Wrongful trading and director liability
Wrongful trading is the legal risk that a director becomes personally liable to contribute to the company's debts if they kept trading after the point when they knew, or should have concluded, that there was no reasonable prospect of avoiding insolvent liquidation. It comes from section 214 of the Insolvency Act 1986, and the protection lies in acting early, not in carrying on hoping. Insolvency Act 1986, s214; Insolvency Service
- The law
- Section 214, Insolvency Act 1986
- The risk
- Personal liability to contribute to company debts
- The test
- Did you keep trading with no reasonable prospect of avoiding insolvent liquidation?
- The defence
- You acted to minimise creditor losses once you knew
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The test and the defence
The test is objective: a court asks what a reasonably diligent director in your position would have known and concluded, not what you hoped at the time. The defence is that, once you realised the position was hopeless, you took every step to minimise losses to creditors, which in practice means taking advice promptly and acting on it.
The red flags to take seriously
Taking customer deposits you may not deliver, paying favoured creditors, and piling up new debt with no realistic plan to repay are the classic wrongful-trading warning signs. If any of these describe your company, stop and take advice immediately. Our wrongful trading red-flag checker lets you self-assess in a couple of minutes. If it flags risk, the safe move is advice, not optimism.
Is trading while insolvent illegal?
Not in itself, and this surprises many directors. Trading while insolvent isn't automatically an offence: companies legitimately trade through insolvent periods while pursuing a rescue, and doing so under professional advice can be exactly the right course. What the law punishes is trading on wrongfully: continuing once there was no reasonable prospect of avoiding insolvent liquidation, and failing to protect creditors from that point. So the question is not "am I allowed to trade while insolvent?" but "is there a realistic way back, and am I acting on advice to protect creditors while we pursue it?" If the honest answer to the first part is no, keep trading and the personal risk starts accruing. Check the company's position with the insolvency test and get advice the same week.
Related data
Our guide to director disqualification grounds: The conduct that most often leads to a director being disqualified. Every page on our data hub names its official source.
Common questions
What is the difference between wrongful and fraudulent trading?
Wrongful trading is about carrying on when you should have stopped, judged objectively. Fraudulent trading involves dishonesty. Wrongful trading doesn't require dishonesty, only that a reasonable director would have acted differently.
How do I protect myself from a wrongful trading claim?
Take advice as soon as you realise the company may not survive, document your decisions, stop incurring debts you can't repay, and act to minimise creditor losses. Early professional advice is the best protection.
What is the penalty for wrongful trading?
Wrongful trading under section 214 is a civil matter, not a criminal one. A court can order a director to contribute personally to the company assets to make up losses caused to creditors after the point trading should have stopped. Director disqualification can also follow under separate rules. There is no automatic fine or prison sentence.
What is an example of wrongful trading?
A common example is a director who keeps taking customer deposits for orders the company is unlikely to fulfil, or keeps ordering stock on credit, after it is clear there is no realistic prospect of avoiding insolvent liquidation. Continuing to run up debts in that situation, rather than stopping and taking advice, is the classic pattern.
How is wrongful trading proved?
A liquidator must show that, at some point before liquidation, the director knew or should have concluded there was no reasonable prospect of avoiding insolvent liquidation, and then failed to take every step to minimise creditor losses. It is judged against what a reasonably diligent director would have done, so contemporaneous records of your decisions matter.