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Insolvency lawSyllabus GInsolvencyWrongful Trading

ACCA · Question 58 · Insolvency law

Section B - Scenario 5

SCENARIO: 'EcoTransit Ltd' operates an electric scooter network. The company has been losing money for months. By 1st September, the directors realize there is no reasonable prospect of avoiding insolvent liquidation. However, they continue trading for another two months, ordering £50,000 of new scooters on credit. During this time, they also repay a £20,000 unsecured loan owed to the brother of one of the directors. The company finally enters insolvent liquidation on 1st November.

QUESTION: By continuing to trade and incur debt after 1st September, what specific civil offense have the directors committed under the Insolvency Act 1986?

Answer options:

A.

Fraudulent trading

B.

Wrongful trading

C.

Misfeasance

D.

A transaction at an undervalue

How to approach this question

Identify the offense of trading while knowingly insolvent without taking steps to minimize creditor loss.

Full Answer

B.Wrongful trading✓ Correct
Section 214 of the Insolvency Act 1986 defines wrongful trading. It applies when a company has gone into insolvent liquidation, and before that point, a director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation, and they failed to take every step to minimize the potential loss to creditors.

Common mistakes

Confusing wrongful trading with fraudulent trading. Wrongful trading is an objective test (ought to have known) and doesn't require malicious intent.
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