Corporate and Business Law (Global) · Fraudulent and criminal behaviour

Fraudulent Trading vs Wrongful Trading Explained

Updated 11 October 2026 · Fact-checked

Fraudulent trading is carrying on business with intent to defraud creditors or for any fraudulent purpose. It needs proof of dishonesty. Wrongful trading is continuing to trade when a director knew, or should have concluded, that insolvent liquidation was unavoidable, and failing to take every step to minimise creditor loss. It needs only negligence.

Understand Fraudulent and Wrongful Trading

Both rules protect creditors when a company is failing. Limited liability lets shareholders and directors keep their personal assets safe. These rules remove that protection for directors who abuse it. The civil claims arise when the company is being wound up, and the liquidator is the usual person who brings them.

Fraudulent trading is about dishonesty. The business has been carried on with intent to defraud creditors of the company or of anyone else, or for any fraudulent purpose. You must show real dishonesty, such as taking deposits you know you can never honour. The civil claim (Insolvency Act 1986 s213) arises only in a winding up. Insolvency is not an element of the claim, although the company is usually insolvent. A court can order a contribution to the company's assets. The criminal offence (Companies Act 2006 s993) needs no winding up. It can lead to a fine, imprisonment or both, but only after a prosecution. Any person who knowingly took part can be liable, not only directors.

Wrongful trading is about carelessness. It applies only where the company has gone into insolvent liquidation (Insolvency Act 1986 s214). That means its assets are not enough to pay its debts and the expenses of winding up. A director is liable if, before that point, they knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation, and they carried on trading anyway. The test is negligence, not dishonesty. Liability applies to directors, including shadow and de facto directors. It is civil only. The remedy is an order to contribute to the company's assets.

Side note: ss246ZA and 246ZB, inserted by the Small Business, Enterprise and Employment Act 2015, extend fraudulent and wrongful trading to companies in administration. LW focuses on liquidation, so concentrate on ss213 and 214.

The test for what a director 'ought to have concluded' has two limbs (Insolvency Act 1986 s214(4)). The director is judged against a reasonably diligent person with (a) the general knowledge, skill and experience reasonably expected of a person carrying out the same functions, and (b) the director's actual knowledge, skill and experience. Limb (a) is the objective minimum. If the director's actual skill is higher, such as a qualified accountant, the standard is raised to match. It is never lower than the objective minimum.

The key defence to wrongful trading is that, once the director knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation, they took every step to minimise the potential loss to creditors. Examples are calling in advisers, stopping new credit, and preparing proper accounts. Directors who simply hope things will improve have no defence. Related penalties include disqualification from acting as a director.

Key formulas to remember

Fraudulent trading test: Business carried on + intent to defraud creditors (or any fraudulent purpose) + dishonesty = liability; Applies to anyone knowingly party to it. The civil claim (s213 Insolvency Act 1986) arises only in a winding up. Insolvency is not an element, though it usually exists. The criminal offence (s993 Companies Act 2006) needs no winding up.
Wrongful trading test: Company in insolvent liquidation (s214) + director knew or ought to have concluded no reasonable prospect of avoiding insolvent liquidation + director kept trading = liability; Civil only. Applies to directors, including shadow and de facto directors. Negligence is enough. A liquidation where the company can pay its debts in full does not trigger it. Ss246ZA and 246ZB (inserted by the Small Business, Enterprise and Employment Act 2015) extend fraudulent and wrongful trading to administration, but LW focuses on liquidation.
Standard of care for wrongful trading (s214(4)): Reasonably diligent person with (a) the general knowledge, skill and experience reasonably expected of someone carrying out the director's functions, and (b) the director's actual knowledge, skill and experience; The objective minimum in (a) always applies. The standard is raised if the director's actual skill is higher, so it is never lower than the objective minimum.
Defence to wrongful trading: Director took every step to minimise potential loss to creditors once they knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation; The burden is on the director to show it.
Remedy: Court may order the person liable to contribute to the company's assets; The amount goes to the liquidator for creditors generally. Disqualification may also follow.

How to solve Fraudulent and Wrongful Trading questions

Use the same sequence for any scenario question on fraudulent or wrongful trading. It shows the examiner you can separate dishonesty from negligence.

1Check the company's position. Wrongful trading (s214) needs insolvent liquidation, not just any liquidation. The civil fraudulent trading claim (s213) arises only in a winding up, although insolvency is not an element of it. The criminal fraudulent trading offence (s993) needs no winding up. The liquidator usually brings the civil claims.
2Look for dishonesty. Did anyone take orders, deposits or credit knowing the company could not pay? If yes, think fraudulent trading.
3If there is no dishonesty, ask whether directors kept trading after they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation. If yes, think wrongful trading.
4Identify who is liable. Fraudulent trading covers anyone knowingly party. Wrongful trading covers directors, including shadow and de facto directors.
5Apply the two-limb standard for wrongful trading: a reasonably diligent person with the general knowledge, skill and experience expected of someone with the same functions (the objective minimum), and also the director's actual knowledge, skill and experience. The standard is raised if the director's actual skill is higher, for example a qualified accountant, but it never falls below the objective minimum.
6Test the defence: did the director take every step to minimise loss to creditors? Note evidence for and against.
7State the consequences: contribution order, criminal penalties for fraud only if there is a prosecution, possible disqualification.
8Finish with a clear conclusion on liability.

