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# 15 Fraudulent and wrongful trading

Fraudulent trading is defined in section 213(1) of the Insolvency Act 1986 (IA 1986) as ‘any business of the company [that] has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose’. Fraudulent trading can give rise to civil liability under section 213(2) of the IA 1986 or criminal liability under section 993 of the CA 2006.

Liability for fraudulent trading requires two things to be established.

1. Dishonest intent. In R v Grantham [1984], the director ordered some potatoes on one month’s credit; at that time, the director knew that the payment could not be made at the end of the credit period.[2]
2. The person should be party to the fraudulent trading. In Re Maidstone Buildings Provisions Ltd [1971], a person needed to take active steps, such as ordering goods, in order to be classified as party to the fraudulent trading.[3]

If the director of a company participated in fraudulent trading, they may be disqualified for 15 years under the Company Directors Disqualification Act 1986. The court can also order the director to contribute to the company’s assets.

Figure 11 ‘Fake’ and ‘Real’

Section 214(2) of the IA 1986 outlines when wrongful trading occurs as follows:

> (2) …

> 1. the company has gone into insolvent liquidation,
> 2. at some time before the commencement of the winding up of the company, that person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or entering insolvent administration, and
> 3. that person was a director of the company at that time.

Section 214(4) of the IA 1986 goes on to state that:

> (4) ...

> 1. the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and
> 2. the general knowledge, skill and experience that that director has.

In Re Produce Marketing Consortium Ltd (No 2) [1989],[4] the directors recognised that liquidation was inevitable in February 1987, but they carried on business to October 1987. The directors argued that the extended period of trading could minimise the losses to creditors. However, the losses were not minimised; instead, £75,000 net debts were incurred during this extended period of trading. The court decided that this was wrongful trading and required directors to contribute £75,000 to the company’s assets.

## Activity 6 Fraudulent and wrongful trading

Allow around 25 minutes for this activity

This activity helps you understand differences between fraudulent and wrongful trading.

Read What is the difference between wrongful trading and fraudulent trading? (Clark, 2020) and summarise similarities and differences between fraudulent and wrongful trading using the table below.

## Table 2 Similarities and differences between fraudulent and wrongful trading

Similarities | Differences
--- | ---
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## Table 2 Similarities and differences between fraudulent and wrongful trading (completed)

Similarities | Differences
--- | ---
Both apply when a company is in liquidation or administration and are concerned with the time before any formal insolvency procedure. | An action for wrongful trading may only be brought against a director(s) or a shadow director(s) of a company. An action for fraudulent trading may be brought against any person who was knowingly a party to the fraudulent trading.
Charges for both are brought by the office-holding insolvency practitioner. | The standard of proof is also different. For an action for fraudulent trading to succeed the office-holding insolvency practitioner will have to prove dishonesty on the part of the defendant. This is much more difficult than showing ongoing trade and increasing losses at a time when there was no prospect of the company avoiding insolvency, as with a wrongful trading action.
The court may declare that the person found guilty of either should contribute to the company’s assets. |
Both provide a way for making incompetent or dishonest directors pay financially for their actions after a company has gone into liquidation or administration. |
Both are likely to be included in disqualification reports against the director that may result in the director being disqualified from acting as a company director. |

If wrongful trading occurs, the liquidators can apply to the court for an order that the director should make such contributions to the company assets as the court thinks fit and increase the assets available to creditors. In some cases, directors may be disqualified for a maximum of 15 years (Kaplan, 2022).

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- 1 R v Grantham [1984] QB 675.
- 2 Re Maidstone Buildings Provisions Ltd [1971] 3 All ER 363.
- 3 Re Produce Marketing Consortium Ltd (No 2) [1989] 5 BCC 569.

OpenLearn - Corporate fraud and criminal behaviour
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