Unit 7 - Insolvency Flashcards
Assume that it is 30 January 2025. A company’s up-to-date balance sheet shows current assets of £25,000, current liabilities of £16,000 and net assets of £500. On 9 January 2025, a creditor served a statutory demand on the company relating to a debt of £1,500. The debt remains unpaid.
Which of the following best describes whether the company can now be placed into compulsory liquidation?
A) No, because the company is currently solvent on the balance sheet test.
B) No, because the creditor is owed over £750.
C) Yes, because the statutory demand was served 21 days ago and remains unpaid so the creditor will be entitled to petition for the compulsory liquidation of the company.
D) Yes, because the company is currently insolvent on the cash flow test.
E) Yes, because the statutory demand was served 21 days ago and remains unpaid so the company will now automatically go into compulsory liquidation.
CORRECT ANSWER C - The fact that the company is solvent on the balance sheet test (option A) is not relevant: under s 123(1)(a) of the Insolvency Act 1986 (‘IA 1986’), failure to pay
the sum owed within three weeks of service of a statutory demand means that a company is deemed unable to pay its debts so the court can wind up the company. This is not an automatic process: a creditor must issue a winding up petition (s 124 IA 1986), so E is wrong. B is also wrong – it is only where the creditor is owed over £750 that they can issue a winding up petition. On the information given, D is wrong too, because the company may well be insolvent on the cash flow test but liquidation does not automatically follow.
A client is owed £30,000 by a company in liquidation. The company has assets of £150,000 and liabilities of £325,000. All of its five creditors are unsecured and there are no preferential creditors.
Which of the following best describes how much the client will receive?
A) £1
B) £0.46
C) £2.16
D) £13,800
E) £64,800
CORRECT ANSWER D - You need to divide total assets by total liabilities (150,000/
325,000 = £0.46). This gives the amount every creditor should receive for each pound they are owed. Then multiply the amount per pound (£0.46) by the amount the client is owed (£0.46 x 30,000) making a total of £13,800.
A client has been served with a bankruptcy petition. Her bank has written to her saying that she will lose her home (in which she lives with her two young children) if she does not pay the amounts she owes.
Assuming the bankruptcy order is made and the client’s trustee in bankruptcy writes to her stating his intention to seek possession of her home unless she pays her debts and the costs and expenses of bankruptcy, which of the following best describes whether the client will lose her home?
A) She will not lose it because the interests of young children outweigh the interests of creditors.
B) She will not lose it because a bankrupt is entitled to keep their family home, everyday household items and the tools of their trade, unless the circumstances are exceptional.
C) She is likely to be able to stay in the home for a year, after which the creditors’ interests outweigh those of any occupants of the house, unless the circumstances are exceptional.
D) She will not lose her home if she pays the credit card debt which was the subject of the petition, as that creditor was putting the most pressure on the client.
E) She is likely to be able to stay in the home until her youngest child is 18, after which point the creditors’ interests outweigh those of any occupants of the house.
CORRECT ANSWER C - After one year, creditors’ interests will prevail over the interests of any other person living at the property unless exceptional circumstances can be shown (s 335A(3) Insolvency Act 1986). There is nothing in these facts to indicate exceptional circumstances so options A, B and E are wrong. Option D is wrong because insolvency is a class remedy and it is not enough just to pay one creditor and leave others if you want to annul the order and so keep the house. All creditors have to be paid, together with interest in full, and the costs and expenses of the bankruptcy.
Which of the following best describes the duties of the administrator to creditors of the company?
A) To sell assets charged to chargeholder(s) and take reasonable action to achieve the best price on realisation of assets as possible for the chargeholder(s).
B) To act in the best interests of the creditors as a whole. Be impartial during their time in control of the company.
C) To oversee the winding up of the company.
D) To act as an agent of the chargeholders.
E) To prevent insolvency.
