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ACCA Applied Skills · Corporate and Business Law (Global) · Fraudulent and criminal behaviour

Kappa Co's directors realised in March that the company could not avoid insolvent liquidation. They continued trading, took on new supplier credit, and the company went into liquidation in September. They did not take any steps to minimise losses to creditors. Which defence would be most likely to protect a director from a wrongful trading claim?

The defence is that the director, once aware insolvent liquidation was unavoidable, took every step a reasonably diligent person would have taken to minimise loss to creditors. Lack of personal gain or being non-executive does not provide a defence, because the test concerns the director's conduct and diligence.

  1. AThe director took every step a reasonably diligent person would have taken to minimise the potential loss to creditorsCorrect
  2. BThe director did not personally benefit from the continued trading
  3. CThe director held only a non-executive role and attended few board meetings

Explanation

The statutory defence to wrongful trading is that, after the director knew or should have concluded that insolvent liquidation was unavoidable, they took every step to minimise loss to creditors. Lack of personal benefit is irrelevant to this claim. Non-executive status does not exempt a director, who is still held to the standard of a reasonably diligent person.

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