Wrongful trading is a civil claim under section 214 of the Insolvency Act 1986 (section 246ZB where the company is in administration). If a company ends up in insolvent liquidation or administration, the court can order a director to contribute to its assets where, at some earlier point, the director knew or ought to have concluded there was no reasonable prospect of avoiding that outcome and did not then take every step to minimise the potential loss to creditors. No dishonesty is needed, which is what separates it from fraudulent trading.

What is wrongful trading?

Directors are not normally personally liable for a limited company’s debts. The Insolvency Service’s director information hub lists wrongful trading, fraudulent trading, misfeasance and compensation orders as situations where they can become personally liable. Wrongful trading is the one most likely to catch an honest director.

Under section 214(1) and (2), the liquidator can apply to the court for a declaration that a director must contribute to the company’s assets where:

  • the company has gone into insolvent liquidation, meaning its assets are insufficient to pay its debts, other liabilities and the expenses of the winding up (section 214(6));
  • at some time before the winding up began, the person knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation or insolvent administration; and
  • the person was a director at that time.

Section 246ZB gives an administrator the same claim. “Director” includes a shadow director (section 214(7)). Under section 246ZD the liquidator or administrator can assign a wrongful trading claim, including its proceeds, to a third party, so a claim can be pursued even where the estate has no money to fund litigation.

How is a director’s knowledge judged?

Section 214(4) sets a two part standard. What a director ought to have known, concluded and done is measured against a reasonably diligent person having both:

  1. the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as that director; and
  2. the general knowledge, skill and experience that the director actually has.

The first limb sets a minimum that applies even to an inexperienced director. The second raises the bar for someone with more expertise, such as a qualified accountant acting as finance director. Section 214(5) adds that functions entrusted to the director count even if they did not carry them out, so a director cannot rely on having left the finances to someone else.

A useful reference point is section 123 of the Act, which treats a company as unable to pay its debts if it cannot pay them as they fall due, or if its assets are worth less than its liabilities, taking into account contingent and prospective liabilities. Being technically insolvent on one of those tests is not itself wrongful trading; the question is whether there was no reasonable prospect of avoiding insolvent liquidation or administration. A properly evidenced going concern assessment is often the best record of how the board reached its view.

What is the “every step” defence?

Section 214(3) says the court must not make a declaration if it is satisfied that, after the director first knew or ought to have concluded there was no reasonable prospect, they took every step with a view to minimising the potential loss to the company’s creditors that they ought to have taken. Continuing to trade is not automatically wrong; it can be the right step if it genuinely protects creditors, for example by completing profitable work in progress.

The Insolvency Service says that once a company is insolvent, directors’ priorities shift from shareholders to creditors, and directors must protect the company’s assets, treat creditors equally, avoid worsening creditors’ position and consult or consider appointing an insolvency practitioner. Section 172(3) of the Companies Act 2006 recognises that the duty to promote the success of the company is subject to rules requiring directors to consider or act in the interests of creditors (see directors’ duties).

Practical steps include regular board meetings with minutes, up to date management accounts and cash flow forecasts, early advice from a licensed insolvency practitioner, and not taking new customer deposits or credit the company cannot honour.

How does wrongful trading differ from other claims against directors?

Claim Provision Key feature
Wrongful trading Insolvency Act 1986, s214 and s246ZB No dishonesty needed; directors and shadow directors only
Fraudulent trading (civil) Insolvency Act 1986, s213 Business carried on with intent to defraud creditors; any person knowingly a party can be liable
Fraudulent trading (criminal) Companies Act 2006, s993 Up to ten years’ imprisonment on indictment, whether or not the company is wound up
Misfeasance Insolvency Act 1986, s212 Officer misapplied or retained company money or property, or breached a duty; court can order repayment with interest
Preferences Insolvency Act 1986, ss239 and 240 Payments preferring a creditor within six months before insolvency, or two years for a connected person, can be reversed

Directors of a company in insolvent liquidation also face the restriction on reusing its name in sections 216 and 217. A person who was a director in the 12 months before liquidation must not, for five years, be involved with a company using the same or a similar name without the court’s permission or a prescribed exception, and doing so can make them personally liable for the new company’s debts.

How much can a director be ordered to pay?

Section 214(1) allows the court to order “such contribution (if any) to the company’s assets as the court thinks proper”. Because the defence looks at the potential loss to creditors after the critical date, claims generally focus on how much worse creditors’ position became after that point.

Illustration only. A small retailer’s directors receive management accounts in March showing it cannot meet rent and HMRC arrears, with no realistic funding in prospect. They keep trading and take customer orders until the company enters liquidation in September. The deficiency to creditors grows from £40,000 in March to £100,000 at liquidation. The liquidator will argue that the directors ought to have concluded in March that insolvent liquidation could not be avoided, and that the £60,000 deterioration is the measure of the loss they should be ordered to contribute towards. The directors’ answer depends on whether they can show that each step after March was taken to reduce creditors’ losses.

Can a director be disqualified as well?

Yes. Under section 10 of the Company Directors Disqualification Act 1986, where the court declares a person liable under section 213 or 214, it may also make a disqualification order, for up to 15 years. Separately, section 6 requires the court to disqualify a director of an insolvent company, or of a company dissolved without becoming insolvent, whose conduct makes them unfit; the period is between 2 and 15 years. Where a disqualified director’s conduct caused loss to creditors, section 15A allows the Secretary of State to apply for a compensation order within two years of the disqualification.

What mistakes do directors make when a company is struggling?

  • Trading on in hope, without cash flow forecasts or minutes showing why continuing was reasonable.
  • Repaying their own director’s loan account or paying connected creditors first, which can be challenged as a preference.
  • Treating a Time to Pay arrangement with HMRC as proof the company is viable, rather than testing whether all debts can be met.
  • Resigning and assuming that ends exposure. Section 214 looks at whether the person was a director when the critical point was reached.
  • Applying to strike the company off instead of using a formal insolvency process. A company that cannot pay its debts should not use the DS01 strike off route.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.