What does 'trading while insolvent' really mean?

Trading while insolvent means continuing to operate your business, take on new obligations, accept orders, and incur debts when your company is unable to pay its existing debts as they fall due, or when its liabilities exceed its assets. This isn't simply about having a tight cashflow month—it's a specific legal status where the company cannot meet its obligations to creditors. The critical issue is whether directors know or ought to know that insolvency is unavoidable. If you're consistently missing payment deadlines, suppliers are threatening legal action, your bank has withdrawn facilities, HMRC is chasing arrears, and you're borrowing just to cover basic operations with no realistic prospect of recovery, then you are almost certainly trading while insolvent. The law doesn't prohibit trading while technically insolvent in all circumstances—if you have a genuine, evidence-based plan to return to solvency and you're not making creditors' positions worse, limited continued trading may be defensible. For example, if you're in advanced negotiations for refinancing, or if you need to complete existing contracts to generate the cash to pay creditors, short-term trading might be justified. However, if you're simply hoping something will turn up, taking on new credit you know you can't repay, or accepting customer orders you can't fulfill, this constitutes wrongful trading and creates personal liability for losses to creditors from the point you should have stopped. The test is objective: what would a reasonable, diligent director with your knowledge have done? If another director in your position would have sought insolvency advice and considered formal procedures rather than continuing to trade, then your continued trading may be wrongful. Many directors trade while insolvent without realizing it because they focus on turnover and ignore the balance sheet, or they convince themselves that the next contract or seasonal upturn will solve everything. If you're uncertain whether your trading is lawful, you should immediately seek advice from an insolvency practitioner who can objectively assess whether continuing to operate is defensible or whether formal insolvency procedures are necessary to protect both creditors and yourself from further losses and liability.