| Aspect |
Wrongful Trading (s.214 Insolvency Act 1986) |
Fraudulent Trading (s.213 Insolvency Act 1986) |
|---|---|---|
| Legal Test | Director knew or ought to have known there was no reasonable prospect of avoiding insolvent liquidation, but didn't take every step to minimise creditor loss | Business carried on with intent to defraud creditors or for any fraudulent purpose |
| Mental Element | Negligence — objective test. What would a reasonable director have known/done? | Dishonesty — subjective test. Actual intent to defraud must be proved. |
| Nature | CIVIL | CIVIL + CRIMINAL |
| Standard of Proof | Balance of probabilities (civil standard) | Civil: Balance of probabilities. Criminal: Beyond reasonable doubt |
| Maximum Penalty | Personal contribution to company assets — unlimited amount. Plus director disqualification (2-15 years) | Civil: Personal contribution (unlimited). Criminal: Up to 10 years imprisonment, unlimited fine, director disqualification |
| Who Brings the Action? | Liquidator or administrator (civil) | Liquidator/administrator (civil) and/or the Crown Prosecution Service (criminal) |
Wrongful Trading: The Trap Most Directors Fall Into
Wrongful trading is the more common of the two charges — and the one directors are most likely to face without realising they're at risk. Here's how it works:
The "Ought to Have Known" Trap
The court applies an objective test. It doesn't matter what you actually knew — it matters what a reasonably diligent director in your position should have known. This means: ignoring worsening financial indicators, failing to keep proper accounting records, not monitoring cash flow, or burying your head in the sand about creditor pressure can all constitute wrongful trading — even if you genuinely believed things would improve.
The "Every Step" Defence (s.214(3))
The law provides a defence: if you can show that, from the moment you knew (or should have known) insolvent liquidation was probable, you took "every step" a reasonably diligent person would take to minimise potential loss to creditors — you may be excused from liability. What counts? Seeking professional insolvency advice, preparing cash flow forecasts, ceasing new credit, engaging with HMRC, exploring CVA or administration options, and documenting everything.
Fraudulent Trading: When Directors Cross the Line
Fraudulent trading requires actual dishonesty — a deliberate intent to defraud creditors. It is far more serious and far rarer. Real-world examples that have led to fraudulent trading findings include:
The key distinction:
Wrongful trading is about incompetence or negligence — failing to do what a reasonable director would do. Fraudulent trading is about deliberate dishonesty — actively trying to cheat creditors. The line between them is intent.
What Happens If You're Found Liable
Wrongful Trading Consequences
- Court order to contribute to company assets (can be £100,000s)
- Director disqualification: 2-15 years
- Personal liability for company debts from the point of wrongful trading
- Legal costs (both sides — often the biggest burden)
Fraudulent Trading Consequences
- Up to 10 years in prison
- Unlimited fine (criminal)
- Director disqualification: maximum 15 years
- Contribution order (unlimited amount)
- Criminal record — career-ending for most directors