This guide is maintained as a current resource for September 2026 and covers only the laws of England and Wales. Information is for general guidance, not legal advice. Consult a qualified solicitor for advice specific to your situation.
Comprehensive guide to fraudulent trading and legal remedies in liquidation in England and Wales. Explains the concept under Section 213 Insolvency Act 1986, how fraudulent conduct is identified, the civil and criminal remedies available, who can bring claims, and practical considerations for creditors and directors.
When a company enters liquidation in England and Wales, its directors and, in some cases, other participants can face scrutiny for how the business was conducted before insolvency. One of the most serious issues an office‑holder (such as a liquidator or administrator) may uncover is fraudulent trading. This concept is distinct from other forms of misconduct and carries significant legal consequences, including civil liability, criminal sanctions and reputational damage for those involved.
This article explains what fraudulent trading is under UK law, how it is identified, the legal remedies available during and after liquidation, how claims are pursued, and practical considerations for creditors, directors and other stakeholders.
What Is Fraudulent Trading?
Fraudulent trading arises under Section 213 of the Insolvency Act 1986. It provides that, if during the winding‑up of a company it appears that the business was carried on with intent to defraud creditors of the company or any other person, or for any fraudulent purpose, the court may order those knowingly involved to contribute to the company's assets as it sees fit.
The key elements of fraudulent trading are:
- Intent to defraud: There must be deliberate dishonesty or a clear intention to mislead or harm creditors, going beyond simple incompetence or poor business judgment.
- Carrying on the business: The behaviour must relate to the conduct of the company's business before liquidation or administration.
- Knowledge and participation: Any person who was knowingly a party to the fraudulent conduct can be held liable, not just formally appointed directors.
Fraudulent trading is a civil claim for the benefit of creditors, but the same conduct may also be prosecuted as a criminal offence under Section 993 of the Companies Act 2006, with potential imprisonment and fines.
How Fraudulent Trading Is Identified
Investigation in Liquidation
After a company enters liquidation (or administration), the appointed liquidator or administrator has a statutory duty to investigate the company's affairs and report any evidence of misconduct to the Insolvency Service. This investigation typically includes:
- Reviewing financial records and bank statements;
- Examining contracts, invoices and trading history;
- Assessing whether debts were incurred with intent to deceive creditors, or assets diverted to put them beyond reach.
Examples of conduct that may point to fraud include:
- Taking customer payments for goods or services without intention to deliver them;
- Concealing liabilities from lenders or suppliers;
- Transferring assets to related parties to avoid creditor claims;
- Continuing to trade when the company is unable to meet its obligations, with intent to create additional creditor losses.
A finding of fraudulent intent requires evidence of dishonest conduct - which is a substantially higher threshold than negligent or imprudent trading.
Legal Remedies in Liquidation
1. Civil Contribution Orders
Under Section 213 IA 1986, if fraudulent trading is established, the court can make a civil order requiring directors or other participants who knowingly engaged in the conduct to pay a contribution to the company's assets. The amount is at the court's discretion and is typically calculated to compensate creditors for losses arising from the fraudulent period.
Civil remedies are pursued by the liquidator or administrator through an application to the High Court (Chancery Division), supported by evidence gathered during the investigation.
2. Criminal Prosecution
Under Section 993 of the Companies Act 2006, fraudulent trading is a criminal offence. If prosecutors can prove, beyond reasonable doubt, that a person acted with intent to defraud, the court may impose:
- Imprisonment for up to ten years on conviction on indictment;
- Unlimited fines;
- Possible disqualification as a company director.
Criminal proceedings are separate from civil contribution claims and are typically brought by the Insolvency Service or the Crown Prosecution Service.
3. Director Disqualification and Compensation Orders
Even if civil or criminal proceedings do not succeed, findings of fraudulent conduct are often referred to the Insolvency Service's Directors Disqualification Unit. Under the Company Directors Disqualification Act 1986, directors may be barred from acting in company management for periods generally between two and fifteen years. Serious misconduct can also result in compensation orders requiring directors to pay for loss caused to creditors.
Bringing a Fraudulent Trading Claim
Who Can Bring a Claim?
A claim for fraudulent trading can be pursued by an insolvency office‑holder (liquidator or administrator) during the winding up or administration process. This aligns with the statutory purpose of restoring misappropriated value to the company's estate for the benefit of creditors.
Since 2015, liquidators and administrators may also assign or transfer fraudulent trading rights to third parties (such as creditors) who can then continue the claim in their own name, subject to legal requirements and funding considerations.
The Court Process
The court application will typically include:
- A detailed application notice under the Insolvency (England and Wales) Rules 2016;
- A witness statement from the office‑holder summarising the investigation and evidence;
- Documentary evidence supporting allegations of fraudulent conduct;
- Statements showing how creditors were harmed by the conduct.
The respondent (director or other party) has an opportunity to contest the allegations, often through legal representation.
Burden and Standard of Proof
For civil fraudulent trading claims, the court applies the balance of probabilities standard, meaning it must be more likely than not that the conduct occurred as alleged. For criminal prosecutions, the higher beyond reasonable doubt standard applies.
Time Limits and Practical Considerations
There is no specific statutory limitation period for bringing a fraudulent trading claim in liquidation - claims are typically pursued as part of the insolvency process itself, and investigations can cover conduct going back several years before the insolvency.
However, practical limitations such as availability of evidence and the expiry of insolvency proceedings underscore the importance of prompt investigation by the office‑holder.
Directors and others involved should be aware that:
- Conduct that may be defensible in isolation can contribute to a finding of fraud when viewed holistically;
- Rapid asset dissipation, deliberate concealment of liabilities, or misrepresentation of financial position substantially increase the risk of claims;
- Assignments of claims by office‑holders can enable creditors to pursue remedies where the insolvency estate cannot fund litigation.
Common Questions
How is fraudulent trading different from wrongful trading?
Fraudulent trading requires intent to defraud and carries both civil and criminal consequences, whereas wrongful trading (under Section 214 IA 1986) involves negligent continuation of trade after insolvency became inevitable and is a civil matter only.
Can directors avoid claims by resigning before liquidation?
No. Conduct prior to resignation can still lead to liability if it amounts to fraudulent trading, and liquidators routinely investigate periods before formal insolvency.
Can creditors pursue fraudulent trading claims directly?
Direct creditors cannot normally start these claims; they are brought by an insolvency office‑holder, although assignment of claims can allow creditors to take over proceedings in appropriate cases.
Key Takeaways
Fraudulent trading in the context of liquidation in England and Wales is a serious statutory and criminal concept under Section 213 of the Insolvency Act 1986 and related provisions. It arises where a company's business has been carried on with deliberate intent to defraud creditors or for other fraudulent purposes. Claims are brought by insolvency office‑holders to recover funds for the benefit of creditors, and can result in civil contribution orders, criminal prosecution, director disqualification and compensation orders. Understanding the legal framework, investigation process and available remedies is essential for directors, creditors and professionals involved in insolvency situations.
