What is wrongful trading? It's when a company director keeps a business trading after the point at which they knew, or ought to have known, there was no reasonable prospect of avoiding insolvent liquidation. Under Section 214 of the Insolvency Act 1986, a director in that position can be ordered to personally contribute to the money owed to creditors.
It's a civil law concept, not a criminal one, and it only applies once a company has gone into insolvent liquidation (or administration), as set out in Section 214 of the Insolvency Act 1986. Many directors worry about it unnecessarily. This guide explains the legal test, the "point of no return", the penalties, and what to do if you're concerned it might apply to you.
What is wrongful trading? In one sentence
Wrongful trading is continuing to run a company after a director knew, or ought reasonably to have concluded, that insolvent liquidation was unavoidable — without taking every step to minimise the loss to creditors from that point onwards.
The key word is "unavoidable". Trading while insolvent is not automatically wrongful. Companies operate with cash-flow pressure all the time, and directors are generally free to try to trade out of difficulty. The claim only bites once there was genuinely no realistic route back to solvency.
The legal test under Section 214 Insolvency Act 1986
Section 214 sets out a two-part test. A court will ask:
- The knowledge test: did the director know, or ought they to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation?
- The response test: from that point, did the director take every step they reasonably ought to have taken to minimise the potential loss to creditors?
The standard is partly objective. The court compares the director's conduct against what a reasonably diligent person with their general knowledge, skill and experience should have done — and also against the higher standard expected of someone with their actual qualifications, if they hold specific expertise (for example, a qualified accountant acting as finance director).
This means "I didn't realise how bad things were" is not always a full answer. If a reasonably competent director in the same role should have spotted the problem, that can still count against you.
The 'point of no return': when you should have stopped
Courts and insolvency practitioners often describe this moment informally as the "point of no return" — the date from which continuing to trade stopped being a reasonable business decision and started increasing creditor losses without a credible way back.
There's no fixed formula, but the following are common warning signs that the point may be approaching:
- The company cannot pay HMRC, suppliers or staff as debts fall due, on a recurring basis.
- Liabilities clearly exceed assets, with no realistic plan to close the gap.
- Credit is being extended by suppliers or lenders under false or overly optimistic assumptions.
- New credit or new stock is being taken on when there is no reasonable basis to expect it can be paid for.
- Management accounts, cash-flow forecasts or professional advice have flagged insolvency but trading continues unchanged.
One factor rarely fixes the date on its own. Courts look at the whole picture, including board minutes, management accounts and any advice the directors received at the time.
What a court can order you to pay personally
If a court finds wrongful trading proven, it can order the director to make a personal contribution to the company's assets under Section 214. This is separate from the director's normal limited liability protection — it is a personal financial order against them.
The contribution is compensatory, not automatically punitive. Courts generally aim to reflect the loss caused to creditors by the continued trading, rather than fine the director for the whole shortfall in the company. In practice, the amount reflects:
- The increase in net deficiency to creditors after the point of no return.
- How much of that loss is fairly attributable to the director's decision to keep trading.
Alongside a financial order, a wrongful trading finding can also lead to a director disqualification order, which prevents someone acting as a company director for a set period. It is not a criminal conviction, but it carries serious professional consequences.
How wrongful trading differs from simply going bust
Company insolvency on its own is not a legal wrongdoing. Businesses fail for many ordinary reasons — a lost contract, a bad debt, rising costs, a market downturn — and directors are not personally liable simply because the company could not pay its debts.
Wrongful trading is different because it's about a director's conduct after the point at which insolvency became unavoidable — a duty set out in gov.uk's guidance on directors' duties when a company is insolvent — not the fact of insolvency itself. Two directors can run identical companies into liquidation; one may have acted reasonably throughout and face no claim, while the other kept trading recklessly past the point of no return.
It's also worth separating wrongful trading from fraudulent trading, a more serious allegation involving intent to defraud creditors, which carries a higher legal threshold and can involve criminal liability as well as a civil claim.
For a fuller comparison, see Wrongful vs Fraudulent Trading: Key Differences.
The defence: taking every step to minimise creditor losses
Section 214 gives directors a specific defence. If a director can show they took every step they reasonably ought to have taken to minimise the loss to creditors once insolvency became unavoidable, the court will not make an order against them.
Evidence that typically supports this defence includes:
- Board minutes recording the financial position and the decisions taken, and why.
- Up-to-date management accounts and cash-flow forecasts.
- Written advice sought from an accountant, solicitor or licensed insolvency practitioner, and evidence that advice was followed.
- Stopping new credit being taken on once repayment could not reasonably be expected.
- Prompt steps towards a formal insolvency process (such as administration, a company voluntary arrangement, or liquidation) once the position became clear.
Directors who ask for professional advice early, and act on it, are generally in a far stronger position than those who carry on regardless and hope things improve.
What to do right now if you're worried
If you're concerned your company may already be past the point of no return, the priority is to stop the position getting worse and get an accurate picture of where things stand.
- Get up-to-date management accounts and an honest cash-flow forecast, rather than relying on assumptions.
- Record your reasoning in board minutes — what you knew, when, and why you made each decision.
- Avoid taking on new credit, stock or deposits you cannot reasonably expect to pay back.
- Speak to a regulated insolvency practitioner or solicitor promptly, rather than waiting for the position to become critical.
Many directors in this position also want to understand their broader personal exposure, not just wrongful trading. It's worth reading Am I Personally Liable for Company Debts? and How to Avoid Wrongful Trading Claims for practical steps to reduce risk while decisions are still being made.
Frequently asked questions
How far back can a wrongful trading claim look?
There's no single fixed time limit written into Section 214 itself, but claims are generally brought by the liquidator or administrator after the company has entered insolvent liquidation, looking back at the period leading up to it. Ordinary limitation rules for civil claims can also be relevant, so timing depends on the specific case.
Is wrongful trading a criminal offence?
No. Wrongful trading under Section 214 is a civil matter, decided in the civil courts, and can result in a personal financial order and possible director disqualification. It is distinct from fraudulent trading, which can carry criminal liability where dishonest intent is proven.
Who can bring a wrongful trading claim?
Only the liquidator (or, in some circumstances, the administrator) of the company can bring a wrongful trading claim under Section 214. Individual creditors cannot bring the claim themselves, though the outcome benefits creditors as a whole.
Does wrongful trading only apply to the managing director?
No. It can apply to any person who was a director at the relevant time, including non-executive and shadow directors who were involved in the decisions, not only the managing director or the person with the most visible role.
Can I be found liable if I resigned before liquidation?
Potentially, yes, for the period during which you were still a director. A claim would generally focus on your knowledge and conduct while you held office, up to the date you resigned.
This article is general information, not legal, financial or insolvency advice. Every company's circumstances are different, and directors should speak to a regulated specialist about their own position before making decisions.
If you'd like to talk through where things stand, Harbourfirst can introduce you to a regulated insolvency practitioner or solicitor — start an enquiry.