When am I personally at risk of wrongful trading under section 214?

Section 214 of the Insolvency Act 1986 makes a director personally liable to contribute to the company's assets where they continued to trade after the point at which they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation. The "moment of truth" was identified by the court in Re Produce Marketing Consortium Ltd (No 2) [1989] BCLC 520. The test has two components: an objective limb (what would a reasonably diligent director with the same skills have known?) and a subjective limb (what did this director actually know?). After the moment of truth, you must have taken every step a reasonably diligent director would take to minimise loss to creditors. A documented decision — to cut overheads, cease taking new orders, seek IP advice, file for administration — is the clearest defence. An undocumented continuation of trade as before is the riskiest position.

How does the section 239 preference rule work — and what counts as a connected party?

A preference under section 239 of the Insolvency Act 1986 is something the company does (typically a payment) that puts a creditor in a better position than they would have been in had the company gone straight into insolvent liquidation. The company must also have been "influenced by a desire" to produce that result. The look-back period is six months for unconnected creditors and two years for connected creditors. Connected parties (defined in IA86 s.249) include directors, their families, and associated companies — broadly any party with a controlling relationship to a director or the company. Where the preferred party is connected, the "desire" is presumed, and the director has the evidential burden of rebutting that presumption. Classic patterns: repaying a director's loan while leaving trade creditors unpaid; paying off a personally-guaranteed bank facility in the months before liquidation; granting security to a connected lender for past consideration.

When is a dividend "unlawful", and what are the consequences?

A dividend or other distribution must be made out of profits available for that purpose (section 830 Companies Act 2006). The reserves test is applied at the date of the actual decision to declare the dividend — not the year-end. If reserves did not in fact justify the distribution at the moment it was voted, the dividend is unlawful. Section 847 CA06 makes the recipient (where they knew or had reasonable grounds for believing it was unlawful) liable to repay the company. In an owner-managed company that knowledge test is usually met as a matter of course. The position is reinforced by Re Marini Ltd [2004] BCC 172 and the BHS Group judgments — directors carry the burden of demonstrating that proper interim accounts justified the distribution at the moment it was made. Dating the voucher to the year-end without contemporaneous interim accounts is not a defence; it is, on its face, false accounting under Theft Act 1968 s.17.

I have an overdrawn director's loan account — what happens in liquidation?

An overdrawn DLA is a personal debt owed by you to the company. On liquidation the liquidator has a statutory duty to pursue recovery — there is no discretion to write it off. The company's claim against you forms part of the realisations available to creditors. Before liquidation there are legitimate ways to address an overdrawn DLA: a genuine personal repayment from outside funds (evidenced by the bank statements on both sides); a properly-declared bonus with PAYE/RTI; a lawful dividend (subject to distributable reserves at the date of declaration). All of these need contemporaneous documentation. A journal entry that clears the DLA without a real cash movement, without PAYE, and without contemporaneous board minutes will rarely survive scrutiny — and may itself be challenged as a transaction at undervalue (s.238) or misfeasance (s.212).

Can I transfer the trade and assets to a new company before liquidation? (phoenix activity)

Phoenix activity — transferring trade, customers, plant or goodwill to a successor company controlled by the same director — is not unlawful in itself. Many businesses survive a liquidation in just this way, and where the transfer is properly priced (with independent valuation evidence and a marketing process) it can be entirely legitimate. The risks: a transfer at an undervalue gives rise to a section 238 claim by the liquidator (two-year look-back, the company's insolvency presumed where the counterparty is connected); a transfer to put assets beyond creditors' reach engages section 423 (no look-back limit, any "victim" creditor can apply); and IA86 s.216 restricts the use of the same or similar name to the failed company by its directors for five years following insolvency (with limited exceptions). The safest path is to discuss the planned transfer with an IP before it happens. A pre-pack sale supervised by an IP, with independent valuation, is materially different from an informal asset transfer in the days before liquidation.

Will I be disqualified as a director after a CVL?

In most CVLs, no. Disqualification proceedings under CDDA 1986 s.6 are taken by the Insolvency Service only in cases where there is evidence of conduct that makes the director unfit to be concerned in company management. The liquidator's confidential report under CDDA s.7A — submitted on every director who served in the three years preceding insolvency — is the gateway to those proceedings. Conduct that may lead to disqualification includes allowing the company to trade while insolvent for an unreasonable period, failing to maintain proper accounting records, failing to file statutory returns, non-payment of Crown debts (VAT, PAYE), unlawful dividends, and clear preferences. A disqualification order typically lasts 2-15 years. Following disqualification the Secretary of State may seek a compensation order under CDDA s.15A. For ordinary commercial failures handled through a properly-conducted CVL, with cooperation with the liquidator and no clear misconduct, directors typically continue trading through new ventures without difficulty.

Knowledge centre · Statutory toolkit

UK insolvency statutory toolkit

The provisions of the Insolvency Act 1986, Companies Act 2006 and CDDA 1986 that a liquidator can deploy against a director on appointment. Each provision is anchored at a stable URL so a specific section can be cited rather than the whole page.

