A guide, not advice. This explains how things generally work. A licensed insolvency practitioner will tell you what applies to your company or to you.
What Is Wrongful Trading?
Wrongful trading is a legal claim available to a liquidator under Section 214 of the Insolvency Act 1986. It arises where a director continues to allow a company to trade after the point at which they knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation.
If proven, the court can order the director to contribute personally to the company's assets - effectively making them liable for the debts incurred during that period of continued trading.
Why It Matters
Wrongful trading exists to discourage directors from running up debts they know the company cannot repay. It is one of the most significant risks a director faces when a company becomes insolvent, because it can turn limited liability into personal liability.
When Does It Apply?
A wrongful trading claim depends on what the director knew or ought to have known. The court considers:
- The company's financial position at the time
- Whether a competent, reasonable director would have concluded there was no reasonable prospect of avoiding insolvent liquidation
- Whether the director took steps to minimise loss to creditors once insolvency was apparent
Crucially, it is not enough that the company was insolvent - the director must have continued to trade despite knowing there was no realistic prospect of recovery.
How to Protect Yourself
The best protection against a wrongful trading claim is to act early and responsibly:
- Take professional advice as soon as you suspect insolvency
- Keep detailed records of decisions and the reasoning behind them
- Prioritise creditors' interests once you know the company may be insolvent
- Do not incur further credit without a realistic plan to repay it
- Consider ceasing trading and seeking a liquidation or administration
Demonstrating that you took advice, acted responsibly, and put creditors first is powerful protection.
Wrongful vs Fraudulent Trading
Wrongful trading is a civil claim. Fraudulent trading (Section 213) is more serious - it requires intent to defraud creditors - and carries criminal as well as civil liability. Both can lead to personal liability.
Speak to a Licensed IP
If you're worried that continued trading may expose you to a wrongful trading claim, early advice is the best protection. Our Manchester-based practitioners will assess your position honestly and confidentially.