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 continuing to trade after the point at which a director knew - or ought to have known - that the company could not avoid insolvent liquidation, without taking every step to minimise creditors' losses; a court can order directors who do it to contribute personally to the company's debts.
In this guide you'll learn where the line sits, what liquidators and courts actually look at, the statutory defence, and the practical behaviours that keep honest directors on the right side.
The concept exists to catch recklessness, not misfortune - most directors of failed companies never face a wrongful trading claim - but the protection comes from how you behave in the final months, so it's a good idea to understand the rules before you're in them.
When does the duty to creditors begin?
While a company is solvent, directors' duties run to the company and its shareholders; once insolvent liquidation becomes inevitable, the interests they must protect switch to the creditors.
The trigger isn't a bad month or a tight quarter - it's the point where a reasonably diligent director would conclude there is no realistic prospect of avoiding insolvent liquidation: no credible turnaround, no funding, no rescue in genuine prospect.
The test is partly objective - "ought to have known" - so not looking at the numbers is no defence; directors are held to the knowledge their role should have given them.
What does trading on wrongfully look like?
The patterns liquidators recognise: taking deposits or new credit the director doubted could be honoured; building HMRC arrears as informal funding while other creditors were paid; racking up supplier debt in a final push that had no realistic basis; and the shortfall to creditors growing month by month past the point of no return.
The measure of a claim is that growth - broadly, the additional loss creditors suffered because the company traded on rather than stopping - which is why the date the line was crossed becomes the battleground.
What is the defence?
The statute provides one: a director is not liable if, once the position was (or should have been) clear, they took every step a reasonably diligent person would take to minimise creditors' losses.
In practice, the evidence that establishes it: taking licensed insolvency advice promptly and following it; stopping new credit and deposits; keeping creditors even-handed - no preferences to friendly or guaranteed creditors; preserving assets; and minuting the decisions and their reasons as they were made.
Two realities worth naming: "every step" can include continuing to trade briefly where advice supports it (an orderly wind-down or completing work in progress can genuinely reduce losses) - and the single strongest exhibit in any director's favour is a contemporaneous note showing advice sought early and followed.
How is wrongful trading different from fraudulent trading and misfeasance?
Wrongful trading is about negligence past the point of no return - no dishonesty required.
Fraudulent trading requires intent to defraud - taking money knowing it - and carries criminal as well as civil consequences; it's rarer and treated far more severely.
Misfeasance is the general claim for breaches of duty causing loss - the umbrella under which overdrawn loan accounts, unlawful dividends, and asset transfers are pursued.
A liquidator's investigation considers all three, alongside the conduct report that feeds disqualification decisions.
How do I protect myself in practice?
The playbook is short: watch the warning signs honestly rather than avoiding the numbers; the moment the "no realistic prospect" question is even arguable, take licensed advice - the conversation itself starts building the defence; then act on it - stop the exposure growing, treat creditors evenly, document everything.
And if the honest answer is that the company can't be saved, an early voluntary liquidation is the definitive step that minimises creditors' losses - which is exactly what the law asks of you.
Call our licensed insolvency practitioners in Manchester on 0333 023 5090 - if you're asking yourself whether trading on is still defensible, that's precisely the conversation to have today, in confidence, with an ICAEW-licensed IP.
InsolvencySupport.co.uk is operated by Xeinadin Corporate Recovery Limited (company no. 11415156), 8th Floor, 100 Barbirolli Square, Manchester M2 3BD. Our insolvency practitioners are licensed and regulated by the ICAEW.
This article is intended for general information purposes only and does not constitute financial, legal, or professional advice. Always take advice from a licensed insolvency practitioner about your specific position.
Reviewed by Alan Fallows, Licensed Insolvency Practitioner, ICAEW.