or administration. Second, at some point before that, the director knew or should have known that insolvency was unavoidable. Third, from that point onwards, the director failed to take every reasonable step to minimise creditor losses.

Examples of conduct that can give rise to wrongful trading claims include continuing to accept credit from suppliers when the company cannot pay its existing debts, taking deposits from customers for work the company may not be able to deliver, paying yourself or connected parties ahead of other creditors, and failing to seek professional advice when the company’s financial position is clearly deteriorating.

“The question we’re asking as liquidators isn’t ‘did the director act dishonestly?’ It’s ‘at what point should a reasonably diligent director have concluded that insolvency was unavoidable, and did they take appropriate steps from that point onwards?’ The directors who protect themselves best are those who sought professional advice early, documented their decisions, and acted on the advice they received.”
- Julie Palmer, Partner, BTG Begbies Traynor

If the court finds wrongful trading has occurred, it can order the director to make a personal contribution to the company’s assets. There is no cap on the amount, instead it is based on the additional losses creditors suffered during the period the director continued trading after the point insolvency became unavoidable. A wrongful trading finding can also lead to director disqualification for up to 15 years.

There is a six-year limitation period for wrongful trading claims, running from the date the company entered insolvency.

Can you defend a wrongful trading claim?

Yes. Section 214(3) of the Insolvency Act 1986 provides a statutory defence. If you can demonstrate that, from the point you knew or should have known insolvency was likely, you took every step that a reasonably diligent person would have taken to minimise the potential loss to the company’s creditors, the court will not make a declaration of personal liability against you.

In practice, this means the court will assess whether you sought professional advice from a licensed insolvency practitioner, documented your assessment of the company’s financial position, stopped incurring non-essential new debts, considered the interests of creditors in every significant decision, and acted on the advice you received. The test is partly objective (what would a reasonable director in your position have done?) and partly subjective (what skills and experience did you personally have?).

“The statutory defence is the single most important thing for directors to understand about wrongful trading. It tells you exactly what we as liquidators will be looking for when we investigate: did the director seek advice, act on it, and put creditors first from the point insolvency became likely?"
- Julie Palmer, Partner, BTG Begbies Traynor

What is fraudulent trading?

Fraudulent trading is a far more serious offence. It is defined in section 213 of the Insolvency Act 1986 (which allows the liquidator to pursue civil claims for a contribution to the company’s assets) and section 993 of the Companies Act 2006 (which makes it a criminal offence carrying a maximum sentence of 10 years’ imprisonment and an unlimited fine).

The critical difference from wrongful trading is intent. Fraudulent trading requires proof that the company’s business was carried on with the intention of defrauding creditors or for any other fraudulent purpose. This means any successful prosecution must demonstrate that the director acted dishonestly, not merely negligently or recklessly.

Common examples of fraudulent trading include taking out credit or loans with no intention or ability to repay them, accepting customer deposits for goods or services with no intention of delivering them, stripping company assets and transferring them to third parties to keep them beyond the reach of creditors, creating a new company to take over the business while deliberately abandoning the old company’s debts, and falsifying financial records to mislead suppliers, lenders, or HMRC.

Because fraudulent trading requires proof of dishonest intent, it is much rarer than wrongful trading. However, the consequences are substantially more severe. Directors found guilty of fraudulent trading face criminal prosecution, unlimited personal liability, and potential imprisonment, in addition to disqualification from acting as director in the future.

How do wrongful and fraudulent trading compare?

What about misfeasance?

Alongside wrongful and fraudulent trading, directors should also be aware of misfeasance which is a separate but related concept defined in section 212 of the Insolvency Act 1986.

Misfeasance occurs when a director has breached their duties to the company, causing loss. This could include misusing company funds, authorising payments that benefited the director personally, or making decisions that were not in the company’s best interests.

The key difference is that misfeasance claims are about a breach of the director’s general duties under the Companies Act 2006 (sections 171–177), while wrongful trading is specifically about continuing to trade when insolvency was unavoidable. In practice, a liquidator may pursue both types of claim against the same director if the conduct warrants it.

How to protect yourself from wrongful trading claims

The statutory defence under section 214(3) effectively tells you what good practice looks like. If your company is in financial difficulty, the following steps will both protect your position as a director and, in many cases, lead to a better outcome for the company and its creditors:

1. Seek professional advice at the first signs of financial difficulty. This is the single most important step. A documented conversation with a licensed insolvency practitioner creates a clear record that you took your duties seriously. It also gives you access to options you may not be aware of.
2. Document every decision. Hold board meetings, record the company’s financial position, and minute the reasons for continuing to trade (or for ceasing). This paper trail is what we as liquidators examine in every investigation.
3. Do not take on new debts. If the company is insolvent, taking on new credit, ordering stock you can’t pay for, or accepting customer deposits for work you may not deliver all increase your personal exposure.
4. Prioritise creditor interests. Once your company is knowingly insolvent, your duty shifts from shareholder interests to creditor interests. Every decision should be assessed through the lens of “does this protect or worsen the position for creditors?”
5. Don’t pay connected parties ahead of other creditors. Preferential payments to yourself, family members, or related companies will be flagged in the investigation and may be reversed by the liquidator.
6. Act on professional advice. Seeking advice and then ignoring it is worse than not seeking it at all. If your insolvency practitioner advises you to stop trading, the safest course is to follow that advice and document that you did so.

How BTG Begbies Traynor can help with wrongful or fraudulent trading concerns

If you’re concerned about wrongful or fraudulent trading, getting advice now is the most effective thing you can do. A single conversation with a licensed insolvency practitioner can establish where you stand and what steps to take.

At BTG Begbies Traynor, we speak to directors in your position every day. We’ll give you an honest, clear assessment of your situation and if action is needed, we’ll help you take the right steps to protect both yourself and your creditors.

Call your nearest BTG Begbies Traynor office to arrange a free, confidential consultation.