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Wrongful Trading and Fraudulent Trading - What Directors Need To Know

12th May, 2023
Keith Steven

Written ByKeith Steven

Managing Director


07879 555349

Keith is the author of the content on this comprehensive rescue, turnaround and insolvency website. He is the managing director of KSA Group Ltd - a specialist firm of turnaround and licensed insolvency practitioners. Keith was nominated for Turnaround Practitioner of the Year 2014 at the National Insolvency and Rescue Awards in 2014.

Keith Steven
  • What is Wrongful Trading?
  • What can you do if you are concerned about wrongful trading?
  • Suspension of liability for wrongful trading
  • What is fraudulent trading?

Directors concerned about insolvency must be aware of wrongful trading, fraudulent trading and their consequences. Failure to understand or act on these concepts can have severe consequences for your business, your reputation and even your personal life.

The Insolvency Act of 1986 introduced wrongful trading to build on the notion of fraudulent trading. It’s a much more common offence, as it’s not a criminal act and often done unwittingly.

To prepare you if your company enters insolvency, we’ll explore both wrongful and fraudulent trading and explain how they work.

What is Wrongful Trading?

Wrongful trading occurs when company directors have continued to trade when they knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation.  In addition, they did not take every step with a view to minimising the potential loss to the company’s creditors.

Wrongful trading or ‘trading irresponsibly’ is a civil offence and is covered by section 214 of the Insolvency Act 1986

Essentially, directors must be found to have acted reasonably and responsibly in the time preceding the company’s insolvency to avoid wrongful trading proceedings. They must always have put creditors’ interests first, and not worked for their own benefit.

If directors are found guilty of wrongful trading, they can be held personally liable for the company’s debts from the point they knew the company was insolvent.

In some cases, they can also be disqualified from being a director, fined or even imprisoned.

What actions constitute wrongful trading?

The liquidator, who must be an insolvency practitioner, determines if wrongful trading has occurred. This occurs during their mandatory assessment of the director’s conduct. There is a six-year limitation period, so you will not be charged after this time has passed.

Examples of behaviour or actions they’ll look for:

  • Not filing annual returns at Companies House
  • Failing to file annual or audited accounts at Companies House
  • Not operating the PAYE scheme correctly, failing to pay PAYE and NIC when due and building up arrears
  • Failing to operate the VAT scheme correctly and building up arrears
  • Taking excessive salaries that the company cannot afford
  • Repaying a director loan made to the company while other creditors were not paid
  • Trading while insolvent
  • Taking credit from suppliers when there was ‘no reasonable prospect’ of paying the creditor on time
  • Wilfully piling up debt
  • Taking deposits from customers when you know the product or service will not be delivered.

You will be at risk of being accused of wrongful trading if you have engaged in any of the above. To avoid this, you must always act in the creditors’ best interest. This even means prioritising their payments over personal and bank guarantees.

It’s important to note that wrongful trading can only apply in terminal insolvency.

Put simply, this means it can only apply when the business is no longer viable. It will only begin after formal insolvency proceedings, such as liquidation or administration.

However, if there is no insolvency event and you still partake in suspicious behaviour, be very careful. Keep records of all actions concerning these points, as well as of board and shareholder meetings. This may protect you in the future.

What can you do if you are concerned about wrongful trading?

Consult insolvency experts and try to act pre-emptively if you are concerned about wrongful trading. You could also try:

There are many options available, all of which could help demonstrate you acted reasonably and appropriately for the situation. It’s best to try these, as you cannot be charged with wrongful trading until your business has ceased to trade (usually through voluntary or compulsory liquidation).

It should be noted that due to the Coronavirus pandemic, emergency legislation had been enacted that allowed some relaxing of the rules surrounding wrongful trading.  The idea was that directors would not be held personally liable if they continued to trade when the situation was so unclear going forward.   However, since this legislation has been enacted there have been many forms of support such as loans, furlough and grants.  If this money is being used to prop up an already failing business and it is reasonable to see that the money will run out then it could be construed that the directors are trading wrongfully. Similarly, how directors use any loan funds received by the company also needs careful consideration. Directors are now coming under scrutiny, and sometimes even attack, because of misrepresentations in loan applications, or misuse of the funds once received.

The relevant section below;

Suspension of liability for wrongful trading

(1) In determining for the purposes of section 214 or 246ZB of the Insolvency Act 1986 (liability of director for wrongful trading) the contribution (if any) to a company’s assets that it is proper for a person to make, the court is to assume that the person is not responsible for any worsening of the financial position of the company or its creditors that occurs during the relevant period.

(2) In this section the “relevant period” is the period which—

(a) begins with 1 March 2020, and

(b) ends with 30th June 2021.

So, basically as of now the suspension on wrongful trading has been lifted.

What is fraudulent trading?

Fraudulent trading is a criminal offence, therefore much more serious than wrongful trading.

The main difference between the two is intent. Directors who take part in fraudulent trading have a clear intent to deceive and defraud their creditors and customers.

However, the Insolvency Service must prove intent, so a thorough investigation will take place.

Directors are most likely to be charged with fraudulent trading if they have tried to maximise money coming in prior to liquidation.

The liquidator will report findings of wrongful trading first, then accuse the director of fraudulent trading if required.

