What is wrongful trading and how can directors avoid it?

Wrongful trading occurs when directors continue operating a company even though they know, or should have known, that insolvency is unavoidable. In such cases, directors may be personally liable for creditor losses incurred after that point. To avoid wrongful trading claims, directors should monitor cashflow carefully, take early advice from insolvency practitioners, and keep detailed board minutes demonstrating that all reasonable steps were taken to protect creditors. Actions such as ceasing unprofitable contracts, negotiating with creditors, or considering formal insolvency options are seen as evidence of responsible behaviour. By acting early, directors reduce their exposure and show they acted in good faith. The law does not punish directors who make honest mistakes, but it does penalise those who ignore obvious insolvency signs or prioritise their own interests above creditors.