Wrongful trading in the UK and how to avoid a personal claim

Facing the possibility of a wrongful trading claim is one of the most serious challenges a director can encounter. When a company is under financial pressure, the decisions you make can have far-reaching personal consequences, not just for the business but for your own financial position and reputation. It is entirely natural to feel uncertain about where your legal obligations begin and end.

At Isadore Goldman, we specialise exclusively in insolvency. Our  solicitors provide clear and pragmatic advice so that parties can take decisive action without delay.

What is wrongful trading?

Wrongful trading is  governed under section 214 of the Insolvency Act 1986. It arises where a director of a company that has entered insolvent liquidation or administration knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding that outcome, yet continued to allow the company to incur liabilities after that point.

The key word is “ought.” Directors are judged not only on what they actually knew, but on what a reasonably diligent person in their position would have known. Wrongful trading is not a criminal offence. It is a civil matter, meaning the court can order a director to make a personal financial contribution to the company’s assets rather than imposing a criminal penalty.

Wrongful trading vs fraudulent trading

Fraudulent trading is governed by section 213 of the Insolvency Act 1986 and requires proof of dishonest intent. A director or other person must have carried on the business with the intent to defraud creditors or for any other fraudulent purpose. As fraud must be established, the threshold is significantly higher.

Wrongful trading applies an objective negligence test. The court does not need to find dishonesty. It is enough that the director fell below the standard of a reasonably diligent person in their position. Fraudulent trading carries criminal penalties, including imprisonment. Wrongful trading does not.

When does the risk of wrongful trading begin?

The risk begins at what courts refer to as the “moment of knowledge”: the point at which a director knew, or should have concluded, that insolvent liquidation or administration was unavoidable.

Two tests are used to assess insolvency: the cash flow test (whether the company can pay its debts as they fall due) and the balance sheet test (whether the company’s liabilities exceed its assets). Directors should watch for warning signs, including:

• Mounting creditor pressure and persistently overdue invoices
• Defaulted loan facilities or broken banking covenants
• Returned payments or requests from creditors for payment arrangements
• Qualified or adverse audit opinions on going concern
• Persistent failure to meet management account projections

The earlier directors identify these signals, the more options remain available and the better placed they are to demonstrate that they acted responsibly.

Who can be held liable?

Liability under section 214 is not limited to formally appointed directors. The Act extends to:

• De jure directors: those formally appointed to the role
• De facto directors: individuals who act as directors without formal appointment
• Shadow directors: persons whose instructions the board regularly acts upon, even without formal involvement in management

This means non-executive directors, informal advisers and individuals who exercise behind-the-scenes influence can all be caught. Anyone whose instructions or guidance shapes board decisions should be aware of their potential exposure.

The section 214 test: what a court considers

When assessing wrongful trading, a court applies a dual standard. It considers what the director actually knew, having regard to their specific knowledge, skill and experience (the subjective element), alongside what a reasonably diligent person with the general knowledge, skill and experience expected of a director in that position would have known (the objective element). The court applies whichever produces the higher threshold.

The central question is whether the director took every step they ought to have taken to minimise potential loss to creditors once the risk of insolvency became apparent.

Consequences and personal liability

A finding of wrongful trading can result in:

• A court order requiring the director to make a personal financial contribution to the insolvent estate, available for distribution to creditors
• Exposure to the costs of the litigation
• Director disqualification under the Company Directors Disqualification Act 1986 (CDDA), which can result in a ban of up to 15 years
• Serious reputational damage affecting future directorships and commercial relationships
• Interaction with any personal guarantees the director has given, which may be called upon separately by lenders or creditors

Our team works with directors facing these consequences, providing honest and realistic assessments of their position and robust representation where required.

The “every step” defence

Section 214(3) of the Insolvency Act 1986 provides a complete defence where a director took every step they ought to have taken, with a view to minimising the potential loss to the company’s creditors. In practice, courts look for evidence that the director:

• Sought timely advice from a licensed insolvency practitioner and a solicitor
• Held regular board meetings and kept accurate minutes of decisions taken
• Maintained up-to-date management accounts and cash flow forecasts
• Actively monitored the company’s financial position and responded to deterioration
• Avoided taking on new credit the company could not realistically service
• Did not prefer connected creditors over the general body of unsecured creditors

Documented, contemporaneous evidence of these steps is essential. A director who can demonstrate a consistent, considered response to financial difficulty is far better placed to resist a claim than one who cannot.

Practical steps directors can take to avoid a wrongful trading claim

Taking early, proactive action is the most effective way to reduce personal exposure. Directors should:

• Seek immediate, expert advice from an insolvency solicitor and a licensed insolvency practitioner at the first sign of financial difficulty.
• Hold and fully minute regular board meetings, recording the financial information reviewed and the decisions made.
• Maintain accurate, current management accounts and rolling cash flow forecasts.
• Stress-test going concern assumptions regularly and document the basis for any positive assessment.
• Avoid taking on new credit or contractual obligations the company cannot service.
• Refrain from preferring connected creditors over the general body of creditors.
• Consider formal insolvency procedures, such as a company voluntary arrangement (CVA), administration or a restructuring plan, at the appropriate time.

Waiting for the position to deteriorate further is rarely in a director’s interests and therefore seeking professional advice early is recommended.

Seek professional advice from our insolvency solicitors

Wrongful trading claims carry significant personal and financial consequences, and the decisions made in the weeks and months before formal insolvency proceedings begin will be subject to close scrutiny. Whether you are a director concerned about your current exposure, an accountant or insolvency practitioner advising a client, we can help.

We will give you an honest and realistic assessment of your position and help you navigate your options with confidence. If director disqualification is also a concern, we can advise on both matters together.

With offices in London, Norwich and Portsmouth, we are ready to provide immediate, expert advice. Please contact us at info@isadoregoldman.com to arrange an appointment.