If you run a company long enough, you’ll hit pressure points. Cash tightens, creditors start calling, and decisions that once felt routine suddenly carry weight.
One of the most misunderstood areas I deal with is wrongful trading. Directors occasionally panic too early, but most of the time carry on too long thinking they’ll ‘trade out of it’.
Let’s cut through it…
What is wrongful trading?
In simple terms, wrongful trading kicks in when:
A director continues trading at a point when they knew, or ought to have known, that the company had no reasonable prospect of avoiding insolvency.
That wording comes from the Insolvency Act 1986 and is enforced through the courts.
If a company later enters liquidation, a liquidator can investigate conduct and, in some cases, pursue directors personally.
The key issue… it’s not about failure
Businesses fail. But that alone isn’t the problem.
The issue is their conduct in the period leading up to insolvency.
I’ve seen plenty of directors do everything right in a failing business and I have seen some dig a hole much deeper than it needed to be.
The line is this:
- Reasonable belief of recovery … acceptable
- Blind optimism with mounting losses … dangerous
Common warning signs you shouldn’t ignore
Most wrongful trading cases don’t start suddenly. The signs are usually there.
Watch for:
- Persistent losses with no credible turnaround plan
- Increasing creditor pressure, especially from HMRC
- Missed tax payments or arrears growing month by month
- Reliance on one-off cash injections to survive
- Suppliers tightening terms or switching to pro forma
- Bounced payments or declining bank support
HMRC pressure is often the tipping point. Their guidance is here:
If you’re constantly firefighting HMRC, that’s not a strategy… it’s a signal.
Practical steps to protect yourself
This is where experience matters. You don’t need perfection… you need evidence that you acted responsibly.
Here’s what I advise directors to do:
1. Get proper financial visibility
You can’t make decisions blind. Up-to-date management accounts and cashflow forecasts are essential.
2. Hold regular board meetings
Even in small companies, document decisions. Minutes matter. They show your thinking at the time.
3. Challenge your assumptions
If your plan relies on ‘things picking up’… that’s not a plan. Pressure test it.
4. Take early professional advice
Speak to an insolvency practitioner before things get critical. Early advice opens options.
5. Prioritise creditors fairly
Don’t favour one creditor over another without good reason. That can lead to further claims.
6. Stop trading if necessary
This is the hardest call. But sometimes stopping early limits damage… and protects you personally.
What the courts look at
If things do end up under scrutiny, the court doesn’t expect perfection. It looks at:
- What you knew at the time
- What a reasonably diligent director would have done
- Whether you took steps to minimise losses to creditors
The pattern is consistent… directors who act early and document decisions are in a far stronger position.
A quick word on ‘trading out’
Let’s be blunt…
‘Trading out’ works… sometimes.
But it’s often used as a justification for delay.
If you’re relying on:
- One big contract
- A refinance that isn’t agreed
- A buyer that hasn’t committed
…then you’re already in risky territory.
Hope isn’t a strategy.
Where this fits in the wider insolvency picture
In earlier parts of this series, we’ve looked at:
- Early warning signs
- Keeping proper records
- Director duties the first 7 days after you realise insolvency is likely
- Do you owe HMRC?
Wrongful trading sits right at the point where pressure turns into legal exposure.
Handled properly, it’s manageable. Ignored, it can follow you long after the business has gone.
Takeaway checklist
If you’re worried about wrongful trading, work through this honestly:
- Do I have up-to-date financial information?
- Can I realistically see a route back to solvency?
- Am I relying on hope rather than evidence?
- Have I documented key decisions and reasoning?
- Have I taken independent professional advice?
- Am I treating creditors fairly?
- If things worsen, am I prepared to stop trading?
If you hesitate on more than one of these… it’s time to act.
Final thought
Most directors don’t get into trouble because they’re dishonest.
They get into trouble because they wait too long.
The earlier you face the situation, the more control you have. And in many cases, there are more options than you think.
If you take one thing from this… don’t just drift into insolvency. Make deliberate decisions, backed by facts, and you’ll protect both the business and yourself.
If you need advice from me, call 07813 102014.