Fraudulent trading means carrying on a company’s business with intent to defraud creditors, or for any fraudulent purpose. It has a civil side, where a liquidator or administrator asks the court to order anyone knowingly party to it to contribute to the company’s assets, and a criminal side under section 993 of the Companies Act 2006, which carries up to ten years’ imprisonment and applies whether or not the company is ever wound up.

What counts as fraudulent trading?

The civil provision, section 213 of the Insolvency Act 1986, applies if in the course of a winding up it appears that any business of the company has been carried on “with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose”. Section 246ZA uses the same words for a company in administration, and the criminal offence in section 993 of the Companies Act 2006 mirrors them.

The defining feature is intent to defraud. That is what separates it from wrongful trading under section 214, which asks whether a director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation or administration, and then failed to take every step to minimise the potential loss to creditors. No intention to defraud is needed for that claim. A director who was overly optimistic, careless or slow to act is in wrongful trading territory. Fraudulent trading is reserved for conduct where the business was run to cheat someone, for example by taking money from customers or credit from suppliers with no intention or realistic expectation that they would be paid or supplied.

The words also reach beyond the company’s own creditors. Defrauding “creditors of any other person”, or carrying on the business “for any fraudulent purpose”, can cover a company used as a vehicle for a wider fraud, such as a scheme to defraud customers, investors or HMRC.

Who can be made liable?

Both section 213 and section 993 apply to “any persons” or “every person” who were knowingly parties to carrying on the business in that way. Liability is not limited to directors. Shadow directors, managers, controlling shareholders and outsiders such as lenders or advisers can be caught if they knowingly took part. This is a key difference from wrongful trading, which applies only to directors and shadow directors; see shadow and de facto directors.

The word “knowingly” is important. A person who did not know of the fraudulent purpose is not a knowing party, even if they worked in the business at the time.

How does the civil claim work?

Only the office holder can bring it: the liquidator under section 213 or the administrator under section 246ZA. The court may declare that the persons involved must make “such contributions (if any) to the company’s assets as the court thinks proper”. Because the money goes into the insolvent estate, it benefits creditors generally rather than any single victim.

Section 215 adds several powers:

  • the liquidator may give evidence or call witnesses at the hearing;
  • the court can make the person’s liability a charge on any debt or security the company owes them;
  • if the person is also a creditor, the court can order that their own debt ranks behind all other debts of the company; and
  • the civil claim can proceed even though the person may also be criminally liable for the same conduct.

Under section 246ZD the liquidator or administrator can assign a fraudulent trading claim, or its proceeds, to a third party. That allows claims to be sold or funded when the estate has no money to litigate.

What is the criminal offence?

Section 993 of the Companies Act 2006 makes it an offence for every person knowingly party to carrying on a company’s business with intent to defraud creditors or for any fraudulent purpose. It applies across the UK and does not depend on the company being wound up. The maximum penalties are:

Court Maximum sentence
Crown Court (conviction on indictment) Ten years’ imprisonment, a fine, or both
Magistrates’ court in England and Wales Twelve months’ imprisonment, a fine up to the statutory maximum, or both
Summary conviction in Scotland or Northern Ireland Six months’ imprisonment, a fine up to the statutory maximum, or both

Businesses outside section 993, such as sole traders, are covered by a parallel offence in section 9 of the Fraud Act 2006, which also carries up to ten years on indictment.

Section 993 is also one of the base offences for the corporate offence of failure to prevent fraud in the Economic Crime and Corporate Transparency Act 2023, which applies to large organisations; see the failure to prevent fraud offence.

Can a director be disqualified as well?

Yes, by two separate routes in the Company Directors Disqualification Act 1986. Under section 4, the court can disqualify a person who, in the course of a winding up, appears to have committed the section 993 offence, whether or not they have been convicted, or to have been guilty of other fraud or breach of duty as an officer. Under section 10, when the court makes a section 213 or 214 declaration it can also disqualify the person, even if nobody has applied for that. The maximum period under each section is 15 years. For how disqualification works more generally, see director disqualification.

How does fraudulent trading fit with other claims?

A liquidator reviewing a failed company will usually consider several claims together. Misfeasance under section 212 targets misapplied money or breaches of duty. Section 239 reverses preferences given to particular creditors. Section 238 reverses transactions at an undervalue. Fraudulent trading is the hardest of these to prove because of the need to show intent to defraud, so office holders often plead it alongside wrongful trading or misfeasance rather than on its own. For how live companies can be investigated, see company investigations by the Insolvency Service.

What might it look like in practice?

Illustration only. A director runs a kitchen fitting company. Its supplier has stopped deliveries for non payment and the bank has frozen the overdraft. Over the next six weeks the director keeps advertising, takes £40,000 in deposits from 20 customers and uses the money to repay a loan he made to the company and to pay his own salary, knowing no kitchens can be supplied. The company then goes into liquidation. The liquidator could ask the court under section 213 to order the director to contribute to the company’s assets, could seek to recover the loan repayment as a preference, and could report the conduct, which may lead to prosecution under section 993 and disqualification. A bookkeeper who processed payments without knowing the supplier had stopped deliveries would not be knowingly party to the fraud.

What mistakes do people make?

  • Assuming only directors are at risk. Anyone knowingly party, including advisers and lenders, can be liable.
  • Thinking there is no exposure while the company is still trading. The criminal offence does not need a winding up.
  • Confusing fraudulent trading with wrongful trading. Honest but mistaken decisions to keep trading fall under section 214, not section 213.
  • Taking customer deposits or new credit once failure is certain. That is the conduct most likely to be read as intent to defraud.
  • Relying on limited liability. A contribution order is a personal liability, and directors can be personally liable in several other ways too.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.