We derive a time-stepping method for unsteady fully nonlinear two-dimensional motion of a two-layer fluid. Essential parts of the method are: use of Taylor series expansions of the prognostic equations, application of spatial finite difference formulae of high order, and application of Cauchy's theorem to solve the Laplace equation, where the latter is found to be advantageous in avoiding instability. The method is computationally very efficient. The model is applied to investigate unsteady trans-critical two-layer flow over a bottom topography. We are able to simulate a set of laboratory experiments on this problem described by Melville & Helfrich (1987), finding a very good agreement between the fully nonlinear model and the experiments, where they reported bad agreement with weakly nonlinear Korteweg–de Vries theories for interfacial waves. The unsteady transcritical regime is identified. In this regime, we find that an upstream undular bore is generated when the speed of the body is less than a certain value, which somewhat exceeds the critical speed. In the remaining regime, a train of solitary waves is generated upstream. In both cases a corresponding constant level of the interface behind the body is developed. We also perform a detailed investigation of upstream generation of solitary waves by a moving body, finding that wave trains with amplitude comparable to the thickness of the thinner layer are generated. The results indicate that weakly nonlinear theories in many cases have quite limited applications in modelling unsteady transcritical two-layer flows, and that a fully nonlinear method in general is required.