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

Wrongful trading is the personal liability that attaches to a director who keeps the company trading when there’s no reasonable prospect of avoiding insolvent liquidation or insolvent administration, and creditor losses get worse as a result.

It sits in section 214 of the Insolvency Act 1986 (and section 246ZB for administration). It’s the single most common reason a director ends up writing a personal cheque to a liquidator after the company has gone.

The trap most directors walk into is not dishonesty. It’s optimism. They believe the next contract will land, the HMRC payment will hold for another month, the bank will agree the overdraft extension. The law doesn’t punish the optimism. It punishes failure to take every step a reasonably diligent director should take to minimise creditor losses once recovery is no longer realistic.

Below, we set out what the test actually requires, where directors typically miss the knowledge date, and what protects you if the company does go down. We’re a UK insolvency advisory firm. Where we describe how this plays out in practice, we’re drawing on the cases our advisory referral network has handled, not abstract legal commentary.

What Wrongful Trading Means in UK Law

Wrongful trading is a statutory civil liability. It’s not a criminal offence (that’s fraudulent trading, under section 213 IA 1986). The claim can only be brought by a liquidator or administrator after the company has entered the relevant insolvency process. Creditors cannot bring it directly.

The statutory test has three components. First, the company must have gone into insolvent liquidation (s.214) or insolvent administration (s.246ZB).

Second, at some point before that, the director knew or ought to have concluded there was no reasonable prospect of avoiding it. Third, from that point on, the director failed to take every step they ought to have taken to minimise loss to the creditors.

“Knew or ought to have concluded” is the bit that bites. The court applies a partly objective test: what would a reasonably diligent director with the same role, the same access to information, and the same skills have concluded?

A property director running a small flat conversion is not held to the same standard as the finance director of a listed group, but neither escapes the test by claiming inexperience.

If the test is met, the court can order the director to make a personal financial contribution to the company’s assets. The amount is whatever the court considers just, usually pegged to the increase in net deficiency between the knowledge date and the date the company entered the formal process.

The leading authority on the principle is still Re Produce Marketing Consortium Ltd [1989] BCLC 520, the first reported s.214 case.

When Wrongful Trading Liability Actually Begins

The “knowledge date” is where most cases turn. Liquidators reconstruct it forensically. They read the management accounts, the cash flow forecasts, the board minutes, the bank statements, and the email traffic. They pin a date to the moment a reasonably diligent director should have concluded the company couldn’t recover.

You’ll recognise the warning signs from your own week. The bounced supplier payment that you topped up with personal funds. The HMRC time-to-pay request that became a second time-to-pay request. The customer concentration where one client is 60% of revenue and is sliding. The auditor’s letter that asked harder questions than usual.

The honest part most guidance underplays: the knowledge date is rarely a single dramatic moment. It’s the cumulative weight of bad signals that a reasonably diligent director would have read together. Continuing to trade in hope, without recalibrating decisions toward creditor interests, is what creates wrongful trading exposure.

BTI 2014 LLC v Sequana SA [2022] UKSC 25 sharpened a related duty. As insolvency becomes likely, the directors’ duty under section 172 of the Companies Act 2006 shifts, so creditor interests must be considered alongside (and eventually ahead of) shareholder interests.

Wrongful trading is the back-end consequence if directors keep optimising for shareholders or themselves once that shift has happened.

The “Every Step” Defence Against Wrongful Trading

Section 214(3) IA 1986 provides the only statutory defence. From the knowledge date onward, the director must have taken every step they ought to have taken with a view to minimising potential loss to creditors. That standard is high, but it’s defined by what a reasonably diligent director in the same role would have done, not by hindsight.

What “every step” looks like in practice:

• Take licensed insolvency advice early. A documented diagnostic call with a licensed insolvency practitioner, dated and minuted, is the single most useful piece of evidence in a defence file.
• Hold and minute board meetings frequently. Weekly, not monthly, once you’re in the danger zone. Minutes should record the financial position considered, the options weighed, the decision taken, and the reason. A liquidator does not read minutes to find what was decided. They read them to find what was not.
• Update cash flow forecasts. A 13-week rolling forecast that’s actually used in board decisions is more defensible than a 12-month optimistic plan that nobody checks against reality.
• Stop incurring credit you can’t pay. Particularly Crown debt (PAYE, VAT, NIC) which became preferential again on 1 December 2020 under the Finance Act 2020. Continuing to bank PAYE you can’t remit is a classic wrongful trading red flag.
• Document the reasoning for any continued trading. If you decide to keep trading because of an imminent funding round or a contract about to sign, write down why and what you’ll do if it falls through.

The defence isn’t a checklist of activities. It’s evidence that creditor interests were genuinely being weighed, not just shareholder optimism dressed up as governance.

Wrongful Trading Penalties and Director Disqualification

If wrongful trading is established, the financial exposure is the contribution order. The disqualification exposure is separate but typically pursued in parallel.

Personal contribution order. The court orders you to pay into the company’s pot. The pot then pays the liquidator’s costs first, then secured creditors, then preferential creditors (including HMRC for the Crown debts), then unsecured creditors. You get back to your personal exposure only when the deficit between the knowledge date and the liquidation date is calculated.

Director disqualification. The Insolvency Service or the Secretary of State can pursue disqualification under the Company Directors Disqualification Act 1986. Section 6 (unfit directors) is the usual route.

