What is wrongful trading?

Wrongful trading is the rule that turns “trading on and hoping” into a personal risk. Unlike fraud, it does not require any dishonest intent — just trading past the point of no return without protecting creditors. This guide explains the test, the defence, and what a director can be made to pay.

The wrongful trading test

Wrongful trading focuses on a specific moment in time: the point at which a director knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation. Lawyers sometimes call this the “point of no return”. From that moment, the director is under a duty to take every step a reasonably diligent person would take to minimise the potential loss to the company’s creditors. The liability does not arise from the company simply failing — businesses fail for all kinds of reasons — but from carrying on as before, racking up further debt, after the point where any reasonable director would have realised the game was up.

How the standard is judged

The court applies a combined, two-part standard. It measures the director against the general knowledge, skill and experience reasonably expected of someone carrying out that role, and against any greater knowledge or experience the particular director actually has. So a qualified accountant acting as finance director is held to a higher standard than a lay director. Crucially, a director cannot hide behind ignorance that the role required them to overcome — “I did not understand the figures” is rarely a defence.

The “every step” defence

The law gives directors a clear defence: if, after realising that insolvent liquidation was unavoidable, they took every step they ought to have taken to minimise the potential loss to creditors, they are not liable. The emphasis is firmly on the word “every” — the director must show they did all that a conscientious person in their position could reasonably have done, not merely that they tried their best. In practice this means acting promptly and responsibly:

• Take advice early — consult a licensed insolvency practitioner as soon as serious doubt arises.
• Document decisions — minute board discussions and the reasoning behind continuing or stopping.
• Stop incurring new credit — avoid taking on liabilities you cannot reasonably expect to meet.
• Act to reduce loss — consider rescue, administration or an orderly liquidation rather than drifting on.

Who brings a claim, and what it leads to

A wrongful trading claim can only be brought by a liquidator or an administrator of the insolvent company, not by an individual creditor. If the court is satisfied that the director continued to trade past the point of no return and failed to minimise loss, it can order that director to contribute personally to the company’s assets — broadly, to make good the additional loss caused to creditors after that point. A finding of wrongful trading frequently goes hand in hand with director disqualification, because the same conduct that founds the claim often also shows the director is unfit. The two can run together off the same set of facts.

Wrongful versus fraudulent trading

The crucial difference is intent. Wrongful trading needs no dishonesty — it is about a failure to act prudently, judged objectively against what a reasonable director would have done. Fraudulent trading requires a dishonest intent to defraud creditors and is also a criminal offence. Because dishonesty is hard to prove, the vast majority of director liability claims brought by liquidators after a company fails are for wrongful, not fraudulent, trading.

Frequently asked questions

Sources & further reading

• Insolvency Act 1986 — s.214 (wrongful trading)
• GOV.UK — Director responsibilities and insolvency
• The Insolvency Service — guidance for company directors
• Company Directors Disqualification Act 1986

This guide is general information, not formal insolvency advice. Your situation must be assessed by a licensed insolvency practitioner before you act.