The core difference between wrongful trading vs fraudulent trading is intent: wrongful trading is a civil test based on negligence, while fraudulent trading requires proof of a deliberate intent to defraud creditors. Many directors worry about both when a company runs into difficulty, but only one carries a genuine criminal risk.
This confusion is common because both concepts sit in the Insolvency Act 1986 and both relate to how a company was run before it entered a formal insolvency process. Understanding which one might actually apply to your situation can bring real reassurance, because the vast majority of struggling directors are nowhere near fraudulent trading territory.
Wrongful trading vs fraudulent trading: the one-line difference
Wrongful trading is about a director who should have known the company had no reasonable prospect of avoiding insolvent liquidation, but kept trading anyway. Fraudulent trading is about a director who knowingly and dishonestly carried on business with intent to defraud creditors.
In short: wrongful trading is judged against what a reasonably diligent director ought to have realised. Fraudulent trading is judged against what that director actually knew and intended. That single distinction — carelessness versus dishonesty — decides which framework applies.
Wrongful trading: negligence, not dishonesty
Wrongful trading is set out in section 214 of the Insolvency Act 1986. A liquidator can bring a claim if, at some point before insolvent liquidation, a director knew or ought to have concluded there was no reasonable prospect of avoiding it, and then failed to take every step to minimise loss to creditors.
Crucially, this is a civil, not criminal, test. Honest mistakes, over-optimism, or simply trading on too long while hoping things would turn around can all fall within it. There is no requirement to show dishonesty or bad faith.
- Applies once liquidation has actually happened.
- Tests what a reasonably diligent director in that role ought to have known.
- Can be brought even where the director genuinely believed the company would recover.
For a fuller breakdown of how this test works in practice, see our guide to what is wrongful trading? A director's guide.
Fraudulent trading: deliberate intent to defraud
Fraudulent trading, covered by section 213 of the Insolvency Act 1986 (and mirrored as a criminal offence under the Companies Act 2006), requires proof that business was carried on with intent to defraud creditors, or for any other fraudulent purpose.
This is a much higher bar. Examples include deliberately taking deposits or payment for goods with no intention of delivering them, or knowingly running up credit while planning to leave creditors unpaid. Genuine business failure, even reckless business failure, does not meet this test on its own.
Because dishonesty must be proved, fraudulent trading claims are far less common than wrongful trading claims. Our companion article on fraudulent trading explained for directors sets out how the dishonesty element is assessed.
How the penalties compare
Both routes can result in a court ordering a director to contribute personally towards the company's debts, but the surrounding consequences differ:
- Wrongful trading: a civil contribution order to compensate creditors, potential director disqualification, and reputational damage.
- Fraudulent trading: the same civil contribution risk, plus disqualification, plus exposure to criminal prosecution with a fine and/or imprisonment.
The financial contribution in either case is decided by the court based on the loss caused to creditors, not a fixed penalty scale — so there is no set figure a director can rely on in advance.
Criminal risk: only one carries prison
This is the point that causes the most worry, so it is worth stating plainly: wrongful trading is not a criminal offence. It cannot lead to a prison sentence. It is a civil claim brought by a liquidator to recover losses for creditors.
Fraudulent trading is different. Alongside the civil claim, it can also be prosecuted as a criminal offence, carrying a maximum sentence of up to ten years' imprisonment and/or an unlimited fine on conviction. This criminal route is reserved for genuine dishonesty, not for a business that simply failed.
Which one are worried directors usually at risk of?
Most directors who contact an insolvency practitioner while worried about "wrongful or fraudulent trading" are, in reality, closer to the wrongful trading test — if they are at any real risk at all. Trading through a difficult period, missing forecasts, or continuing while trying to save the business does not amount to fraud.
The safest step once insolvency looks likely is to stop making things worse: take advice early, keep records of decisions, and avoid taking on new credit you cannot reasonably expect to repay. Directors are also often unclear on where personal exposure begins more broadly — our guide to am I personally liable for company debts? covers the wider picture beyond these two specific tests.
Frequently asked questions
Can wrongful trading become fraudulent trading?
Not automatically. They are separate tests based on different evidence. However, if a liquidator's investigation uncovers dishonest intent during the same period, a fraudulent trading claim could be pursued alongside, or instead of, a wrongful trading one.
Which is more common: wrongful or fraudulent trading?
Wrongful trading claims are far more common. Fraudulent trading requires proof of dishonest intent, which is a high evidential bar, so it is reserved for genuinely deliberate misconduct rather than ordinary business failure.
Does bad luck or poor judgement count as either offence?
No. Bad luck, poor judgement, or optimistic decisions made in good faith do not meet the fraudulent trading test, and on their own are unlikely to meet the wrongful trading test either, provided the director acted reasonably once problems became apparent.
Do both apply only once a company is in liquidation?
Wrongful trading claims can only be brought once a company has entered insolvent liquidation. Fraudulent trading can, in limited circumstances, also be prosecuted criminally even where the company has not been liquidated.
Who decides if a director faces one of these claims?
A liquidator investigates the company's conduct and decides whether to bring a civil claim. Criminal fraudulent trading cases are a matter for prosecuting authorities, based on evidence of dishonest intent.
This article is general information, not legal, financial or insolvency advice, and every company's circumstances are different.
If you would like to talk through your situation, Harbourfirst can introduce you to a regulated insolvency practitioner or solicitor who can advise properly on your circumstances — start an enquiry.