Wrongful trading is one of the most misunderstood provisions in insolvency law, and one of the most misquoted. It is not a criminal offence. It is not a fine. It is not simply “carrying on trading while insolvent”. Getting the distinction right matters, because the conduct that actually creates exposure is narrower, and later, than most directors assume.
Reviewed 18 August 2026. This page describes the law of England and Wales.
What Wrongful Trading Actually Is
Wrongful trading is a civil liability created by two provisions of the Insolvency Act 1986: section 214, which applies where a company goes into insolvent liquidation, and section 246ZB, which does the same job where a company enters insolvent administration.
The test turns on a single moment. Liability can arise where, at some point before the company went into insolvent liquidation or administration, a director knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid that outcome — and carried on anyway.
Read that wording closely, because two things follow from it.
First, the trigger is not insolvency. A company can be insolvent on one or both of the statutory tests and still have a reasonable prospect of trading out, refinancing, or reaching a formal arrangement with its creditors. Insolvency starts the clock on your duties. It does not, by itself, put you in breach of section 214.
Second, the trigger is not “avoiding insolvency” in a loose sense. It is the absence of any reasonable prospect of avoiding insolvent liquidation or insolvent administration. That is a harder, later and more specific point than simply running short of money.
The Standard You Are Judged By
The court asks what a reasonably diligent person would have known, concluded and done, measured against two yardsticks taken together: the general knowledge, skill and experience reasonably expected of someone carrying out your functions in that company, and the general knowledge, skill and experience you actually have.
The practical effect is that the standard has a floor but no ceiling. You cannot argue your way below the objective baseline by saying you were inexperienced or that you left the finances to someone else. If you happen to be a chartered accountant, you are held to what you actually know as well.
This is where “I did not realise how bad it was” tends to fail. Not because ignorance is treated as dishonesty, but because the test is partly objective, and a director is expected to know the company’s financial position.
What Wrongful Trading Is Not
Several different things get bundled together under the phrase “wrongful trading”. They are separate regimes, with separate tests, separate claimants and separate consequences. Treating them as synonyms is how directors end up worrying about the wrong risk.
It Is Not the Same as the Shift in Your Duties
When a company is insolvent, or insolvency becomes probable, the duty you owe as a director changes in emphasis: you must consider the interests of creditors as a whole, and you must not diminish what is available to them. That duty engages earlier than section 214 does.
Failing to give proper weight to creditors’ interests is a breach of duty. It is not, in itself, wrongful trading. A claim under section 214 requires the specific statutory test above to be met.
It Is Not a Criminal Offence
There is no such thing as being “found guilty” of wrongful trading, and no fine attaches to it. It is a civil claim brought in the insolvency of the company. The language of guilt, offences and penalties belongs to other regimes, and importing it here gives a false picture of what is at stake.
It Is Not Preference, Misfeasance or Disqualification
Each of the following is a distinct route, and an office-holder may pursue one, several or none of them on the same facts:
- Preference — putting a creditor in a better position than they would otherwise have been in, where the company was influenced by a desire to do so. Common where a director has guaranteed a debt.
- Transaction at an undervalue — disposing of an asset for significantly less than it was worth.
- Misfeasance or breach of duty — a civil claim to recover money or property misapplied by a director.
- Director disqualification — a separate regime, run by the Insolvency Service, aimed at unfitness rather than compensation. It can produce a ban of up to 15 years.
- Fraudulent trading — dealt with below, and materially more serious.
These overlap in distressed companies. They are not interchangeable, and the defences to one are not defences to another.
The Statutory Defence: Every Step to Minimise Loss
If the test in section 214 is met, the court must not make an order against a director who satisfies it that, after the point at which they knew or ought to have concluded that insolvent liquidation or administration was unavoidable, they took every step with a view to minimising the potential loss to the company’s creditors.
Note the direction of that wording. It is about minimising loss to creditors, not about maximising returns, rescuing the company or trading on in the hope of an improvement. Those are different objectives, and pursuing them is not the same as running the defence.
