Wrongful trading — what directors need to know
Wrongful trading is a personal-liability claim under section 214 of the Insolvency Act 1986. If a director knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration and did not take every step to minimise creditor loss, the court can order them to contribute personally to the company's assets. The reasonable-diligence defence in s.214(3) is the only safe harbour — and it lives or dies on the paper trail. Author: Chris at Sell Ltd.
The three-part statutory test
The company has gone into insolvent liquidation or insolvent administration. Insolvency is measured on a balance-sheet basis: assets less than liabilities including contingent debts.
At some point before that, the director knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration.
The director did not take every step with a view to minimising the potential loss to creditors that a reasonably diligent director would have taken.
Reasonable-diligence defence — s.214(3)
The defence is not "we tried our best". It requires evidence that the director took every step a reasonably diligent director would have taken, judged on both an objective standard (general knowledge, skill and experience reasonably expected) and a subjective uplift (the director's actual knowledge, skill and experience). A CFO with 20 years of restructuring experience is held to a higher standard than a first-time non-executive.
Board minutes recording the going-concern decision each month with references to management accounts and cash-flow forecasts.
Independent advice from a licensed insolvency practitioner, obtained early and revisited as the position deteriorated.
Documented actions: ceasing loss-making product lines, stopping new customer prepayments, negotiating creditor forbearance.
Verbal reassurances between directors without minutes; no cash-flow model; no independent advice.
Taking on new bank debt or supplier credit that could not realistically be repaid.
Continuing to draw director salaries or dividends while trade creditors and HMRC fell further behind.
Landmark cases directors should know
The first reported s.214 case. Set the two-tier objective/subjective standard now embedded in modern authority.
Park J rejected the claim: liquidators had to prove the wrongful continuation caused a net increase in deficiency. Redefined the causation and quantum test.
Snowden J: 'point of no return' can be earlier than filing; directors must actively engage with the going-concern question, not just avoid worse outcomes.
Supreme Court fixed the trigger for the creditor duty under s.172 CA 2006. Not a s.214 case, but essential context for when directors' focus must shift.
Sibling reads
Frequently asked questions
What is wrongful trading in UK law?
Wrongful trading is a civil claim under section 214 of the Insolvency Act 1986. It applies when a company enters insolvent liquidation or administration and, before that, a director knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation, and did not take every step to minimise loss to creditors. The court can order the director to contribute personally to the company's assets.
Who can bring a wrongful-trading claim?
A liquidator (s.214) or administrator (s.246ZB IA 1986, added by the Small Business, Enterprise and Employment Act 2015) brings the claim. Since the SBEE 2015 reforms the claim can also be assigned to a litigation funder, which has increased the number of cases pursued.
What is the 'reasonable-diligence' defence?
Section 214(3) provides a defence if the director took every step with a view to minimising the potential loss to creditors that a reasonably diligent person having the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions would have taken. It is objective plus a subjective 'uplift' — the standard rises for a director with above-average skills.
What personal loss can a director face?
The court quantifies the loss to the company's assets caused by the wrongful continuation. In Re Continental Assurance Co of London [2001] BPIR 733, Park J stressed that the claimant must prove a net increase in deficiency during the wrongful trading period. Contribution orders can range from a token amount to millions; the largest reported UK orders have exceeded £5m.
Does wrongful trading apply to non-executive directors?
Yes. Section 214 catches every person 'who is or has been a director', including de facto and shadow directors under s.251 IA 1986. NEDs cannot rely on non-involvement — the standard is what a reasonably diligent NED would have known and done. Attending board meetings but ignoring the numbers is a common losing fact pattern.
Was wrongful trading suspended during Covid?
Yes, twice. The Corporate Insolvency and Governance Act 2020 initially suspended s.214 for the period 1 March to 30 September 2020; a second suspension ran 26 November 2020 to 30 June 2021. Both suspensions are historical and do not affect current conduct.
Is directors' insurance (D&O) any help?
It depends on the wording. Most D&O policies respond to wrongful-trading defence costs and civil-liability awards but exclude fraudulent trading and deliberate wrongdoing. Notify insurers as soon as insolvency is on the horizon; late notification is a leading ground for declinature. Some insurers now offer bespoke insolvency add-ons.
How is wrongful trading different from misfeasance?
Misfeasance under s.212 IA 1986 is a procedural gateway that lets a liquidator or administrator bring any breach-of-duty claim in the winding-up. Wrongful trading is a specific cause of action about continued trading past the point of no return. Many cases plead both — misfeasance as the vehicle and s.214 as one of the underlying wrongs.
What defensive documentation matters most?
Board minutes recording why continued trading was in creditors' interests; contemporaneous cash-flow forecasts; independent advice from a licensed insolvency practitioner; regular management accounts; and evidence of steps taken to reduce loss (cutting overheads, ceasing new orders, protecting customer prepayments). Absence of these is far more damaging than the wrong decision itself.
Can a wrongful-trading claim be assigned?
Yes. Since 1 October 2015, s.246ZD IA 1986 allows office-holders to assign wrongful-trading, fraudulent-trading, transaction-avoidance and misfeasance claims. Assignments to specialist funders have increased litigation activity, particularly for lower-value claims that a liquidator could not otherwise afford to pursue.
The paper trail you build this week is what defends the claim in 18 months. Chris at Sell Ltd routes directors to licensed insolvency practitioners for a first-look assessment.