Wrongful trading is the rule that makes directors personally liable for continuing to trade when they should have known the company was finished. It is not fraud and it does not require dishonesty — which is precisely why it catches ordinary directors of ordinary businesses who believed, sincerely, that the next contract would turn things around.
What the rule says
Under section 214 of the Insolvency Act 1986, where a company has gone into insolvent liquidation, a court may order a director to contribute personally to the company's assets if, at some point before the winding up began, that director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation — and did not then take every step they ought to have taken to minimise the potential loss to creditors. The equivalent provision covers administration.
Three features make it dangerous. It applies to shadow and de facto directors as well as those formally appointed. The standard is objective as well as subjective: a director is judged by the knowledge and skill reasonably expected of someone carrying out that function, and by their own actual knowledge, so a finance director is held to a higher standard than a marketing director and nobody is protected by not having looked. And the contribution is measured by the increase in the deficiency to creditors between the moment the director should have acted and the moment they did — the losses caused by the delay. Note what "acted" means, because the section does not say stop. The defence is having taken every step with a view to minimising the potential loss to creditors, and continuing to trade can sometimes be that step, where a solvent sale or a funded restructuring genuinely preserves value. What will not answer is trading on without forecasts, without advice and without a record of why the decision was thought to be in the creditors' interests.
The moment that matters
Almost every case turns on a single question: when did the director know, or when should they have known? Courts have been consistent that this is not the moment the company became balance-sheet insolvent, nor the moment it ran out of hope. It is the point at which insolvent liquidation became unavoidable rather than merely possible — and optimism is not a defence once the facts no longer support it.
The evidence that decides it is contemporaneous and ordinary: management accounts, cash flow forecasts, board minutes, correspondence with the bank, aged creditor listings, and any advice the directors took. A board that met monthly, looked at a forecast, recorded its reasoning and took advice will be judged on that record. A board that stopped producing management accounts eight months before liquidation has handed the liquidator the argument, because the absence of information is itself a failure to take reasonable steps.
The defence: every step to minimise creditor loss
There is a statutory defence, and it is not "we thought it would be fine". It is that the director took every step with a view to minimising the potential loss to creditors that they ought to have taken. In practice that means demonstrable actions, taken promptly:
- Taking professional advice early — from an insolvency practitioner, and following it. Advice taken and ignored is worse than no advice;
- Keeping the board informed and meeting more often, with minutes that record what was known and why each decision was taken;
- Not incurring new credit the company cannot reasonably expect to pay — continuing to take customer deposits or supplier credit while insolvent is the fact pattern that produces the largest awards;
- Ceasing to trade where the analysis says there is no prospect, rather than trading on to protect employment or reputation, however sympathetic the motive;
- Treating creditors even-handedly, since paying a connected creditor ahead of others adds a preference claim to the wrongful trading claim.
What sits alongside it
Wrongful trading rarely arrives on its own. A liquidator reviewing the same period will also consider fraudulent trading (which requires dishonesty and carries criminal as well as civil consequences), transactions at an undervalue and preferences (which can be unwound, looking back years, where connected parties are involved), misfeasance, and director disqualification proceedings that can run for up to 15 years and are pursued independently of any money claim.
Directors should also understand where their duties point once insolvency looms. The duty to promote the success of the company for the benefit of members shifts, as insolvency approaches, towards a duty to have regard to the interests of creditors — the point the Supreme Court settled in recent years. A decision that benefits shareholders at creditors' expense stops being defensible well before the company enters liquidation.
What to do when the numbers turn
The practical sequence: get accurate, current figures, including a cash flow forecast that is honest about the downside; take advice from a licensed insolvency practitioner and record that you did; convene the board, assess whether there is a genuine, evidenced prospect of trading out, and write down the reasoning; set review points and actually hold them; stop incurring credit the company cannot service; and if the answer becomes no, act on it that week rather than the next quarter.
Directors who do this rarely face a wrongful trading claim, even where the company fails — because the record shows a board that acted on the information rather than avoiding it. That, rather than the outcome, is what section 214 actually tests.
Acumon is not an insolvency practice, but the work that protects directors here is work we do: reliable management accounts, an honest cash flow forecast, and the governance record set out in our corporate governance support. Where the answer is a formal process, we will say so and work alongside the insolvency practitioner rather than around them.