Fraudulent trading is when a company's business is carried on with intent to defraud creditors, or for any other fraudulent purpose — and it is one of the few insolvency offences that can lead to a criminal prosecution, not just a civil claim. It is rare, and it is not the same as simply running out of money.
Many directors worry that struggling to pay bills, or trading while insolvent, automatically makes them a fraudulent trader. It doesn't. Fraudulent trading requires dishonesty — a deliberate intent to cheat creditors — which sets a much higher bar than the more common offence of wrongful trading.
This article explains what fraudulent trading actually covers, how it differs from wrongful trading, and what happens if the allegation is made against you.
What fraudulent trading actually means
Fraudulent trading is set out in section 213 of the Insolvency Act 1986, which allows a liquidator to apply to the court where a company's business has been carried on with intent to defraud creditors, or for any fraudulent purpose. The same conduct can also be prosecuted as a criminal offence.
The key word is "fraudulent". This is not about poor business decisions, cash flow problems or optimistic trading during a downturn. It is about dishonesty — knowingly running a business as a vehicle to deceive the people it owes money to.
The key ingredient: intent to defraud creditors
Courts have held that fraudulent trading requires actual dishonesty, judged by ordinary standards of honest business behaviour — not carelessness, poor judgement or even recklessness on its own. Examples the courts have accepted as showing intent to defraud include:
- Taking customer deposits or payments with no genuine intention, or realistic ability, to deliver the goods or services
- Continuing to take credit from suppliers while knowing there is no real prospect of ever paying them
- Deliberately concealing the company's true financial position to obtain further credit
- Diverting company assets or money to avoid it reaching legitimate creditors
By contrast, trading on while hoping things will improve — even if that hope later proves wrong — does not, on its own, amount to fraudulent trading.
Civil liability vs criminal prosecution
Fraudulent trading is unusual because it carries two separate routes of exposure. In an insolvent liquidation, a liquidator can bring a civil claim under section 213 asking the court to order those responsible to make a personal contribution to the company's assets.
Separately, fraudulent trading is also a criminal offence under section 993 of the Companies Act 2006, which applies whether or not the company is being wound up. A criminal case is investigated and prosecuted quite differently from a civil claim, and the standard of proof is higher.
This dual exposure is what separates fraudulent trading from wrongful trading, and it's covered in more depth in our guide to Wrongful vs Fraudulent Trading: Key Differences. It's also worth understanding how this fits into the broader picture of when a director can become personally liable for company debts — see Am I Personally Liable for Company Debts?
Real examples of what crosses the line
To make the distinction concrete, here is roughly where the line tends to sit:
- Not fraudulent trading: a director keeps trading through a difficult quarter, genuinely believing a new contract will restore cash flow, and it doesn't materialise.
- Not fraudulent trading: a company misses HMRC payments while trying to keep staff employed and negotiate a payment plan.
- Potentially fraudulent trading: a director takes prepayments from customers for orders they know cannot be fulfilled, with no intention of refunding them.
- Potentially fraudulent trading: a director moves company money to a personal account, or a connected company, specifically to keep it out of creditors' reach.
The penalties: contribution orders, prison and disqualification
The consequences depend on which route is taken. In a civil claim under the Insolvency Act 1986, the court can order a person to contribute personally to the company's assets, with no fixed upper limit — the sum reflects the loss caused.
A criminal conviction for fraudulent trading can lead to a prison sentence, an unlimited fine, or both, reflecting how seriously the courts treat proven dishonesty. Alongside either route, a director found to have engaged in fraudulent trading is very likely to face director disqualification, preventing them from acting as a director of any UK company for up to 15 years.
Why most struggling directors are not fraudulent traders
It's worth repeating: financial difficulty is not fraud. Most directors who come to Harbourfirst are dealing with cash flow pressure, an HMRC winding-up petition, or the risk of wrongful trading — a lower, civil threshold about continuing to trade once insolvency becomes unavoidable, covered fully in What Is Wrongful Trading? A Director's Guide. Fraudulent trading, by contrast, requires proven dishonesty and is investigated far less often, but treated far more seriously when it is found.
If you have been open with creditors, kept proper records and taken reasonable steps to limit further losses once you knew the company was in trouble, that behaviour points away from fraudulent trading, not towards it.
What to do if you're being accused
If a liquidator, HMRC or another party has raised the possibility of fraudulent trading, the practical steps are the same ones that protect any director acting properly:
- Stop and take stock — avoid making any further decisions about company money without proper advice.
- Preserve all records: bank statements, correspondence, board minutes and invoices, rather than deleting or amending anything.
- Get independent advice from a solicitor experienced in insolvency litigation as early as possible.
- Cooperate factually with any liquidator or Insolvency Service enquiry, while taking proper legal advice on what to say.
An accusation is not a finding. Fraudulent trading has to be proven, and directors are entitled to put their case and be properly represented.
Frequently asked questions
Can I go to prison for fraudulent trading?
Yes, but only if convicted of the criminal offence under section 993 of the Companies Act 2006, which requires proof of dishonest intent beyond reasonable doubt. Civil liability under the Insolvency Act 1986 does not carry a prison sentence, but can require a personal financial contribution.
What's the burden of proof for fraudulent trading?
In a civil claim, the liquidator must prove intent to defraud on the balance of probabilities, though courts require clear evidence given the seriousness of the allegation. In a criminal prosecution, the prosecution must prove dishonesty beyond reasonable doubt, the higher criminal standard.
Who investigates fraudulent trading?
A company liquidator can bring a civil claim as part of winding up the company. Criminal investigations are typically led by the Insolvency Service, sometimes working alongside police or other agencies, before any prosecution decision is made.
What's the difference between fraudulent trading and wrongful trading?
Wrongful trading is a civil-only offence about continuing to trade once a director knew, or should have known, insolvent liquidation was unavoidable — it does not require dishonesty. Fraudulent trading requires actual intent to defraud and can also be prosecuted as a crime.
Can a company be prosecuted for fraudulent trading before it goes into liquidation?
Yes. The criminal offence under the Companies Act 2006 applies whether or not the company is in liquidation. The civil claim under the Insolvency Act 1986, by contrast, can only be brought once the company is being wound up.
This article is general information, not legal, financial or insolvency advice, and does not reflect your specific circumstances.
If you'd like to talk it through, Harbourfirst can introduce you to a regulated insolvency specialist or solicitor — start an enquiry.