CORRECT ANSWER B - The administrator must perform their duties in the interests of all of the company’s creditors as a whole, and have a primary objective of rescuing the company as a going concern. If this is not practicable, they must try to achieve better results for the company’s creditors as a whole than would be likely if the company were wound up. If this is not practicable, they must realise property to make a distribution to one or more secured or preferential creditors.
Acting for the creditors as a whole, rather just acting for particular creditors is a key role of the administrator. The administrator cannot prevent insolvency with a magic wand, although he/she does have a duty to rescue the company if that is possible.
Which one of the following best describes the group(s) who would fall into a category of preferential creditors on insolvency?
A) Employees
B) HMRC
C) Shareholders
D) Employees and HMRC
E) Employees, HMRC and shareholders.
CORRECT ANSWER D - The most common preferential debt is wages/salaries of employees for work carried out in the four months immediately preceding the date of the winding up order, up to a maximum of £800. In addition, employees’ accrued holiday pay is a preferential debt.
As of December 2020, HMRC is also secondary preferential creditor (ranking behind employees), but only in relation to taxes which companies collect on HMRC’s behalf, such as PAYE and VAT.
5 months ago, a private company limited by shares entered into a transaction with one of its directors to sell a delivery van for £21,000. The director sells the van 3 months later for £29,000. The company was insolvent at the time of the transaction and the transaction was not made in good faith to benefit the company. The company has now gone into liquidation.
What is the likely status of the transaction?
A) Avoidance of a floating charge.
B) Preference.
C) Transaction at an undervalue.
D) Voidable for lack of registration.
E) Will remain unchallenged.
CORRECT ANSWER C - (and therefore option E is wrong). The company received significantly less consideration for the sale than the van was worth. The transaction was within the relevant time, because the transaction occurred during the two years prior to the date of commencement of winding up; and insolvency is presumed, because the director is connected to the company.
A, B and D all describe other antecedent transactions, but they do not fit the facts as described.
A private company limited by shares has entered financial difficulties and is now insolvent.
Which of the following might be a viable alternative to avoid insolvent liquidation?
A) Directors unilaterally declare a moratorium under the Corporate Insolvency and Governance Act 2020
B) Members’ voluntary liquidation
C) Cease trading
D) Wrongful trading
E) A company voluntary arrangement
CORRECT ANSWER E - A CVA is a common alternative to liquidation (and also to administration and administrative receivership, since anyone entitled to appoint a receiver or administrator will need to support the CVA if it is to proceed). A CVA can also develop out of administration.
Option A is wrong because the directors are not able to declare a moratorium on their own. They need to receive the support of a Licensed Insolvency Practitioner ( called a “ monitor” in this process).
Option B is wrong because a members’ voluntary liquidation is not possible when a company is insolvent.
Option C is wrong because if the company ceases trading, it may be a prudent course of action (we do not have enough facts to decide), but it would not be a viable alternative to avoid insolvent liquidation.
Option D is wrong because wrongful trading can have serious repercussions for those involved and for others dealing with the company. It is not a viable alternative, but rather a possible consequence of insolvency for the directors.
Which of the following groups get paid first on a liquidation?
A) Preferential creditors.
B) Liquidator’s expenses.
C) Unsecured creditors.
D) Shareholders
E) Trade creditors
CORRECT ANSWER B - The correct order is:
- Assets subject to a fixed charge
- Liquidation expenses
- Preferential creditors
- Unsecured creditors
- Shareholders
If there were floating charge creditors, they would be paid before the unsecured creditors. Trade creditors would normally be one group of the unsecured creditors.
A private limited company continues to trade after the directors know that there is no realistic possibility of avoiding insolvent liquidation.
Which of the following is correct about wrongful trading?
A) It cannot be the reason for a disqualification of the director(s).
B) It is a criminal offence.
C) It only applies to current directors.
D) It does not require any fraudulent or dishonest intent.
E) It is still wrongful trading if the directors took every step with a view to minimising the loss to the company’s creditors.
CORRECT ANSWER D - There is no mention of fraudulent or dishonest intent.
