Wrongful trading

This is the mechanism by which trustees of incorporated charities lose the protection of limited liability.

The test is whether the person knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation, and whether they then took every step to minimise loss to creditors. It applies to charitable companies and, through the CIO insolvency regulations, to CIOs.

The exposure is created by continuing, not by failing. Recognising distress late is the risk — see spotting financial distress and going concern.