Wrongful trading

Also called Trading while insolvent, Directors' duties on insolvency

Continuing to trade when you should have known the company could not avoid insolvency. It makes directors personally liable.

What it means

If a company goes into insolvent liquidation or administration, a court can order a director to contribute personally to its assets if, at some point before that, they knew or ought to have concluded there was no reasonable prospect of avoiding it — and did not take every step to minimise loss to creditors.

The test is what a reasonably diligent person in that role ought to have known, not what this particular director actually thought.

Why it matters

It is the main exception to limited liability that arises from behaviour rather than from signing something.

It also flips a duty most directors do not know they have: once a company is in financial difficulty, directors' duties shift from the shareholders to the creditors.

What it looks like in practice

The protective steps are unglamorous and they work: take advice early, keep board minutes recording what you knew and why you decided what you decided, stop taking credit you cannot reasonably expect to repay, and treat creditors consistently rather than paying the ones who shout.

Talking to an insolvency practitioner is not an admission of failure. It is evidence of taking the duty seriously, and the earlier it happens the more options exist.

What to watch out for

Fraudulent trading and misfeasance are separate and more serious. Disqualification as a director for up to fifteen years is also available to the court.

Paying yourself, or connected companies, ahead of other creditors. Those payments can be reversed as preferences.

Where to get proper advice

A licensed insolvency practitioner — check the register — and a solicitor. The first conversation is usually free and going early is the whole point.