The requirements of wrongful trading are that:
the company has gone into insolvent liquidation or insolvent administration;
before commencement of the winding up of the company, the director knew or ought to have concluded there was no reasonable prospect that the company would avoid insolvent liquidation; and
that person was a director of the company at the time.
It can be the reason that directors are disqualified, and it is not a criminal offence. It applies to directors “at the time” which means that it can apply to past as well as current directors. It is a defence to wrongful trading if the directors took every step with a view to minimising the loss to the company’s creditors (s 214(3) Insolvency Act 1986).
A private company limited by shares has entered insolvent liquidation. The company has model articles. The liquidator has determined that there is a shortfall of £45,600. There are 3 directors and 4 shareholders.
No one is both a shareholder and a director. No personal guarantees were given. There is no suggestion of wrongdoing on behalf of any of the parties involved.
Who is liable for the shortfall and how much are they liable for?
A) Each of the directors are liable for £15,200 each.
B) Each director is jointly and severally liable with the other directors for the entire amount.
C) Each shareholder is liable for £11,400.
D) Each shareholder is jointly and severally liable with the other shareholders for the entire amount.
E) No one is liable.
CORRECT ANSWER E - The principles of limited liability and separate legal personality still apply by default to companies. Unless there has been wrongdoing of some kind the liability remains with the company and not with the shareholders or directors. Even if there has been wrongdoing, it will have to be proved before potential other recovery options against other parties can be considered.
Which of the following is correct about the avoidance of a floating charge, assuming the liquidator is to be successful in avoiding the charge?
A) The charge must be granted to a connected person.
B) The charge must be over assets that are worth significantly more than the debt being secured.
C) The charge is void automatically, there is no need to make an application.
D) The charge must have been granted within 6 months of the onset of insolvency.
E) The directors must have desired to prefer the recipient.
CORRECT ANSWER C - Invalid floating charges are automatically void under s245 IA 1986. Essentially a charge is automatically void where, at the ‘relevant time’ before the onset of the company’s insolvency, a charge was granted without the company receiving fresh consideration in exchange for granting security.
The charge does not have to be to a connected person, but if it is given to a connected person, it is not necessary to show that the company was insolvent when the charge was granted and the relevant time is extended from 12 months to two years. This means that it isn’t true that the charge must have been granted within 6 months (option D is wrong).
A preference requires a desire to prefer on the part of the company, but the avoidance of floating charges does not.
What does a creditor need to prove in order to obtain a winding up order against a company that owes it money?
A) Prove that the debtor company cannot pay their debts within 30 days of the debts falling due
B) Prove that the debtor company’s assets are worth substantially less than their liabilities
C) Show that the debtor company owes them a debt exceeding £750 which remains unpaid for 3 weeks
D) Get a court order for a debt exceeding £750
E) Convince the Court it is just and equitable that the company should be wound up.
CORRECT ANSWER E - One of the options for granting a winding up order is that it is just and equitable that the company be wound up. Most causes of a winding up order are that a company is unable to pay its debts but it is also possible to petition on the just and equitable basis.
Option A mentions 30 days, which a common period for companies to grant each other credit, but it does not relate to winding up orders.
Option B is wrong - it has some merit in that if a debtor company could prove that the company’s assets are worth less than their liabilities then it would be unable to pay their debts. However, there is no need for them to prove they are substantially less.
Option C is wrong because there is no reference to the required written demand in the proper form.
Option D would not lead to a winding up order unless it was also unpaid and there is no requirement for it to be over £750.
In which ONE of the following situations might the transaction by the relevant company be set aside as a transaction at an undervalue?
A) A private limited company has just been placed in administration. Two years and three months ago it sold a property to one of its directors for £45,000 less than its market value. The company’s assets exceeded its liabilities both before and after the transaction and the administrator has no evidence that it was unable to pay its debts at the time.
B) A private limited company has just been placed in administration. 16 months ago it sold a property to an unconnected company for £63,000 less than its market value. The company’s assets were less than its liabilities as a result of the transaction.
