ExpertMedium2 marksMultiple Choice
ACCA · Question 58 · Insolvency law
Scenario: 'GeoThermal Grid Ltd' is facing severe financial difficulties. The directors realize the company cannot avoid insolvent liquidation, but they continue trading for six months, incurring £500,000 in new debts. Just before liquidation, they repay a £50,000 loan to the Managing Director's brother, while ignoring other creditors.
Question: Under the Insolvency Act 1986, what civil liability do the directors face for continuing to trade and incur debt when they knew insolvency was unavoidable?
Scenario: 'GeoThermal Grid Ltd' is facing severe financial difficulties. The directors realize the company cannot avoid insolvent liquidation, but they continue trading for six months, incurring £500,000 in new debts. Just before liquidation, they repay a £50,000 loan to the Managing Director's brother, while ignoring other creditors.
Question: Under the Insolvency Act 1986, what civil liability do the directors face for continuing to trade and incur debt when they knew insolvency was unavoidable?
Answer options:
A.
Fraudulent trading.
B.
Wrongful trading.
C.
Misfeasance.
D.
No liability, as companies have limited liability.
How to approach this question
Identify the key phrase: 'realize the company cannot avoid insolvent liquidation, but they continue trading'. This is the exact definition of wrongful trading.
Full Answer
B.Wrongful trading.✓ Correct
Under section 214 of the Insolvency Act 1986, directors can be held personally liable to contribute to the company's assets if they engaged in 'wrongful trading'. This occurs when a director knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation, and failed to take every step to minimize potential loss to creditors.
Common mistakes
Confusing wrongful trading (s.214) with fraudulent trading (s.213). Fraudulent trading requires actual dishonesty/intent to defraud, whereas wrongful trading is based on negligence/recklessness.
Practice the full ACCA LW — Corporate and Business Law Practice Exam 2
60 questions · hints · full answers · grading
More questions from this exam
Q01A dispute has arisen between 'AquaHarvest Ltd' and a supplier over a £150,000 contract for specia...MediumQ02A judge is interpreting a 19th-century statute regarding 'carriages on the highway' to determine ...MediumQ03Under the Human Rights Act 1998, certain rights can be claimed by corporate entities as well as n...MediumQ04'AeroDyne Drone Logistics Ltd' sends an automated email to a potential client stating: "We can pr...EasyQ05'EcoVertical Farms Ltd' leases a warehouse from a landlord. During a severe economic downturn, th...Hard