Fraudulent trading is distinct from wrongful trading. In the context of liquidation or administration, fraudulent trading is a cause of action brought by a liquidator or on the basis that company business has been carried on with the intention of defrauding creditors or for any fraudulent purpose.
The burden of proof required to establish this claim is extremely high as the court has to be satisfied that there was actual dishonesty on the part of the directors involved. However, that burden can be reached in some cases with significant consequences for directors who can be ordered to make a contribution to the losses suffered by the company. Fraudulent trading is also a criminal offence punishable by fines, a prison sentence, or both. Fraudulent trading also has an impact of director disqualification proceedings in that if a director has been found culpable of fraudulent trading, they are also highly likely to be disqualified as a director for a significant period of time.
The implications for directors, and any other party knowingly involved in fraudulent trading, can be very serious. Clearly early advice is key to ensure that none of the decision made or activity undertake could ever be construed as fraudulent trading.