Wrongful Trading Flashcards
(12 cards)
What is the primary purpose of the wrongful trading provisions under the Insolvency Act 1986?
A. To punish directors who act dishonestly
B. To protect shareholders from creditor claims
C. To allow directors to resign during financial crisis
D. To hold directors accountable for failing to minimise creditor losses
D. To hold directors accountable for failing to minimise creditor losses
Explanation: Wrongful trading provisions are designed to ensure directors take every step to limit losses once they know insolvency is unavoidable.
Who can bring a claim for wrongful trading under the Insolvency Act 1986?
A. A liquidator or administrator
B. Any creditor
C. A shareholder
D. A director of another company
A. A liquidator or administrator
Explanation: Only a liquidator under section 214 or an administrator under section 246ZB can bring a wrongful trading claim.
What is the key difference between fraudulent trading and wrongful trading?
A. Wrongful trading can be brought against banks
B. Fraudulent trading does not apply to directors
C. Wrongful trading involves shareholder consent
D. Fraudulent trading requires dishonesty
D. Fraudulent trading requires dishonesty
Explanation: Fraudulent trading requires intent to defraud and dishonesty, whereas wrongful trading focuses on negligence.
What type of insolvency test is used to determine wrongful trading liability?
A. Balance sheet test
B. Solvency ratio test
C. Cash flow test
D. Ability to obtain credit test
A. Balance sheet test
Explanation: For wrongful trading, insolvency is determined only by the balance sheet test (assets not covering debts).
A director learns the company’s liabilities exceed its assets but continues trading and increases debts. What must be shown for a wrongful trading claim to succeed?
A. The director owed money to the company
B. The director intentionally defrauded creditors
C. The director received personal benefit from the continued trading
D. The director did not take every step to minimise creditor losses
D. The director did not take every step to minimise creditor losses
Explanation: Liability arises where a director knew insolvency was unavoidable and failed to act to minimise losses.
The directors of Alpha Ltd knew the company could not avoid insolvent liquidation. They kept trading without updating financial records. What is their best defence?
A. They resigned immediately
B. They took every step to minimise losses
C. They claimed they had no financial knowledge
D. They sought advice six months after problems arose
B. They took every step to minimise losses
Explanation: The “every step” defence under section 214(3) applies if directors actively worked to reduce losses.
A non-executive director of a company continued to attend board meetings but failed to speak up about its insolvency risk. Can they be liable for wrongful trading?
A. Yes, non-executive directors are included
B. No, only executive directors are liable
C. Yes, but only if they own shares
D. No, unless they have a written contract
A. Yes, non-executive directors are included
Explanation: Any director, including non-executives, can be liable if they do not act to minimise creditor loss.
A shadow director encouraged a company to keep trading while insolvent. Can they face a wrongful trading claim?
A. No, shadow directors are excluded
B. Yes, shadow directors can be liable
C. Only if the company was in liquidation
D. Only if creditors consent
B. Yes, shadow directors can be liable
Explanation: Shadow directors are explicitly covered under section 251 of the Companies Act 2006 and can be liable.
A director resigns as soon as they realise the company cannot avoid insolvency. Can they still be liable for wrongful trading?
A. No, resigning avoids liability
B. Yes, resignation does not avoid liability
C. Only if the company is a public company
D. Only if no board minutes were taken
B. Yes, resignation does not avoid liability
Explanation: Resignation alone does not protect a director; they must have taken every step to minimise losses before resigning.
What standard is applied to determine whether a director ought to have known the company was beyond the point of no return?
A. The opinion of the shareholders
B. The subjective intentions of the creditors
C. The reasonably diligent person test
D. The directors’ trading history
C. The reasonably diligent person test
Explanation: The test looks at both the objective expectations and the director’s actual skills and knowledge.
A director allowed the company to continue trading to try to save jobs. However, the debts doubled. What must the court consider in assessing liability?
A. Whether the directors followed HR rules
B. Whether every step was taken to minimise creditor loss
C. Whether employees supported the decision
D. Whether profits were made before the insolvency
B. Whether every step was taken to minimise creditor loss
Explanation: The key issue is whether the director minimised loss to creditors, not the intention to save jobs.
Which of the following outcomes can follow a wrongful trading finding?
A. The director is fined and jailed
B. The director is awarded compensation
C. The director is ordered to compensate creditors and may be disqualified
D. The company is automatically dissolved
C. The director is ordered to compensate creditors and may be disqualified
Explanation: The court can order a contribution to the assets and may disqualify the director under the Company Directors Disqualification Act.
