Wrongful trading occurs when directors continue to trade and incur debts on behalf of the company when they knew or ought to have known that there was no reasonable prospect of avoiding insolvent liquidation. 

Under UK insolvency law, directors must act in the best interests of the company's creditors once it becomes apparent that the company is insolvent or likely to become insolvent. 

Wrongful trading involves directors failing to take appropriate action to minimize losses to creditors once insolvency becomes inevitable. The Insolvency Act 1986, S.214 states that if it's found that directors continued to trade despite knowing the company was insolvent, they can be held personally liable for the company's debts incurred during that period. This includes any debt to HMRC such as liabilities for PAYE, VAT, and Corporation Tax that arose during that period of wrongful trading.

The consequences of wrongful trading can be severe. They may include personal liability for the company's debts, disqualification from acting as a director, and potentially criminal sanctions in deliberate misconduct or fraud cases. Directors should seek professional advice if they suspect their company is insolvent to avoid potential liability for wrongful trading.

The Wrongful trading legislation is aimed at protecting creditors' interests when a company faces financial distress, of which HMRC is deemed a preferred creditor. Here are some key points to understand it better:

1. Duty of Directors: Directors of a company have a fiduciary duty to act in the best interests of the company and its creditors, especially when the company is facing insolvency or is likely to become insolvent.
2. Test for Wrongful Trading: The test for wrongful trading involves determining whether a director continued to trade and incur debts on behalf of the company when they knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation. It's essentially about assessing whether the directors acted reasonably in the circumstances.
3. Timeframe Consideration: The assessment of wrongful trading typically involves looking at directors' actions during a specific period leading up to the insolvency event. This period may vary but often covers when the directors knew or should have known that the company was insolvent. 
4. Liability: If a court finds that wrongful trading has occurred, directors can be held personally liable for the company's debts incurred during the period of wrongful trading. This means they may be required to contribute to the company's assets to satisfy its debts, potentially from their personal assets.
5. Defences: If directors can demonstrate that they took every reasonable step to minimize potential losses to creditors once they became aware of the company's insolvency, they may have a defence against wrongful trading.
6. Disqualification and Criminal Liability: In addition to civil liability, directors found guilty of wrongful trading may be disqualified from acting as directors for a specified period. Deliberate misconduct or fraud may also result in criminal sanctions, including fines and imprisonment.
7. Impact on Reputation: Even if directors are not personally liable for wrongful trading, allegations of wrongful trading can damage their reputation and affect their ability to act as directors.

Overall, wrongful trading provisions encourage directors to act responsibly and ethically in times of financial difficulty, ensuring that they prioritise the interests of creditors and take appropriate steps to mitigate losses.