Stephen Halloran, Director at Lawtons Solicitors, criminal defence solicitors in London share their expertise on the difference between wrongful and fraudulent trading.
Wrongful and fraudulent trading are two different types of trading offences that company directors should be extremely mindful of. The main difference between the two is the intent and deception behind the actions. Fraudulent trading is the more severe issue, due to being viewed as a criminal offence. Whereas wrongful trading, although still serious, is a civil offence with a less severe intent behind it.
Both offences can lead to potential disqualification from company directorship for up to 15 years. In general, any form of trading offence will be detrimental to a company and the reputation of the directors. This guide will give you the information you need to help identify the differences between the two offences and how to avoid them.
What is a trading offence?
If a company enters into liquidation after becoming insolvent, a liquidator will look into the conduct of the directors during the period leading up to insolvency. The investigation will determine whether any wrongful or fraudulent trading has occurred. If a director is found to have traded in either manner, thus leading to the company’s insolvency, this will be stated within the report and passed on to the Insolvency Service.
What is the difference between wrongful and fraudulent trading?
Wrongful and fraudulent trading can be differentiated by the level of severity and the intent behind them. Fraudulent trading is a serious, criminal offence, which can lead to a long disqualification, a steep fine or, in some cases, even imprisonment. On the other hand, wrongful trading is a much more common offence and is often carried out unintentionally. However, both offences can cause significant consequences.
What is wrongful trading?
Wrongful trading is a civil offence covered by the Insolvency Act 1986. It is the term given to a company that continues to trade, despite the knowledge that the company is insolvent. During the time period prior to insolvency, company directors must focus on creditors’ interests before focusing on their own.
Directors that choose to put their own interests first can be found guilty of wrongful trading. It may be the case that the directors were attempting to help improve the fate of their company or did not fully understand the upcoming fate of the business due to poor communication. Some examples of fraudulent trading are:
- Trading whilst being insolvent
- Running up large debts without a means to pay them back
- Taking high salaries that the company can’t afford
- Using credit agreements, despite the fact that repayment will not be carried out
- Taking deposits from customers even though the order will not be delivered
What is fraudulent trading?
Fraudulent trading is a criminal offence under the Insolvency Act 1986. It describes a scenario where a company carries on operating during the course of liquidation, with the direct intention of defrauding creditors and customers of the company. It means that directors have deliberately continued to trade to increase the amount of income prior to liquidation. In order for a company to be found guilty of fraudulent trading, the Insolvency Service must be able to show that actions were carried out in a deliberate and deceptive manner.
What are the implications of wrongful or fraudulent trading?
The consequences of being found guilty of wrongful trading can include the following :
- Disqualification from the role of company director for up to 15 years
- Steep fines may be issued to the directors
- Directors can be held liable for any company debts amassed prior to liquidation
The consequences of being found guilty of fraudulent trading are much more serious. Consequences can include:
- A prison sentence of up to 10 years
- Directors can be held liable for a larger portion of company debts
- Larger fines due to the severity of the offence
- Disqualification from the role of company director for up to 15 years
What actions should you take if you are accused of wrongful or fraudulent trading?
As the consequences of wrongful or fraudulent trading can potentially be serious, it is important to prepare a defence as soon as you can. Acquiring the assistance and support of an experienced lawyer can be invaluable and lead to the best possible outcome. A professional lawyer may be able to help demonstrate that you acted in a responsible and reasonable manner, along with establishing the best plan of action.
Lawtons Solicitors is a long-established criminal defence specialist firm, recognised as being national leaders in crime by Chambers & Partners and ranked by Legal 500. One of the largest specialist criminal solicitors in London & the Home Counties.