The punishments (although similar to wrongful trading) are more severe. You may be:

  • Held personally liable for a larger proportion of the company’s debts
  • Given a longer disqualification
  • Fined more for your actions
  • Sent to prison – this is much more likely for fraudulent trading

Both wrongful trading and fraudulent trading can have a severe impact on your professional and personal life, so should be avoided at all costs.

Worried Director What Will Happen To Me After Liquidation?

in Company Liquidation What is …?

"A man in the pub said I cannot be a director of any other company if I liquidate my company. Is this true?"Actually, this statement is entirely false! Misconceptions like this frequently arise from individuals with limited understanding of the subject matter. Such misinformation can cause undue anxiety for directors considering liquidation, fearing it might personally affect them. Guess what? Listening to bar room experts, inexperienced accountants, or no insolvency specialist lawyers can stop decisions being made, this failure to make a decision is really what could land you in trouble. So how will liquidation affect me and how long does it take? Having a limited liability company means that the directors have little risk (or limited liability) if the company fails, as long as they have acted properly and acted in time. What is more, if as a director, you have been compliant and on the payroll for many years, you can actually claim redundancy from the government like any other employee. But, and it is a big but, if you fail to act in time, fail to act reasonably, fail to keep books and records, continue taking credit KNOWING that the company cannot possibly repay it, then you ARE at risk of personal financial loss or worse such as losing your house. So, act now and get help for your company and more importantly start reducing your own risks.Voluntary liquidation is the quickest most efficient way to deal with an insolvent company that has no future. As a director of an insolvent company, you are at risk if you do not act. This risk RISES the longer you don't act to put the company into liquidation.If you fail to act and the company is wound up by the creditors (compulsory liquidation) then the Official Receiver (OR) will be appointed to liquidate the business and he or she will investigate the activity of the directors and the business over the last 2-3 years. This is known as a conduct report on each director.  If the OR can prove there was wrongful trading where, for instance, you have taken credit from a supplier or took deposits from customers when you knew that it was highly unlikely that you could pay them back, then you could be made personally liable.This is known as the "lifting of the veil of incorporation" that protects directors under limited liability. If this happens then you could made liable for PAYE, VAT and creditors monies from the time that you should have known the company had no reasonable prospect of surviving the problems it faced.Additionally, the directors may face disqualification proceedings under the Company Directors Disqualification Act 1986 for up to 15 years, they can be fined and may face the loss of personal assets like your home, or even personal bankruptcy.Look, if you as directors have acted naively you may not know that you have broken these laws, but now you do know, it is vital to ensure that you protect yourself as a director by acting quickly to cease trading and put the company into voluntary liquidation; or consider a company voluntary arrangement if the company is VIABLE if the problems are solved. What is Creditors Voluntary Liquidation and what does it mean for me? In short, liquidation usually means, the company's trading stops and it's assets are turned into cash or "liquidated".All other possible liabilities, like employment liabilities, landlord's rent or payments to lease companies are stopped. It really is the end of the company, but the "business" may survive if a phoenix is organised. Liquidation is a powerful way to END creditor pressure and let you get on with your life. What if I have signed personal guarantees? If you have signed personal guarantees or indemnities to lenders, then the liquidation could lead to them being called in if the bank cannot get its money back from the company. There is little that can be done about that, but you should not delay decisions on liquidation to try and prevent a PG being called in: just think what ALL of the company's debts landing on your shoulders would do. Also it should be noted that HMRC now rank ahead of floating charge holders in any liquidation since December 2020.  Consequently, this may well mean that lenders that you have personally guaranteed will get less recovery hence exposing you more.All banks will agree a deal to repay the PG over time - provided you work with the bank to reduce their exposure.One great piece of FREE advice - always make sure that ALL tax returns, VAT returns and annual returns have been completed and sent in and that other "compliance" issues are dealt with wherever possible. These are important processes and will help protect you as individual directors. It shows that you have been acting properly.  I have heard about directors being able to claim redundancy in liquidation If you have been employed by the company and made payments via PAYE then you will be able to claim redundancy from the government and this is in fact a very simple process (20 minutes to fill out a form and we can help with that) so there is no need really to employ a third party to make a claim.  This process has been open to fraud so the HMRC are cracking down on operators that claim to be able to get money back when there is not enough "paperwork".  It isn't worth the risk.  If it sounds too good to be true then it probably is!You need to learn more about the options. This is clearly a general guide so, if you have any worries at all, please, just call us and we will talk you through the situation free and with expert guidance for your situation. Call one of our advisors or if you prefer, call our IPs (insolvency practitioners) now:Just one CALL will help relieve the stress and get you out of the mess.Why not call 08009700539 or 020 7887 2667 now?We could help you start the liquidation process today.(8.15am till 5.00pm; Out of hours call on 07833 240747, Wayne Harrison (IP)  or Eric Walls (IP) on 07787 278527)Finally, please remember this: NO BUSINESS is worth losing your health, relationships, marriages or your children over. Act properly, take advice, get the problem sorted and then get on with your life. In a little while the stress will go and you can focus on other things that are more important.Want more information on liquidation? Get our new free 2023 Experts Complete Guide to Creditors Voluntary Liquidation that covers Bounce Back LoansWe are experts in liquidation, voluntary liquidation, administration, pre-pack administration, business rescue, corporate rescue and company rescue, we can help solve your problems but only if you talk to us. Call 0800 9700539 for help.or email us your worries at help@ksagroup.co.uk 

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