C) A private limited company has just been placed in insolvent liquidation. Two years and five months ago it sold a property to one of its directors for £15,000 less than its market value. The company’s assets were less than its liabilities as a result of the transaction.
D) A private limited company has just been placed in insolvent liquidation. Four months ago, it sold a property to an unconnected individual for £82,000 less than its market value. The company’s assets exceeded its liabilities both before and after the transaction and the liquidator has no evidence that it was unable to pay its debts at the time.
CORRECT ANSWER B - This transaction is within the two year “relevant time” for transactions at an undervalue, and the company was insolvent at the time. Transactions A and C are both outside the two-year period. In transaction D, there is no evidence that the company was insolvent at the time, and no presumption of insolvency because the transaction was with an unconnected party.
A private limited company went into creditors’ voluntary liquidation last year. The liquidator is now finalising the dividend available for unsecured creditors. The liquidator has realised £130,000 and has incurred expenses of £500 and fees of £2,000. In addition, the preferential creditors are owed £20,000. Unsecured creditors amount to £ 215,000. What is the dividend available to unsecured creditors?
Which ONE of the following statements is CORRECT?
A. 50p in the £.
B. 25p in the £.
C. 75p in the £.
D. 175p in the £.
E. Nil.
CORRECT ANSWER A - The liquidator’s fees and expenses and the preferential creditors are paid before the unsecured creditors. Thus, there would be only £107,500 to split equally among the unsecured creditors. With only £107,500 to pay a total of £215,000 owed to the unsecured creditors - that amounts to a liquidation dividend of 50p in the £.
Which ONE of the following can the court order under sections 238 or 239 Insolvency Act 1986?
A. The court can impose a custodial sentence on any guilty parties.
B. If the proceeds of sale have been used to purchase property, the court can make an order that such property be vested in the shareholders of the company.
C. The court can order the creation of any security interest in favour of the company.
D. The court can order the disqualification of a relevant director.
E. The court can require any property transferred as a preference to be re-vested in the company.
CORRECT ANSWER E - The court can require any property transferred as a preference to be re-vested in the company. If the proceeds of sale have been used to purchase property, the court can make an order that such property be vested in the company - but not in the shareholders. The court can order the release or discharge of any security entered into, but the court cannot create security. The court cannot impose a custodial sentence on any guilty parties or disqualify a director under s238 or s239 IA86.However, if there have been breaches of ss 238 or 239 IA86, then these may be factors taken into account if the Secretary of State decides to initiate company director disqualification proceedings.
A private limited company is in liquidation. It has funds of £50,000 (after the costs of liquidation), preferential creditors of £10,000 and ordinary unsecured creditors of £50,000 as follows: Bentons Limited: £20,000; Sandals Limited: £15,000; Sasha: £15,000.There are no secured creditors. Which one of the following is or are CORRECT?
A. On distribution, the preferential creditors will not be paid in full.
B. On distribution, Bentons will receive £20,000.
C. On distribution, Sasha will receive nothing.
D. On distribution, Sandals Limited will receive £12,000.
E. On distribution, Sandals Limited will receive £16,000.
CORRECT ANSWER D - Preferential creditors are paid in priority to ordinary unsecured creditors and there are sufficient funds to pay them in full. This leaves £40,000 to pay the ordinary unsecured creditors.
Ordinary unsecured creditors rank and abate equally - regardless of when their debt was incurred. They will each receive 80 pence for every £1 outstanding:
Bentons Limited £16,000
Sandals Limited £12,000
Sasha £12,000
Note that preferential creditors also rank and abate equally within the category of preferential creditors, and since December 2020, there is a new category of secondary preferential creditors for certain tax debts owed to HMRC ( notably VAT) but on the facts, there is enough to pay the preferential creditors in full.
A bank has a first fixed charge over the premises of a private limited company. If, on liquidation, the value of those premises is less than the sum owed to the bank, where will the bank rank as regards the shortfall?
Which one of the following is correct?
