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Corporate and Business LawSection BSyllabus GInsolvency LawMTQ
This question is part of a case study — click to read the full scenario(Case 58)

SCENARIO 5: Titanium Foundry Ltd went into insolvent liquidation on 1 November. Six months prior, on 1 May, when the company was already hopelessly insolvent, the directors granted a floating charge over the company's inventory to a connected person (the CEO's brother) to secure an old, existing debt of £50,000. No new money was advanced to the company.

Under Section 245 of the Insolvency Act 1986, what is the status of this floating charge?

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ACCA · Question 59 · Corporate and Business Law

SCENARIO 5: Titanium Foundry Ltd went into insolvent liquidation on 1 November. Six months prior, on 1 May, when the company was already hopelessly insolvent, the directors granted a floating charge over the company's inventory to a connected person.

The liquidator discovers that from 1 May to 1 November, the directors knew the company could not avoid liquidation, but they continued trading anyway, incurring an additional £200,000 in debts to suppliers. What action can the liquidator take against the directors personally?

Answer options:

A.

Bring a claim for fraudulent trading under s.213.

B.

Bring a claim for wrongful trading under s.214 of the Insolvency Act 1986 to make them contribute to the company's assets.

C.

Sue the directors for breach of contract on behalf of the suppliers.

D.

Nothing, because directors are protected by limited liability.

How to approach this question

Identify the statutory remedy for directors who fail to minimize loss to creditors when insolvency is inevitable.

Full Answer

B.Bring a claim for wrongful trading under s.214 of the Insolvency Act 1986 to make them contribute to the company's assets.✓ Correct
Under Section 214 of the Insolvency Act 1986 (Wrongful Trading), if a director knew or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation, they have a duty to take every step to minimize potential loss to creditors. By continuing to trade and incurring £200,000 in new debt, they failed this duty. The court can order them to make a personal contribution to the company's assets (typically the amount the deficit worsened, i.e., £200,000).

Common mistakes

Assuming limited liability protects directors from their own negligent management during insolvency.
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