Trading while insolvent means continuing to run your company after it can no longer pay its debts as they fall due, or after its liabilities exceed its assets. It is not automatically illegal, but it puts directors at real risk of personal liability if losses to creditors keep growing and nothing is done about it.
Many directors trade through short cashflow problems perfectly legitimately, provided they act reasonably and take advice early. The risk arises when a director carries on regardless, knowing (or ought to have known) that insolvent liquidation could not reasonably be avoided.
This article explains what the law expects of you, what "wrongful trading" means in practice, and the steps that genuinely protect you if you decide to keep trading through a difficult period.
What trading while insolvent actually means
A company is insolvent when it fails either of two legal tests: the cash-flow test (it cannot pay debts when they are due) or the balance-sheet test (its total liabilities exceed its total assets). Trading while insolvent simply describes continuing to operate once one of these tests is met.
On its own, this is not a criminal offence. Many companies trade through a temporary cash squeeze and recover. The law is concerned with what happens next: whether the director acted honestly and reasonably, or kept trading and allowed losses to build up unnecessarily. For a fuller explanation of the two tests, see Is My Company Insolvent? The Two Legal Tests.
Wrongful trading and personal liability
The specific legal risk directors worry about is wrongful trading, set out in section 214 of the Insolvency Act 1986. It applies once the company goes into insolvent liquidation, and asks whether the director knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation, yet carried on regardless.
If a court finds wrongful trading, it can order the director to make a personal contribution to the company's assets, effectively removing the protection of limited liability for losses caused after that point. This is the core of wrongful trading director liability, and it is assessed with hindsight by a liquidator or the court, not by how the director felt at the time.
Fraudulent trading, a separate and more serious offence, involves deliberately continuing to trade with intent to defraud creditors. It is rarer, carries criminal consequences, and requires evidence of dishonesty rather than simple misjudgement.
How your duties shift toward creditors
Under normal trading, directors owe their duties primarily to the company and, through it, to shareholders. Once insolvency becomes likely, that focus shifts. Directors must start to consider, and give appropriate weight to, the interests of creditors as a whole — this is part of the general duty to promote the success of the company under the Companies Act 2006.
In practice this means:
- Not entering into new contracts or taking on credit you cannot reasonably expect the company to repay.
- Treating creditors fairly rather than favouring one over another without good reason.
- Keeping accurate financial records so decisions can be shown to be reasonable later.
- Seeking professional advice as soon as insolvency risk becomes apparent.
This shift is often the answer to "can you trade while insolvent" — yes, but with a materially different standard of care than before, reflecting the duty to promote the success of the company under section 172 of the Companies Act 2006.
What the courts and liquidators look at
If a company later enters liquidation, the liquidator reviews the period leading up to it. They typically look at:
- When a reasonably diligent director in that position ought to have realised insolvent liquidation could not reasonably be avoided.
- What steps were taken between that point and the actual liquidation.
- Whether losses to creditors increased during that period, and by how much.
- Board minutes, management accounts and correspondence with advisers showing the reasoning behind decisions.
Directors who sought advice, documented their decisions and took steps to limit further losses are in a much stronger position than those who simply carried on and hoped things would improve. Good record-keeping is often what separates ordinary trading whilst insolvent consequences from a genuine wrongful trading finding.
Steps that protect you if you keep trading
Directors do not need to stop trading the moment cashflow tightens. What matters is showing that continued trading was a considered, reasonable decision. Practical steps include:
- Get professional advice early — speaking to an insolvency practitioner or solicitor as soon as concerns arise is one of the strongest protections available.
- Keep clear financial records — up-to-date management accounts and cashflow forecasts show you understood the position at each point.
- Minute board decisions — record why you decided to continue trading and what you expected to achieve.
- Avoid new credit you cannot repay — be cautious about taking on further supplier debt, loans or leases once insolvency is a live risk.
- Review the position regularly — insolvency risk can change quickly, so revisit your assessment often rather than relying on an early decision.
Understanding and tackling the underlying cashflow problem is often the first practical step; see Business Cashflow Crisis: How to Take Control for a structured way to approach that.
When to stop and take advice
There is no single moment that applies to every company, but common triggers for seeking advice include missed HMRC payments, a statutory demand, mounting supplier arrears, or management accounts showing liabilities overtaking assets. The earlier you speak to a regulated specialist, the more options are usually available — including restructuring, a company voluntary arrangement, or an orderly wind-down.
Official guidance on what directors must do if their company is insolvent sets out these responsibilities in more detail. Delaying that conversation tends to narrow your options and increase the risk that continued trading is later judged unreasonable. Taking advice is not an admission of failure; it is one of the clearest ways to demonstrate you acted responsibly as a director.
Frequently asked questions
Can I still take a salary if the company is insolvent?
Directors can generally continue to draw a reasonable salary for work actually done, provided it reflects normal remuneration and is not disguised as an attempt to extract value ahead of creditors. Excessive or irregular payments made once insolvency is apparent can be challenged later, so this is a point worth discussing with a specialist.
Can you trade while insolvent at all?
Yes. Insolvency itself is not illegal, and many companies trade through short-term difficulties. The risk is continuing to trade once there is no reasonable prospect of avoiding insolvent liquidation, without taking steps to limit further losses to creditors.
Should I avoid taking on new credit once cashflow is tight?
Be very cautious. Taking on new loans, supplier credit or leases that the company is unlikely to be able to repay is one of the clearest examples of behaviour that can lead to wrongful trading director liability if the company later fails.
What are the main trading whilst insolvent consequences for a director?
The most serious is a court order requiring a personal financial contribution under wrongful trading rules. Directors can also face disqualification, and in cases involving dishonesty, more serious action. Acting reasonably and taking early advice significantly reduces these risks.
How can I minimise losses to creditors while I decide what to do?
Keep records current, avoid new debt the company cannot service, treat creditors even-handedly, and get advice from a regulated insolvency practitioner or solicitor as soon as you have concerns. Acting promptly is consistently the single biggest protective factor for directors.
This article is general information, not legal, financial or insolvency advice, and every company's circumstances are different. If you would like to talk through your position, Harbourfirst can introduce you to a regulated insolvency specialist — start an enquiry.