A. The bank becomes a preferential creditor as regards the deficit.
B. The bank ranks as a floating chargeholder as regards the deficit.
C. The bank becomes an ordinary unsecured creditor as regards the deficit.
D. The bank loses the deficit.
E. The bank can recover the money from HMRC.
CORRECT ANSWER C - . The bank cannot somehow “roll over” its priority from a fixed charger holder into other categories. The bank had priority as to the proceeds of sale of the premises, but once that money has been exhausted, the bank becomes an unsecured creditor for the remainder of the debt. The bank does not fall within the definition of preferential creditors and a floating charge will not arise automatically. There are no provisions for creditors to recover monies owed to them from HMRC.
A private limited company is in liquidation. The liquidator has discovered that the company sold a large amount of stock to one of its directors for less than market value.
Which one of the following conditions need to be fulfilled if the transaction is going to be set aside as a transaction at an undervalue under s238 IA 1986?
A. That the company desired to help the purchaser.
B. That the transaction was made within two years of the onset of insolvency.
C. That the company received less consideration than it gave
D. That the transaction was made in good faith to benefit the company.
E. That the director is also a shareholder.
CORRECT ANSWER B - The transaction must have taken place within the period of two years of the onset of insolvency.
Consider the definition of a transaction at an undervalue.
The Company must have received significantly less consideration than it gave (so C is wrong because it did not use the word significantly).
There is no need to show that the Company was motivated by any desire to improve the position of the other party to a transaction at an undervalue. A desire to prefer is important in the definitions of preferences under s.239 IA 1986 but not to transactions at an undervalue.
A defence to a transaction at an undervalue is that it was made in good faith to benefit the company, there is no need to show it in order to have the transaction set aside.
Being a director is enough to connect the person to the company. The additional fact that they are also a shareholder does not change the rules any further.
1 year and 1 one month before the onset of insolvency, a company sold a warehouse to one of the company’s directors for £700,000. The market value at the time of sale was £890,000. The liquidator is considering applying to court for an order to set the transaction aside on the basis of it being a transaction at an undervalue.
Which one of the following statements best explains whether or not the liquidator is likely to be successful?
A) The transaction can be set aside if the liquidator can prove the company was unable to pay its debts at the time of the transaction or as a result of it.
B) The transaction cannot be set aside as it is longer than 1 year before the onset of insolvency.
C) The transaction can be set aside unless the director can show the transaction was in good faith to benefit the company.
D) The transaction cannot be set aside as only a creditor can apply to court for such an order.
E) As the transaction was with a director, the solvency of the company at the time of the transaction and/or as a result of the transaction is irrelevant.
CORRECT ANSWER C - It is a defence to a transaction at an undervalue if the transaction was entered into in good faith to benefit the company.
Option A is not correct. The transaction was with a director so the company’s inability to pay its debts at the time of the transaction or as a result of it is presumed. The liquidator does not have to prove it.
Option B is not correct. The transaction happened less than two years before the onset of insolvency, therefore it is within the relevant time (section 240 Insolvency Act 1986).
Option D is not correct. Both a liquidator and an administrator have standing to make an application under section 238 IA 1986 but a creditor does not.
Option E is not correct. Similar to option A, the company’s inability to pay its debts may be presumed when the transaction is with a director - but it is only a presumption and can be rebutted.
A liquidator for a company has discovered transactions, which if avoided, would increase the funds available for the company’s ordinary unsecured creditors. With this in mind, the liquidator confirms that the onset of insolvency occurred two weeks ago and that there is undeniable evidence that the company was balance sheet insolvent twelve months ago (but not before) and that the position of the company did not improve.
The history of the transactions in question are as follows:
Two months ago, the board of directors passed a resolution to sell some warehouse premises to one of the directors. The balance sheet valued the premises at £900,000 and they were sold for £895,000.
Two and a half years ago, the company created a floating charge over a loan made to the company four years’ ago by the father of one of the directors. No consideration was given for the floating charge. The charge was registered at Companies House a week later.
Which of the following best represents the position of the company?
A) The floating charge created two and a half years ago is enforceable against the liquidator.
