Wrongful trading: the line you must not cross

Wrongful trading is continuing to trade after the point where you knew, or ought to have known, that the company could not avoid insolvent liquidation, without taking every step to minimise creditors’ losses. It is the main route by which directors of limited companies are made personally liable for company debts.

The rule

Section 214 of the Insolvency Act 1986. A liquidator (or, since 2015, an administrator) can apply to the court for an order that a director contribute personally to the company’s assets if two things are shown: that at some point before the liquidation the director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation, and that after that point the director did not take every step a reasonably diligent person would have taken to minimise the potential loss to creditors.

The standard is partly objective. You are judged against what a reasonably diligent director with the general knowledge, skill and experience expected of someone in your position would have known and done. Not knowing because you did not look at the figures is no defence. If you also had particular expertise, say as an accountant, you are held to that higher standard too.

The point of no return

The claim turns on a date. Liquidators reconstruct it from the records: the month the company stopped paying HMRC, the management accounts that showed losses with no funding, the email from the bank, the board minute that recorded the concern. The court then asks whether, at that date, a reasonable director would have concluded the company could not avoid insolvent liquidation.

Note what the test is not. It is not “the company was insolvent”, which many trading companies are for a period and recover from. It is “insolvent liquidation could not reasonably be avoided”. A company with a credible plan, a funder in discussion, a signed contract about to start, can be insolvent today and still have a reasonable prospect. A company hoping something turns up does not.

What “every step” means

Once past the point, you are not automatically liable. You are liable if you failed to take every step to minimise creditors’ losses. In practice the court looks for:

• Stopping new credit: not taking deliveries or deposits you knew the company could not pay for.
• Not increasing the deficit: not trading on at a loss funded by unpaid creditors.
• Paying creditors fairly: no preferences to yourself or connected parties.
• Taking advice promptly from a licensed practitioner and acting on it.
• Keeping proper records of the decisions and why they were taken.

Trading on can itself be the right step, if it is to complete work in progress that realises value, or to achieve a better sale of the business. The difference between that and wrongful trading is whether it was a considered decision to protect creditors, documented at the time, or a reflex to keep the lights on.

How the liability is calculated

The usual measure is the increase in the net deficiency to creditors between the point of no return and the date of liquidation. If the company’s deficit was £200,000 on the day you should have stopped and £350,000 on the day the liquidator was appointed, the claim is for £150,000, shared between the directors who were responsible. The court has discretion to reduce it and considers the director’s conduct and means.

Claims are often settled rather than litigated, and liquidators weigh the cost of proceedings against what a director can pay. A director who engaged early and kept records is in a different negotiating position from one who did not.

The protection: a record

The defence to wrongful trading is almost always documentary. Board minutes that show the directors met, looked at the figures, considered whether the company could continue, took advice, and recorded the reasons for the decision. Monthly management accounts. A cash flow forecast with the assumptions written down. An email to the practitioner on the day you first thought the company might not survive.

None of this requires the decision to have been right. It requires it to have been reasonable, considered and recorded at the time.

Related claims to know about

Fraudulent trading (section 213) requires intent to defraud creditors and carries criminal liability. It is rare and reserved for dishonesty.

Misfeasance (section 212) is the general claim for breach of duty by a director, often used alongside wrongful trading for specific transactions.

Preferences and transactions at undervalue (sections 239 and 238) attack individual payments or transfers rather than the decision to trade on.

What to do today

1. Run the two insolvency tests with real figures. The outcome tells you which side of the line you are on.
2. Write a dated note of the result and your decision, and minute it if you have a board.
3. Stop taking credit you cannot pay for, and stop paying anyone ahead of anyone else.
4. Speak to a licensed insolvency practitioner. The date of that conversation is itself evidence that you acted.