ExpertMedium2 marksMultiple Choice
ACCA · Question 19 · Insolvency law
Section A
During a liquidation, the liquidator discovers that the directors continued to trade and incur debts for six months after they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation.
What action can the liquidator take against the directors?
Section A
During a liquidation, the liquidator discovers that the directors continued to trade and incur debts for six months after they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation.
What action can the liquidator take against the directors?
Answer options:
A.
Bring a claim for fraudulent trading, which requires proof of intent to defraud creditors.
B.
Bring a claim for wrongful trading to compel the directors to contribute personally to the company's assets.
C.
Automatically disqualify the directors for a period of 15 years.
D.
Nothing, as directors are protected by limited liability.
How to approach this question
Distinguish between fraudulent trading (requires intent) and wrongful trading (negligence standard). Identify the remedy for wrongful trading.
Full Answer
B.Bring a claim for wrongful trading to compel the directors to contribute personally to the company's assets.✓ Correct
Under s.214 of the Insolvency Act 1986, if a director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation, and failed to take every step to minimize potential loss to creditors, the court can order them to make a personal contribution to the company's assets (wrongful trading).
Common mistakes
Confusing wrongful trading with fraudulent trading.
Practice the full ACCA LW — Corporate and Business Law Practice Exam 6
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