Fraudulent Trading Under Company Law

Fraudulent trading is one of the most serious areas of personal liability in UK company and insolvency law. When a company's business is carried on with intent to defraud creditors or for a fraudulent purpose, the law enables courts to hold responsible persons personally liable, potentially overriding limited liability and leading to substantial financial and criminal consequences. This article explains the legal framework for fraudulent trading under the Insolvency Act 1986, how it is proved, who can be liable, what remedies are available and the key practical and legal issues involved. It is written for directors, creditors, solicitors, students and anyone seeking to understand this complex area of UK law.

What Is Fraudulent Trading?

Fraudulent trading refers to situations in which a company's business is conducted with an intent to defraud creditors of the company or of any other person, or for any fraudulent purpose. This may occur when directors or others knowingly incur debts, dispose of assets or engage in business activities designed to deceive creditors about the company's financial position or prospects.

Under section 213 of the Insolvency Act 1986, if during the course of winding up a company it appears that the business has been carried on fraudulently, the court may declare that any person who was knowingly a party to that conduct is liable to contribute to the company's assets as the court thinks proper.

Legal Framework: Section 213 Insolvency Act 1986

The central statutory provision setting out fraudulent trading is section 213 of the Insolvency Act 1986. It applies when:

• a company is in the course of winding up (or, under some circumstances, administration under section 246ZA);
• the company's business was carried on with the intent to defraud creditors or for another fraudulent purpose; and
• the person against whom the court order is sought was knowingly a party to that fraudulent conduct.

The provision gives courts wide discretion to require such persons to make contributions to the company's assets where appropriate.

Intent to Defraud and What It Means

To succeed under section 213, there must be intent to defraud. This is a higher threshold than mere poor commercial judgement or wrongful trading (see separate article on Wrongful Trading and Directors' Liability). Fraudulent trading requires dishonest conduct involving real moral blame, such as knowingly misleading creditors, falsifying financial information, misusing company assets or trading in a way that was designed to harm creditors. A single act can be sufficient where it forms part of a fraudulent purpose.

Case law confirms that fraud requires not merely an absence of intent to pay debts but actual dishonesty, for example taking credit when there is no intention or reasonable basis to repay.

Who Can Be Held Liable?

Section 213 is deliberately broad. Historically it has applied to directors and those involved in management, but recent decisions confirm that liability extends further. In Bilta (UK) Ltd v Tradition Financial Services Ltd [2025] UKSC 18 the UK Supreme Court held that “any persons who were knowingly parties to the carrying on of the business … for any fraudulent purpose” can be liable, not only directors but third parties who participated in, facilitated or assisted the fraudulent business knowing its purpose.

This expanded interpretation means that funders, advisors, suppliers or other “outsiders” may be liable if they engaged with the company's business while knowingly assisting in its fraudulent activities.

Civil and Criminal Dimensions

Civil Liability

Under section 213, the liquidator or administrator can apply to the court for an order that liable persons must contribute towards the company's assets. This contribution is compensatory and designed to restore the position of the company and its creditors.

Because the contribution strips away limited liability in part or whole, fraudulent trading claims are powerful tools to protect creditors and the integrity of the insolvency process.

Criminal Offence

Separate from the civil provision, Companies Act 2006 section 993 creates a criminal offence of fraudulent trading. A person guilty of this offence may face:

• imprisonment of up to ten years;
• an unlimited fine on conviction;
• or shorter sentences and fines on summary conviction in magistrates' courts.

The criminal standard of proof (beyond reasonable doubt) is higher than in civil proceedings, which require proof on the balance of probabilities.

Examples of Fraudulent Trading

Fraudulent trading can arise in various scenarios, such as:

• knowingly incurring debts when there is no intention or reasonable basis to repay;
• transferring assets out of the company for improper purposes;
• creating fictitious transactions to mislead creditors;
• operating “phoenix” vehicles to escape liability while continuing the same trade without settling debts.

As part of liquidation or administration, insolvency practitioners routinely investigate and report such conduct, and findings often lead to claims under section 213.

Court Process and Remedies

A fraudulent trading claim is generally brought by the liquidator or administrator as part of insolvency proceedings. The claimant must persuade the court that:

• the company was being wound up;
• the business was carried on with intent to defraud or for a fraudulent purpose;
• the defendant was knowingly involved in that conduct.

If the court is satisfied, it may order the defendant to contribute to the company's assets such sums as it deems appropriate. The court's discretion is guided by the scale of loss to creditors and circumstances of the fraud.

The Supreme Court's decision in Bilta extends the pool of potential defendants to include third parties who knowingly assisted fraudulent business activities.

Interaction with Director Disqualification

A finding of civil or criminal fraudulent trading will almost always be reported as part of a disqualification investigation. Under the Company Directors Disqualification Act 1986, directors who engage in fraudulent trading or whose conduct contributes to it can be disqualified from acting as a director for periods often up to 15 years. Disqualification seeks to protect the public and creditors from further misconduct.

Time Limits and Procedural Points

Because fraudulent trading claims are typically pursued in the course of winding up or administration, the limitation period is tied to the period of insolvency proceedings. Recent case law indicates that where companies have been dissolved and restored, limitation periods may be influenced by fraud principles (e.g., section 32 Limitation Act 1980), meaning actions may be brought after restoration if fraud could not have been reasonably discovered earlier.

Preventing Liability: Practical Director Duties

Directors should be vigilant when a company is under financial stress. They must:

• monitor solvency and cease trading when debts cannot be met;
• avoid misleading creditors about the company's prospects;
• document decision‑making and financial information;
• seek professional advice when insolvency risks arise. Engaging early with insolvency practitioners or independent legal advisers can reduce exposure to claims.

Strict internal controls and transparency with creditors help ensure that directors can demonstrate that they did not knowingly participate in fraudulent conduct.

Common Questions from our Readers

Is every insolvency a case of fraudulent trading?
No. Insolvency or inability to pay debts alone does not establish fraud. Fraudulent trading requires intent to defraud creditors or a fraudulent purpose, not just poor business performance.

Can non‑directors be liable?
Yes. The Supreme Court confirmed that third parties and outsiders can be liable under section 213 if they knowingly assist or participate in fraudulent business activities.

How does fraudulent trading differ from wrongful trading?
Wrongful trading (section 214) concerns trading beyond the point of insolvency without necessarily acting dishonestly. Fraudulent trading requires actual dishonesty and intent to deceive or defraud creditors.

Final Thoughts

Fraudulent trading under UK company and insolvency law is a serious legal concept designed to protect creditors and maintain confidence in corporate governance. Under section 213 of the Insolvency Act 1986, dishonest conduct that defrauds creditors can lead to substantial personal liability for directors and other knowingly involved persons. The law empowers courts to require contributions to a company's assets and, under the Companies Act 2006, to impose criminal penalties including imprisonment and fines. Directors and others involved in company management should act with transparency and integrity, especially in financial distress, to avoid the legal, financial and reputational risks of fraudulent trading. Recent case law underscores the broad scope of liability and reinforces the importance of early professional advice and robust governance.