Quickest way: Dishonest or careless? Two-question filter

When to use it: Use in Section A and in Section B scenario questions where you must pick between the two types of trading.

Ask: was there dishonest intent? Yes means fraudulent trading.
If no, ask: did they carry on after insolvent liquidation was unavoidable? Yes means wrongful trading.
Check the answer options for 'criminal'. Only fraudulent trading is criminal.
Check for 'every step to minimise loss'. That is the wrongful trading defence only.
Eliminate options that say wrongful trading needs intent to defraud.

Common mistakes in Fraudulent and Wrongful Trading

Saying wrongful trading requires intent to defraud.
The two names sound alike and students blend the tests.
Fix: Remember: fraudulent means dishonest; wrongful means negligent. Wrongful trading needs no dishonesty.
Saying wrongful trading is a crime.
Students link 'wrongful' with a criminal wrong.
Fix: Wrongful trading is a civil remedy only. Fraudulent trading can be both civil and criminal.
Applying wrongful trading to a company that is not in insolvent liquidation.
Students focus on the director's conduct and forget the trigger.
Fix: State that wrongful trading under s214 needs the company to be in insolvent liquidation, and that the claim is brought by the liquidator. Separately, do not say that every fraudulent trading claim needs liquidation: the criminal offence does not.
Judging the director only by their own skill, so an inexperienced director escapes.
Students ignore the objective minimum standard.
Fix: Say the director is held to the standard of a reasonable person in the role, or higher if they have more skill.
Treating 'hoping things would improve' as a defence.
Students think good faith is enough.
Fix: The defence needs positive steps to minimise creditor loss, not optimism.
Forgetting that shadow and de facto directors can be liable.
Students read 'director' as formally appointed only.
Fix: Check the facts for people who give instructions or act as directors without appointment.

Worked examples

Example 1

Zeta Ltd is in compulsory liquidation and its assets are not enough to pay its debts and the winding-up expenses. Its two directors knew in March that the company had no realistic hope of paying its debts. They kept ordering stock on credit until June. They did not seek advice or stop trading. There is no evidence they intended to cheat anyone. Advise on their liability.

Show the solution

The company is in insolvent liquidation, so the wrongful trading trigger is met and the liquidator may bring a claim.
There is no evidence of dishonest intent, so fraudulent trading is unlikely to be proven.
The directors knew from March that insolvent liquidation was unavoidable. They kept trading and taking credit. This fits wrongful trading.
They did not seek advice or take steps to limit loss, so the defence of taking every step to minimise creditor loss fails.
The remedy is a civil order to contribute to the company's assets. Disqualification is also possible.

Answer: The directors are likely liable for wrongful trading and may be ordered to contribute to the company's assets. Fraudulent trading is unlikely as no dishonesty is shown. Wrongful trading is civil, not criminal.

Example 2

Nova Ltd took customer deposits for goods in October, knowing it could not supply them and would cease trading. It used the money to pay a director's personal loan. Nova is now in liquidation. Explain the type of liability that arises and who can be liable.

Show the solution

The company is in liquidation, so the liquidator can bring a civil claim under s213.
Taking deposits it knew it could not honour shows intent to defraud customers, who are creditors. This is dishonesty. The use of the money to pay the director's loan is supporting evidence but is not needed to prove the fraud.
That points to fraudulent trading, which does not depend on a negligence standard.
Anyone knowingly party to the carrying on of the business can be liable, not only the directors. This includes the director who benefited.
Consequences: the liquidator can seek a civil contribution order under s213. Criminal liability under s993 Companies Act 2006 (a fine, imprisonment or both) would need a separate prosecution. Disqualification may also follow.

Answer: This is fraudulent trading. The liquidator can bring a civil s213 claim, and anyone knowingly party to it, including the director, can be ordered to contribute to the company's assets. Criminal penalties under s993 would arise only if a separate prosecution succeeds.

Exam tips

Look first for the word 'dishonest' or 'intent' in the scenario. It signals fraudulent trading. Its absence points to wrongful trading.
In multiple-choice options, reject any that call wrongful trading criminal or say it needs intent.
When asked for defences, name 'every step to minimise potential loss to creditors' and link it to specific facts in the scenario.
In constructed answers, set out the trigger, test, standard, defence and remedy in that order, with one short paragraph each.
Remember that objective test questions score all or nothing. Read every option before you choose.

Practice questions from Fraudulent and criminal behaviour

Fraudulent and Wrongful Trading: frequently asked questions

What is the main difference between fraudulent and wrongful trading?

Fraudulent trading needs dishonest intent to defraud creditors or another fraudulent purpose. Wrongful trading only needs a director to have carried on trading when they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation. Fraudulent trading can also be criminal; wrongful trading is civil.

Who can be liable for wrongful trading?

Directors can be liable, including shadow directors and de facto directors. Shareholders and employees who are not acting as directors are not liable under this rule.

What is the defence to wrongful trading?

The director must show that, once they knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation, they took every step to minimise potential loss to creditors. Examples include taking professional advice, stopping new credit and keeping creditors informed.

Who brings a claim for fraudulent or wrongful trading?

The liquidator normally brings the civil claim during the company's winding up. Any money recovered goes to the company's assets for the benefit of creditors generally. A criminal fraudulent trading charge needs a separate prosecution.