Last Updated: 27/08/2026
Insolvent trading means continuing to trade when a company cannot pay its debts as they fall due, or when it owes more than it owns. It is not automatically illegal, but it changes a director duties and carries real risks. Once a company is insolvent, directors must act in the interests of creditors, and continuing without a reasonable prospect of recovery can lead to personal liability for wrongful trading.
What is insolvent trading?
Insolvent trading is the act of carrying on a business after the company has become insolvent. A company is insolvent when it fails either the cash flow test, meaning it cannot pay its debts as they fall due, or the balance sheet test, meaning its liabilities exceed its assets. Trading on in that position is described as insolvent trading.
The term is often confused with wrongful trading. Insolvent trading describes the situation; wrongful trading is the legal fault that can arise from it, where directors keep trading when they knew, or ought to have known, there was no reasonable prospect of avoiding insolvency.
Is it illegal to trade while insolvent?
No, trading while insolvent is not automatically illegal. A company can be insolvent for a time and still recover, and directors are allowed to try to trade out of difficulty, provided they act reasonably and in the interests of creditors. What matters is how you behave once you know, or should know, the company is insolvent.
The duty shifts at that point. Instead of promoting the company success for shareholders, directors must minimise the potential loss to creditors. That means not taking on credit you cannot repay, not favouring one creditor over others, and keeping proper records of your decisions. Directors who take and follow professional advice are in a much stronger position if their conduct is later reviewed.
The line is crossed when there is no longer a reasonable prospect of avoiding insolvent liquidation and the directors keep trading anyway. From that moment, continuing to trade risks becoming wrongful trading. Because that judgement is easy to get wrong under pressure, it is exactly the point at which to take advice, so that any decision to continue is informed, reasonable and recorded.
What can happen to your business if you trade while insolvent?
If an insolvent company cannot recover, it is likely to be wound up, either voluntarily by the directors or compulsorily by the court. A creditor owed at least the statutory minimum can present a winding up petition, which can lead to compulsory liquidation and involvement of the Insolvency Service.
Once a petition is advertised in The Gazette, the company bank accounts are usually frozen and it must stop trading. The company assets are then sold to pay creditors and any employees are made redundant. Acting before this stage, for example through a creditors’ voluntary liquidation or a rescue, generally gives a better and more controlled outcome than waiting for the court.
What can happen to you as a director?
For most directors of a failed company, the answer is nothing personal: they face no personal liability and are not disqualified. Personal consequences arise where conduct has fallen short, and they are the exception rather than the rule.
The main risks are:
- Wrongful trading: if you carried on trading with no reasonable prospect of avoiding insolvency, a court can order you to contribute personally to the company losses.
- Fraudulent trading: if the business was carried on with intent to defraud creditors, the consequences are more serious and can include personal liability and, in the worst cases, criminal sanctions.
- Disqualification: conduct that makes you unfit can lead to a ban from acting as a director, typically for a set number of years.
- Other personal claims: an overdrawn director loan account, unlawful dividends or a personal guarantee can each create personal liability separately from how you traded.
These outcomes are associated with directors who ignored the warning signs and kept running up liabilities with no real prospect of paying them back. Directors who took advice early and acted in creditors interests rarely face them.
What about sole traders and partnerships?
Sole traders and partners are personally liable for all the business debts, so the wrongful or fraudulent trading rules that apply to company directors are less relevant to them. Instead, insolvency for an individual is dealt with through bankruptcy or an individual voluntary arrangement.
In bankruptcy, an individual assets can be sold to pay creditors, and where there is surplus income an income payments arrangement may be required. In the more serious cases, a bankruptcy restriction order can extend the restrictions well beyond the usual period. The right response, as with a company, is to take advice early.
How to protect yourself
The best protection is to recognise insolvency early and act on advice. In practice that means monitoring cash flow, keeping accurate records, not transferring assets out of the business, treating all creditors even-handedly, and speaking to a licensed insolvency practitioner as soon as insolvency looks likely. Our Director’s Guide to Company Insolvency and our page on company insolvency explain these duties in more detail.
If you are worried your company may be trading while insolvent, the first conversation with us is free and confidential. To speak to a licensed insolvency practitioner, book free initial advice or call 0800 331 7417. This page is general information and not advice about your own situation, which always needs a conversation with a licensed insolvency practitioner.
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