Disqualification periods run from 2 to 15 years: 2 to 5 for the lower band, 6 to 10 for the middle, 11 to 15 for the most serious cases. Disqualification stops you acting as a director, being involved in management, or forming a new company without leave of the court.

Compensation orders. Since the 2015 reforms (CDDA 1986 ss.15A-B), the Secretary of State can also seek compensation orders alongside disqualification, ordering disqualified directors to pay creditors directly.

The reputational cost compounds. Disqualifications are public. They sit on the Companies House register and they make future banking, leasing, and contract relationships materially harder. Insurers will ask. Future investors will ask. The disqualification stays referenced in your professional history regardless of what happens to the underlying company.

Wrongful Trading Versus Fraudulent Trading and Misfeasance

Directors often confuse three different liability regimes that overlap in the same insolvency. The distinctions matter because the consequences differ.

Claim	Statute	Test	Consequence
Wrongful trading	s.214 / s.246ZB IA 1986	No reasonable prospect of avoiding insolvent liquidation/administration; failure to take every step	Civil only. Personal contribution order. Disqualification likely.
Fraudulent trading	s.213 IA 1986 (civil) / s.993 Companies Act 2006 (criminal)	Intent to defraud creditors	Civil contribution order and/or criminal liability up to 10 years’ imprisonment.
Misfeasance	s.212 IA 1986	Breach of fiduciary duty or misuse of company assets	Civil. Restoration, repayment, or compensation.
Preferences and undervalue transactions	ss.238, 239 IA 1986	Preferring a creditor or transferring assets at undervalue within the lookback window	Civil. Transaction reversal.

Wrongful trading does not require dishonesty. Fraudulent trading does. That’s the central difference, and it’s why s.214 is the most common claim brought by liquidators: it has a lower evidential threshold. Liquidators routinely run wrongful trading and misfeasance in parallel because they protect against different defences.

Wrongful Trading After COVID-19 and Crown Preference

Two recent shifts changed the landscape and are worth knowing.

COVID-19 suspensions are over. The Corporate Insolvency and Governance Act 2020 temporarily disapplied wrongful trading liability between 1 March and 30 September 2020, and again between 26 November 2020 and 30 June 2021.

Those provisions have expired. The standard s.214 regime is fully reinstated and has been throughout 2025 and 2026.

Crown preference is back. From 1 December 2020, under the Finance Act 2020, HMRC is a secondary preferential creditor for VAT, PAYE, employee NIC, CIS deductions, and student loan deductions.

This matters for wrongful trading because continuing to trade on unpaid PAYE or VAT now does direct, identifiable damage to a preferential creditor. Liquidators read this as a clear marker of the moment creditor interests stopped being protected.

If you’re trading through HMRC arrears today, that’s the first place a liquidator will look if the company later fails. Document the time-to-pay arrangements, document the reasoning behind continued trading, and take advice now rather than later.

Practical Steps If You Think You’re at Risk

If reading the above has made you uneasy, that’s a useful signal. Here’s what reduces exposure most reliably.

• Get a confidential diagnostic with a licensed insolvency practitioner. Most reputable firms offer a free initial review. We refer directors into our network for exactly this conversation. The diagnostic tells you where you sit on the timeline and what needs to happen this week.
• Stop and document. Pause any decision that adds creditor exposure. Write down what you’re doing and why. Date it. The liquidator’s reconstruction is a paper trail, so build the paper trail now.
• Call a board meeting. Even if it’s just you and one other director, hold the meeting, minute the financial position, and minute the decision taken.
• Run the diagnostic. Run the insolvency test for a quick read on whether the company meets the cash flow or balance sheet insolvency definitions in s.123 IA 1986.
• Don’t pay yourself or connected parties out of turn. Preferences (s.239) and transactions at undervalue (s.238) sit alongside wrongful trading and have a 6-month lookback for unconnected parties, 2 years for connected. The dangerous payment is the quiet one to a spouse’s company, not the noisy one to a trade supplier.

The earlier you take advice, the more options remain. Administration, a CVA, or a controlled creditors’ voluntary liquidation all preserve more value than a compulsory winding-up petition that catches you flat-footed.

Wrongful Trading and Northern Ireland

The s.214 regime applies in England, Wales, and Scotland. In Northern Ireland, the equivalent provision is Article 178 of the Insolvency (Northern Ireland) Order 1989. The substantive test is the same, the courts apply the same principles, and the case law cross-refers. The differences are procedural rather than substantive.

For directors with cross-border operations, the practical answer is to take advice from a practitioner familiar with both jurisdictions. The wrongful trading exposure attaches to your conduct as a director regardless of which UK jurisdiction the proceedings are brought in.

Your Next Step on Wrongful Trading Risk

If your company is approaching insolvency or already in distress, the cheapest version of this problem is the one you act on this week. Wrongful trading exposure compounds with every additional day of trading-in-hope, so delay is the enemy.

Three actions in one afternoon usually changes the picture. Pull together the last three months of management accounts and bank statements. Book a confidential diagnostic with a licensed insolvency practitioner. Hold a minuted board meeting that records the position and the decision taken. None of those actions commits you to liquidation. All of them build the paper trail that protects you later.

What we’ve consistently seen across the cases handled by our advisory referral network: the directors who close cleanest are the ones who rang an insolvency specialist inside 48 hours of the warning sign, not the ones who waited until the bailiff was at the door. The cost of one diagnostic call is zero. The cost of a wrongful trading contribution order is the rest of your savings.

FAQs on Wrongful Trading