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ACCA Applied Skills · Corporate and Business Law (Global) · Insolvency and administration

Karim was a director of Delta Ltd, which entered insolvent liquidation. When the directors first realised insolvent liquidation was unavoidable, Karim promptly took every step a reasonably diligent director would take to minimise potential loss to creditors, although the company still traded briefly. How does this affect a wrongful trading claim against him?

Taking every step a reasonably diligent director would take to minimise creditors' potential loss is a defence to wrongful trading. Liability is not strict, and shareholder ratification is not required. Without dishonest intent, the conduct does not become fraudulent trading.

  1. AIt provides a defence, as the court must not make a declaration against a director who took every step to minimise loss to creditorsCorrect
  2. BIt is irrelevant, because wrongful trading is a strict liability offence
  3. CIt reduces liability only if the shareholders ratified his conduct
  4. DIt converts the claim into one for fraudulent trading

Explanation

The statutory defence to wrongful trading is that, after the director knew insolvent liquidation was unavoidable, he took every step to minimise potential loss to creditors that a reasonably diligent person would take. It is not strict liability. Shareholder ratification does not remove duties owed with regard to creditors, and the facts show no dishonesty, so fraud is not engaged.

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