What Is Wrongful Trading? UK Law, Risks, and Penalties for Company Directors

Facing mounting financial pressures can be daunting for company directors. Wrongful trading is a serious civil liability risk that can arise when directors continue to trade at a point where there is no reasonable prospect of avoiding insolvent liquidation or insolvent administration. Under the Insolvency Act 1986, directors who fail to act appropriately may face personal financial contribution orders and director disqualification. Understanding the law is essential to navigating financial distress and avoiding severe personal consequences.

Directors must recognise when recovery is no longer realistically achievable and take every step required by law to minimise potential losses to creditors during this critical period.

Understanding Wrongful Trading Under UK Law

Wrongful trading is a statutory civil liability under the Insolvency Act 1986, specifically:

• Section 214 (companies that go into insolvent liquidation), and
• Section 246ZB (companies that enter insolvent administration).

Wrongful trading arises where, before the commencement of insolvent liquidation or insolvent administration, a director knew or ought to have concluded that there was no reasonable prospect of avoiding that outcome, yet failed to take every step to minimise potential loss to creditors.

Importantly, wrongful trading does not require dishonesty. The test is partly objective: the court considers what a reasonably diligent person with the director’s knowledge, skill, and experience should have concluded, alongside what the director actually knew.

If wrongful trading is established, the court may order the director to make a personal financial contribution to the company’s assets in an amount it considers just.

Unlike fraudulent trading, wrongful trading is not a criminal offence. It is a civil remedy available only once the company has entered insolvent liquidation or insolvent administration.

When Directors Become Liable

Directors become exposed to wrongful trading liability when the statutory conditions are met and the company subsequently enters:

• Insolvent liquidation (for claims under section 214), or
• Insolvent administration (for claims under section 246ZB).
  

The critical issue is the knowledge date — the point at which the director knew or ought to have concluded that there was no reasonable prospect of avoiding the relevant insolvent outcome.

Wrongful trading claims can only be brought by the liquidator or administrator and only in the course of the insolvency process. Creditors cannot bring claims directly.

The court will assess whether, from the knowledge date onward, the director took every step that could reasonably be expected to minimise losses to creditors.

Key Risks and Consequences

Being found liable for wrongful trading can have serious consequences for directors:

• Personal Financial Contribution – The court may order the director to contribute personally to the company’s assets. The amount is discretionary and based on what the court considers just in the circumstances.
• Director Disqualification – Conduct giving rise to wrongful trading can form the basis of disqualification proceedings under the Company Directors Disqualification Act 1986. Disqualification periods range from 2 to 15 years, depending on the seriousness of the conduct.
• Reputational Damage – Findings of wrongful trading can significantly damage a director’s professional reputation and future prospects.
• Civil Liability Only – Wrongful trading itself does not carry criminal penalties. However, related misconduct may give rise to other civil or criminal proceedings.
• Overlapping Claims – Wrongful trading claims may be pursued alongside misfeasance claims, transactions at undervalue, preferences, or — where dishonesty is alleged — fraudulent trading under separate legal provisions.

Defences and Minimising Personal Liability

The primary statutory defence to wrongful trading is set out in section 214(3) and section 246ZB(3) of the Insolvency Act 1986.

To avoid liability, a director must show that, from the point they knew or ought to have concluded recovery was no longer reasonably possible, they took every step to minimise potential losses to creditors.

Key actions typically include:

• Documenting Board Decisions
  Keeping accurate and contemporaneous board minutes showing active engagement with financial realities.
• Seeking Professional Advice Early
  Taking advice from insolvency practitioners, accountants, or legal advisers at an early stage.
• Protecting Creditor Interests
  Avoiding actions that increase creditor losses and ceasing high-risk trading where appropriate.

A practical checklist for directors includes:

• Updating cash flow forecasts regularly
• Holding frequent and properly minuted board meetings
• Retaining written records of professional advice
• Implementing cost controls and reviewing trading decisions critically

Evidence of structured, informed decision-making is central to any defence.

Practical Steps for Directors Facing Insolvency

When insolvency becomes a realistic possibility, directors must act decisively.

Key steps include preparing detailed financial forecasts, identifying funding shortfalls early, and reassessing whether continued trading genuinely reduces or increases creditor losses.

Consulting a licensed insolvency practitioner is often critical. Early professional advice can help directors understand their legal position and determine whether continuing to trade is defensible.

Directors should prioritise creditor interests, maintain transparency, and ensure that decisions are properly documented.

Practical measures include:

• Preparing up-to-date financial information
• Reducing unnecessary expenditure
• Avoiding speculative or high-risk transactions
• Seeking professional insolvency advice
• Keeping clear written records of decisions and advice received

Distinctions from Other Insolvency Claims

Wrongful trading is only one of several director liability risks in insolvency:

Claim Type	Nature	Key Requirement	Legal Consequence
Wrongful Trading	Civil	No reasonable prospect of avoiding insolency + failure to minimise losses	Court-ordered contribution
Fraudulent Trading	Civil / Criminal	Intent to defraud creditors	Civil recovery and/or criminal penalties
Misfeasance	Civil	Breach of duty or misuse of company assets	Compensation or restoration
Preferences / Undervalue	Civil	Improper transactions before insolvency	Transaction reversal or recovery

Understanding how these claims differ helps directors assess their overall risk exposure.

Regional Differences and COVID-19 Measures

In Great Britain, wrongful trading is governed by the Insolvency Act 1986.
In Northern Ireland, equivalent provisions exist under Article 178 of the Insolvency (Northern Ireland) Order 1989. While the legal framework differs, the principles are broadly similar.

During the COVID-19 pandemic, temporary measures restricted the operation of wrongful trading liability by requiring courts to assume that directors were not responsible for worsening the company’s financial position during specified periods. These measures applied between:

• 26 March 2020 to 30 September 2020, and
• 26 November 2020 to 30 April 2021.

These provisions have now expired, and the standard wrongful trading regime is fully reinstated.

FAQs

Your Next Step

If your company is approaching insolvency, early action is essential. Seeking advice from a licensed insolvency practitioner can help you understand your legal duties and reduce the risk of personal liability. Delay can significantly increase exposure to wrongful trading claims and disqualification proceedings. Acting promptly and responsibly is the most effective way to protect both your position and your creditors.