Audience: Company directors and their advisers | Jurisdiction: England & Wales | Published: May 2026 · Updated: May 2026

IA86 s.212 — Misfeasance

A summary procedure by which the liquidator can bring claims against any person who has been involved in the management of the company for breach of fiduciary or other duty. It is the workhorse of director liability, catching unlawful dividends, undocumented bonuses, undervalued asset transfers, and similar breaches of duty. There is no fixed look-back period for the breach itself, but the limitation rules apply to the proceedings.

IA86 s.213 — Fraudulent trading

Where, in the course of winding up, it appears that any business of the company has been carried on with intent to defraud creditors or for any fraudulent purpose, the court may, on the liquidator's application, declare that any persons who were knowingly parties to the carrying on of that business are liable to make contributions. A high-threshold provision (actual dishonesty must be shown) but not limited to directors — advisers who knowingly assist are within its reach. Criminal exposure runs in parallel under CA06 s.993.

IA86 s.214 — Wrongful trading

If, before the commencement of winding up, a director knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation, and did not take every step a reasonably diligent director would have taken to minimise loss to creditors, the court may order the director to contribute to the company's assets. The relevant moment is the "moment of truth" identified in Re Produce Marketing Consortium Ltd (No 2) [1989] BCLC 520. The test is partly objective and partly subjective.

IA86 s.238 — Transactions at an undervalue

A transaction is at an undervalue if the company makes a gift or receives consideration significantly less than the value of what it provides. The look-back period is two years ending with the onset of insolvency. The company must have been unable to pay its debts at the time of the transaction (or have become unable as a result), but this is presumed if the transaction is with a connected party. The court can order the transaction reversed, or compensation paid, under section 241.

IA86 s.239 — Preferences

A preference occurs where the company does something that has the effect of putting a creditor (including a guarantor) in a better position, in the event of insolvent liquidation, than they would otherwise have been in, and the company was influenced by a desire to produce that result. The look-back is two years for connected parties and six months for unconnected creditors. For a connected party, that "desire" is presumed. Classic examples: repaying a director's loan while leaving trade creditors unpaid; paying off a personally-guaranteed bank facility just before liquidation.

IA86 s.240 — Relevant time

Sets out when the look-back clock runs. For sections 238 and 239, time runs back from the "onset of insolvency", which is usually the date of the winding-up petition (compulsory liquidation), the date of the resolution to wind up (CVL), or the filing of the notice of intention to appoint an administrator.

IA86 s.245 — Avoidance of floating charges

A floating charge granted within twelve months of the onset of insolvency (or two years for connected parties) is invalid, except to the extent of new consideration provided at or after the time of its creation.

IA86 s.423 — Transactions defrauding creditors

Unlike section 238, section 423 has no fixed look-back period. It applies where a transaction at an undervalue was entered into for the purpose of putting assets beyond the reach of a person who has or may have a claim against the company. The applicant does not need to be the liquidator — any "victim" creditor can apply. Particularly important in the context of asset transfers to a spouse's company, trust structures, or phoenix arrangements.

CA06 s.172 — Duty to promote the success of the company

A director's general duty is to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. Section 172(3) preserves the rule, restated by the Supreme Court in BTI 2014 LLC v Sequana SA [2022] UKSC 25, that the director must, in certain circumstances, consider or act in the interests of the company's creditors. The duty is engaged when insolvent liquidation or administration becomes "probable" and intensifies as the prospect approaches inevitability.

CA06 ss.386-389 — Accounting records

A company must keep adequate accounting records sufficient to show and explain its transactions and to disclose with reasonable accuracy, at any time, the financial position of the company. Failure is a criminal offence by every officer in default. The CDDA report on director conduct (CDDA s.6 and Schedule 1) specifically requires the IP to comment on the quality and adequacy of the records.

CA06 ss.829-853 — Distributions

A dividend or other distribution must be made out of profits available for that purpose (section 830). The test is applied by reference to the relevant accounts at the date of declaration. If a distribution is made when there are insufficient distributable reserves at that moment, it is unlawful, and section 847 makes the recipient (if they knew or had reasonable grounds for believing it was unlawful) liable to repay it. Re Marini Ltd [2004] BCC 172 and the BHS Group judgments establish that directors carry the burden.

CDDA s.6 — Disqualification of unfit directors

The court must disqualify a director of an insolvent company whose conduct makes them unfit to be concerned in the management of a company. The minimum disqualification is two years; the maximum fifteen. Schedule 1 lists the matters the court must have regard to, including the extent of any breach of duty, any misfeasance, and the extent to which the director has been responsible for the company entering insolvency.

CDDA s.7A — Reports on conduct

The IP, on appointment, must submit a confidential report on the conduct of every director (and shadow director) who has served in the three years preceding insolvency. The IP's report is the gateway to disqualification proceedings brought by the Secretary of State.

CDDA s.15A — Compensation orders

Following disqualification, the Secretary of State may apply for a compensation order requiring the disqualified person to pay compensation to creditors or the company. Used increasingly against directors whose unfit conduct has caused identifiable loss.