What is Wrongful Trading and Why it Must Be Avoided

Wrongful trading occurs when directors continue trading once they know, or should have known, that the company cannot avoid insolvent liquidation. At that point, directors must stop trading and take every step a reasonably diligent person would take to minimise loss to creditors.

by Mark Hollinshead
Experienced Managing Director leading financial services with strategic vision, regulatory expertise, client focus, and proven growth leadership.

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60-second explainer

Wrongful trading explained

If directors take actions to maximise their own interests, or that of anyone else’s, over those of the Company’s creditors this constitutes Wrongful trading, and they can face significant punishment. These include disqualification from directorship for up to 15 years, fines and sometimes imprisonment.

It is imperative that you as a director act vigilantly and diligently if you believe your company may be on the verge of insolvency or presently insolvent.

When wrongful trading applies

It starts from the moment a director becomes aware the company is insolvent or likely to become insolvent
Liability only arises if the company later goes into liquidation and an insolvency practitioner finds the director failed to protect creditor interests.

It is imperative that you as a director act vigilantly and diligently if you believe your company may be on the verge of insolvency or presently insolvent.

Common examples of wrongful trading

Continuing to trade while the business cannot pay its debts.
Deliberately accruing further debt.
Paying excessive director remuneration the company cannot afford.
Failing to file statutory accounts or to operate PAYE/NIC and VAT correctly.
Taking customer payments where delivery or performance is unlikely.

The accurate keeping of records is extremely important in these circumstances. They can help you demonstrate the validity of your actions in insolvency.

Consequences for directors

Directors found liable may face personal financial liability for losses, a report to the Insolvency Service, disqualification (up to 15 years), fines and, in rare cases, criminal proceedings. Keywords: director disqualification, personal liability.

If you believe you may be guilty of wrongful trading, it is important you seek professional help as soon as possible. We offer free consultations and advice to help guide you through the best course of action.

How to reduce risk of wrongful trading.

Stop trading promptly once insolvency is suspected.
Keep accurate, contemporaneous financial records and board minutes.
Seek urgent professional advice from a licensed insolvency practitioner or restructuring adviser.
Consider rescue options early: administration, a Company Voluntary Arrangement (CVA), or formal time‑to‑pay arrangements with HMRC.

If a director suspects wrongful trading, they should Act immediately. Obtain specialist advice, preserve records, and avoid preferential or suspect transactions.

Directors should document decisions that prioritise creditors and show steps taken to limit losses. Early, documented action strengthens any future defence. Keywords: wrongful trading defence, insolvency advice.

Practical note

Preventing wrongful trading depends on timely, prudent decisions that prioritise creditors. Directors who act transparently and seek professional help improve their chances of a compliant outcome or rescue where viable.

Key Takeaways

Directors must prioritise creditors over personal interests:
Wrongful trading occurs when directors act in their own interest instead of protecting creditor rights.
Liability begins once insolvency is suspected:
The duty to act arises the moment directors know (or should know) the company is insolvent or likely to become insolvent.
Common wrongful trading behaviours:
Examples include continuing to trade while unable to pay debts, accruing further debt, excessive director pay, failing statutory filings, or taking customer payments without realistic delivery.
Severe consequences for directors:
Penalties can include personal liability for losses, disqualification for up to 15 years, fines, and in rare cases imprisonment.
Steps to reduce risk:
Stop trading promptly, keep accurate records, seek professional insolvency advice, consider rescue options early, and document creditor‑focused decisions.