How to Claim for Wrongful Trading Against Directors

When a company in England and Wales enters insolvency, the appointed insolvency office‑holder - usually a liquidator or administrator - reviews the conduct of its directors. One significant area of investigation is wrongful trading, a statutory claim under Section 214 of the Insolvency Act 1986 designed to protect creditors by holding directors personally liable for losses caused by continuing to trade when insolvency was inevitable.

This article explains how wrongful trading claims work, who can bring them, what legal tests apply, the process for making a claim, time limits, potential outcomes, and practical considerations for creditors and others seeking redress.

What Is Wrongful Trading?

Wrongful trading arises where directors continue to run a company beyond the point at which they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation or administration, and they fail to take reasonable steps to minimise losses to the company's creditors.

Wrongful trading is a civil claim, not a criminal offence. If established, courts can order directors to make a personal contribution to the company's assets so that losses are reduced for creditors.

Who Can Bring a Wrongful Trading Claim?

A wrongful trading claim can only be brought by an insolvency office‑holder once a company has entered a formal insolvency procedure, such as:

• Compulsory liquidation,
• Voluntary liquidation, or
• Administration.

This means that creditors cannot directly initiate a wrongful trading claim against directors under Section 214, although in some circumstances a liquidator or administrator may assign the right of action to a creditor where they do not wish to pursue it themselves.

Who Might Be Liable?

Wrongful trading claims are aimed at individuals who were directors at the relevant time, including:

• Registered directors at Companies House,
• Shadow directors (those whose instructions the board follows), and
• De facto directors (those acting in the capacity of a director without formal appointment).
  These categories are recognised under Sections 214 and 246ZB IA 1986.

Legal Test for Wrongful Trading

To succeed in a wrongful trading claim, the office‑holder must show:

1. Insolvency was inevitable: There came a point before insolvency began when the director knew or ought reasonably to have concluded that the company could not avoid insolvent administration or liquidation.
2. Director's conduct worsened creditor losses: The company continued to incur debts after that point, resulting in an increase in losses to the unsecured creditors.

In assessing knowledge and conduct, courts apply a combined objective and subjective standard - considering what a reasonably diligent person with the director's knowledge, skill and experience would have done in the same circumstances.

Step‑by‑Step: How a Wrongful Trading Claim Is Made

1. Insolvency Begins

A wrongful trading claim can only be pursued once a company enters a formal insolvency process such as liquidation or administration. Before that point, the office‑holder has no standing to make the claim.

2. Investigation by the Insolvency Practitioner

After appointment, the liquidator or administrator conducts a detailed investigation into the company's trading history, financial records, board minutes and communications. This review focuses on the period leading up to insolvency to establish whether directors should have recognised insolvency and taken steps to minimise losses.

3. Preparation of Evidence

The office‑holder prepares an application notice supported by a witness statement and documentary evidence. The evidence will seek to demonstrate that:

• The company was trading with no reasonable prospect of avoiding insolvency,
• The director continued to incur debts post that point, and
• Losses to creditors can be attributable to that conduct.
  The content and procedural requirements for the application align with the Insolvency (England and Wales) Rules 2016.

4. Filing in Court

The insolvency office‑holder files the application with the High Court (Chancery Division) or appropriate court listing. The application is served on the director(s) named in the claim.

5. Defence and Hearing

Directors may contest the claim. A key defence is showing they took every step to minimise losses to creditors once insolvency became inevitable - for example, by seeking professional advice, ceasing trading, arranging restructuring or holding board meetings with documented decisions. This defence is statutory and, if made out, will prevent a contribution order.

6. Judgment and Order

If the court finds wrongful trading, it will order the director to contribute financially to the company's assets. The amount usually reflects the increase in losses suffered by creditors as a result of continued trading after the wrongful trading point. Directors may be ordered to pay jointly and severally where more than one is found liable.

Time Limits

Under the Limitation Act 1980, wrongful trading claims are subject to a six‑year limitation period, which generally runs from the date the company enters liquidation or administration. Office‑holders must act within this timeframe or risk the claim being statute‑barred.

Outcomes and Legal Consequences

When a wrongful trading claim succeeds:

• Personal contribution orders are made against directors to compensate the company's creditors for losses suffered during the wrongful trading period. Funds recovered form part of the estate available for distribution.
• The court may consider director disqualification proceedings under the Company Directors Disqualification Act 1986 following findings of misconduct.
• Findings can have reputational and professional consequences for directors' future roles.

Practical Considerations for Claimants

Assignment of Rights

If a liquidator or administrator lacks funds or chooses not to pursue a claim, they can assign the wrongful trading cause of action (and potential proceeds) to a third party such as a creditor. This allows civil litigation to continue when the office‑holder cannot fund proceedings.

Costs and Risks

Pursuing or defending wrongful trading claims involves legal costs and procedural risk. Claimants should assess prospects of success and potential recoveries before litigating. Directors defending claims should consider expert legal and insolvency advice to prepare evidence for statutory defences.

Common Questions

Can a creditor bring a claim directly?
No. Creditors cannot directly bring a wrongful trading claim. Only an insolvency office‑holder can initiate the claim in court. However, claims may be assigned to creditors by the office‑holder in certain circumstances.

Does wrongful trading require dishonesty?
No. Wrongful trading liability does not require proof of dishonesty. It depends on the director's conduct and whether they failed to take steps to protect creditors once insolvency was inevitable.

Can former directors be liable?
Yes. Claims can be brought against current and former directors, including shadow and de facto directors, provided they held influence at the relevant time.

Key Takeaways

A wrongful trading claim under UK insolvency law enables a liquidator or administrator to pursue directors who continued trading after insolvency became inevitable, resulting in increased losses for creditors. The process involves a detailed court application supported by evidence that directors knew, or should have known, there was no reasonable prospect of avoiding insolvency. Successful claims result in personal contribution orders, and may also trigger director disqualification or reputational consequences. Understanding the legal tests, procedural steps, time limits and potential outcomes is essential for creditors, directors and professionals involved in corporate insolvency.