Wrongful Trading and Directors’ Personal Liability
Directors of limited companies benefit from the principle of separate legal personality. However, that protection is curtailed where directors allow a company to continue trading once insolvency is unavoidable. In those circumstances, the law permits personal liability for the losses caused.
This article explains what constitutes wrongful trading, when it arises, who may bring a claim, and the potential consequences for directors.
1. What Is Wrongful Trading?
Wrongful trading is governed by section 214 of the Insolvency Act 1986.
Section 214 applies where a company has entered insolvent liquidation and, at some point prior to the commencement of the winding up, a director knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation.
If that test is met, the court may order the director to make such contribution to the company’s assets as it thinks proper.
The purpose of the provision is compensatory rather than punitive. It is designed to protect creditors from losses caused by directors who continue trading beyond the point of viability.
2. When Does Trading Become Wrongful?
Wrongful trading does not require dishonesty, fraud, or improper motive. The key issue is timing.
The court will identify the point at which there was no reasonable prospect of avoiding insolvent liquidation. From that point onwards, directors are under a statutory obligation to take every step to minimise potential loss to creditors.
The assessment is both:
subjective, considering what the director actually knew; and
objective, considering what a reasonably diligent person carrying out the same role would have known.
Relevant factors commonly include persistent cashflow deficits, inability to meet liabilities as they fall due, escalating creditor pressure, and reliance on speculative funding or rescue attempts with no realistic prospect of success.
Continuing to trade in the hope of a turnaround will not, without objective justification, prevent liability.
3. Wrongful Trading Proceedings
Wrongful trading claims may only be brought once the company has entered insolvent liquidation.
Claims are typically brought by:
a liquidator, or
an administrator (where applicable),
acting on behalf of the company’s creditors as a whole.
Claims may be brought against:
current directors,
former directors, and
shadow or de facto directors who exercised real influence over the company’s affairs.
Wrongful trading claims are frequently advanced alongside claims for misfeasance, breach of fiduciary duty, preferences, or transactions at an undervalue.
4. Directors’ Personal Liability
Where wrongful trading is established, the court may order the director to make a personal financial contribution to the company’s assets.
The amount is usually assessed by reference to the increase in creditor losses caused by the continuation of trading after the relevant date. There is no statutory cap, and liability can be substantial where losses escalate rapidly.
In addition to financial exposure, a finding of wrongful trading may support:
director disqualification proceedings,
adverse findings in related insolvency litigation, and
reputational and regulatory consequences.
5. Key Practical Point for Directors
A director will avoid liability if they can demonstrate that, once insolvency was unavoidable, they took every step to minimise creditor losses. This is a high threshold and requires clear evidence of proactive, creditor-focused decision-making.
Early professional advice, accurate financial information, and decisive action are critical.
Speak to a Solicitor today
If you require any assistance or would like to find out your options regarding wrongful trading or insolvency, please contact us by sending an email to info@lyoncroft.co.uk, calling us on 020 3576 7170, or complete a contact-us form. Our offices are in Park Royal, West London and you can find our address at the bottom of the page.
This article has been authored by Abdullah Suker, Managing Director of Lyon Croft Law.
