What is Fraudulent Trading?

Mary McMahon
Mary McMahon

Fraudulent trading is a legal offense in some jurisdictions involving trading and engaging in business activities with the intent of defrauding creditors. It most commonly comes up in the context of insolvency law in the United Kingdom, although it can appear in other regions, sometimes under a different name. A related charge, wrongful trading, is a less serious offense with a lower standard of proof, allowing for recovery of damages in cases where it is not possible to prove fraudulent trading.

Businessman with a briefcase
Businessman with a briefcase

In fraudulent trading, a company facing bankruptcy accepts orders for products and other services, collecting the funds associated with those orders with no intention or ability to make good on the orders. Creditors believe that since the company is continuing to accept orders and operate normally, it is in good financial health. When the company goes bankrupt, the orders evaporate, the funds are already spent, and creditors take a loss.

To prove charges of fraudulent trading, it must be demonstrated that not only did the company knowingly engage in business interactions it had no intention of completing, but someone also profited from those trades. If a company executive or owner benefited from a situation where an order was accepted under dubious circumstances, it can be considered fraudulent trading. A company owner who accepts an order for a large batch of product and pockets the proceeds, knowing the order won't be filled, would face fraudulent trading charges.

In the process of moving through a bankruptcy case, the company's business activities will be carefully examined for signs of fraudulent trading and other wrongful activities. If someone profited from these activities, that person may be required to pay damages. These damages are pooled with other company assets set aside for compensating creditors once the bankruptcy is complete. The goal is to compensate as many creditors as possible with proceeds from the liquidation of the company, reducing their losses, and to prevent people from holding to unlawful gains.

Proving fraudulent trading can be difficult. While it may be possible to demonstrate that a company knowingly entered trade contracts with no intent to make good on their end of the deal, it can be harder to show how someone benefited. In such transactions, it is common to take steps to conceal the ultimate beneficiary of the fraud with the goal of avoiding legal penalties. Poring through company records and seeking out witnesses willing to whistleblow can be valuable for proving the charge and collecting damages.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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