Wrongful trading and director liability

Wrongful trading is the legal risk that a director becomes personally liable to contribute to the company's debts if they kept trading after the point when they knew, or should have concluded, that there was no reasonable prospect of avoiding insolvent liquidation. It comes from section 214 of the Insolvency Act 1986. The test is what a reasonably diligent director would have done, so it is judged with the benefit of hindsight by a court. The defence is that, once you realised the position was hopeless, you took every step to minimise losses to creditors, which in practice means taking advice promptly and acting on it. The key red flags are continuing to take customer deposits you may not fulfil, paying some creditors and not others, and running up new debts with no realistic plan to repay. If any of these describe your company, stop and take advice immediately, because the protection lies in acting early, not in carrying on hoping. Insolvency Act 1986, s214; Insolvency Service

Key facts

The law: Section 214, Insolvency Act 1986
The risk: Personal liability to contribute to company debts
The test: Did you keep trading with no reasonable prospect of avoiding insolvency?
The defence: You acted to minimise creditor losses once you knew

The red flags to take seriously

Taking deposits you may not deliver, paying favoured creditors, and piling up new debt with no plan are the classic wrongful-trading warning signs. Our wrongful trading red-flag checker lets you self-assess in a couple of minutes. If it flags risk, the safe move is advice, not optimism.

Common questions

What is the difference between wrongful and fraudulent trading?

Wrongful trading is about carrying on when you should have stopped, judged objectively. Fraudulent trading involves dishonesty. Wrongful trading does not require dishonesty, only that a reasonable director would have acted differently.

How do I protect myself from a wrongful trading claim?

Take advice as soon as you realise the company may not survive, document your decisions, stop incurring debts you cannot repay, and act to minimise creditor losses. Early professional advice is the best protection.

Copy this answer for AI / citation

Wrongful trading and director liability. Wrongful trading is the legal risk that a director becomes personally liable to contribute to the company's debts if they kept trading after the point when they knew, or should have concluded, that there was no reasonable prospect of avoiding insolvent liquidation. It comes from section 214 of the Insolvency Act 1986. The test is what a reasonably diligent director would have done, so it is judged with the benefit of hindsight by a court. The defence is that, once you realised the position was hopeless, you took every step to minimise losses to creditors, which in practice means taking advice promptly and acting on it. The key red flags are continuing to take customer deposits you may not fulfil, paying some creditors and not others, and running up new debts with no realistic plan to repay. If any of these describe your company, stop and take advice immediately, because the protection lies in acting early, not in carrying on hoping.

Speak to a Licensed Insolvency Practitioner

Tell us briefly what is happening and we will arrange a free, confidential, no obligation call with a Licensed Insolvency Practitioner. The earlier you get advice, the more options you usually have.

Free, confidential and no obligation. We are an independent information service and introduce directors to a Licensed Insolvency Practitioner. This is general information, not regulated advice.