“Every step” is a demanding standard, and it is for the director to make it out. In practice that means being able to show, from contemporaneous records rather than recollection, what you knew, when you knew it, what you did about it and why. Board minutes, management accounts, cash flow forecasts, advice you took and acted on, decisions to stop taking customer deposits or incurring new credit — this is the material that answers the claim. Reconstructing it afterwards is far less persuasive.
What a Court Can Order
If a wrongful trading claim succeeds, the court may declare that the director is liable to contribute to the company’s assets by such amount as it thinks proper. The contribution is compensatory. It is broadly measured by reference to the increase in the deficiency to creditors caused by continuing to trade past the relevant point, rather than by the total of the company’s debts.
A claim under section 214 is brought by the liquidator, and one under section 246ZB by the administrator. Since 2015 an office-holder has also been able to assign these claims, so in some cases the claim is pursued by a third party who has bought it.
A finding of wrongful trading does not automatically produce a disqualification, but the conduct behind it will be reported on, and can support separate disqualification proceedings.
Fraudulent Trading
Fraudulent trading is a different order of allegation. It requires actual dishonesty: carrying on the business with intent to defraud creditors, or for any fraudulent purpose.
It exists in two forms. Section 213 of the Insolvency Act 1986 creates a civil liability to contribute to the company’s assets, brought by the office-holder. Section 993 of the Companies Act 2006 creates a separate criminal offence, which does not depend on the company being in liquidation and which carries a custodial sentence on conviction.
Because dishonesty must be proved, the evidential burden is significantly higher than for wrongful trading. Typical allegations include taking customer deposits or supplier credit for orders the director knew would never be fulfilled, or stripping assets out of the company ahead of a liquidation.
Wrongful trading, by contrast, requires no dishonesty at all. It catches directors who were optimistic, or slow, or simply wrong, past the point where the objective evidence no longer supported carrying on.
What to Do If You Are Worried
The honest answer is that the earlier you take advice, the more of the defence you still have available to you. Once the point of no reasonable prospect has passed, every further week of trading on credit is a week you may have to account for.
- Get current, reliable figures. You cannot assess prospects on out-of-date management accounts.
- Record decisions as you make them, with the reasoning and the information they were based on.
- Be careful about incurring new credit, taking deposits, or paying one creditor ahead of others.
- Do not repay a debt you have personally guaranteed in preference to other creditors.
- Take advice from a licensed insolvency practitioner, and follow it or record why you did not.
Taking professional advice is not a statutory requirement in itself, and no provision makes failing to consult an insolvency practitioner an offence. It is, however, one of the clearest ways to show that you were taking the position seriously, and it is regularly treated as relevant when conduct is later examined.
Frequently Asked Questions
No. Wrongful trading under sections 214 and 246ZB of the Insolvency Act 1986 is a civil liability, not an offence. There is no finding of guilt and no fine. If a claim succeeds the court may order the director to contribute to the company’s assets. Fraudulent trading is different: it has a civil form under section 213 of the Insolvency Act 1986 and a separate criminal offence under section 993 of the Companies Act 2006, which can carry a prison sentence.
No. Insolvency changes the duties you owe, because you must then consider the interests of creditors as a whole. It does not by itself create liability. Wrongful trading requires that you knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding insolvent liquidation or insolvent administration, and continued regardless. A company can be insolvent and still have a realistic route out.
That once you knew, or ought to have concluded, that insolvent liquidation or administration could not be avoided, you took every step with a view to minimising the potential loss to the company’s creditors. The burden is on the director, the standard is demanding, and it is generally made out through contemporaneous records rather than recollection.
The court may order such contribution to the company’s assets as it thinks proper. The award is compensatory rather than punitive, and is broadly measured by the increase in the deficiency to creditors caused by trading on past the relevant point. It is not automatically the whole of the company’s debts.
Not as before. Liquidation brings the directors’ powers to an end and the liquidator takes control. A liquidator may continue trading for a limited period where doing so benefits creditors, for example to complete work in progress or sell the business as a going concern, but that is the liquidator’s decision, not the directors’.