B) The sale of the warehouse two months ago is likely to be avoidable because it is a transaction at an undervalue.
C) The floating charge is a transaction at an undervalue which can be set aside by the liquidator.
D) The floating charge is void against the liquidator because it was created over two years ago.
E) The liquidator can apply to the court for an order stating that the floating charge is voidable as a preference.
CORRECT ANSWER A - (and therefore option D is wrong) because the floating charge is valid and can be enforced against the liquidator. It has been over two years since it was granted and therefore it cannot be avoided.
Option B is wrong because the sale of the warehouse appears to be at a value which is very close to market value. It is hard to say with certainty that it was sold for a price significantly below the value of the property when the book value and the sale price are within 1% of each other.
Option C is wrong because a charge cannot be a transaction at an undervalue. No assets are being sold.
Option E is wrong because although this could be a preference, it is outside the two-year maximum time period.
A private company limited by shares went into insolvent liquidation. The winding up started two months ago.
Three years ago, a golfing friend of one of the directors lent £225,000 to the company to help it pay its corporation tax. The loan was unsecured. It was agreed that the company would repay the director’s friend £49,000 every year for 5 years.
One year ago, the director’s friend became ill and needed expensive medical treatment. The directors agreed to repay the director’s friend the balance of the loan early in order to avoid complications should difficulties befall the company. The company’s management accounts showed that the company appeared to be insolvent at the time.
Can the liquidator set aside the repayment of the loan as a voidable preference?
A) Yes, because the company desired to put the director’s friend in a better position on liquidation than he would have been in had the repayment not occurred and the preference took place within the relevant time being 2 years ending with the onset of insolvency.
B) No, because the company has a defence that the transaction was entered into in good faith for the purpose of the company’s business and there were reasonable grounds for believing it would benefit the company.
C) Yes, because the company received consideration significantly lower in value than it provided, and the preference took place within the relevant time.
D) No, because the company did not desire to put the director’s friend in a better position on liquidation than he would have been in had the repayment not occurred.
E) No, because the company desired to put the director in a better position on liquidation than he would have been in had the repayment not occurred but the preference did not take place within the relevant time being 6 months ending with the onset of insolvency
CORRECT ANSWER E - The company did desire to put the director’s friend in a better position on liquidation but as the friend is not a connected person, the relevant time is only 6 months before the onset of insolvency (and hence option A is wrong). For the definition of the onset of insolvency , see s 240(3) Insolvency Act 1986.
Option B is wrong because the defence is for a transaction at an undervalue not for a preference – s238(5) IA 86.
Option C is wrong because this is the definition of a transaction at an undervalue not for a preference – s238(4) IA 86.
Option D is wrong because the directors did desire to put the friend in a better position on liquidation. Despite the illness, the desire was still to avoid complications should difficulties befall the company.
A corporate creditor of an insolvent company is told that they will receive a payment of 36p in the pound. It is owed £10,000.
How much money will the creditor receive?
A) Nothing
B) 36p
C) £3,600
D) £7,400
E) £10,000
CORRECT ANSWER C - Receiving a certain number of pence in the pound means that for every pound owed to the creditor, it will only receive a fraction of that pound. Here it will receive 36p for every pound it is owed which is £10,000 x 0.36 = £3,600.
Which of the following is correct about a preference under the Insolvency Act 1986?
A) No challenge is required, the transaction is automatically void.
B) It must be in favour of a creditor, surety or guarantor.
C) The default relevant time period is twelve months before insolvency.
D) If the transaction is with a connected person then insolvency at the time of the transaction or as a result of it is presumed.
E) The only order available to the Court is to void the transaction.
CORRECT ANSWER B - A preference is when a transaction puts a creditor, surety, or guarantor in a better position on insolvency and the company desired this
Option A is wrong because a challenge must be mounted by an administrator or liquidator.
Option C is wrong because the relevant time period is six months before the onset of insolvency (if with a connected person this extends to two years).
Option D is wrong because a connected person extends the relevant time period but does not change the fact that the company must be unable to pay debts at the time of the transaction or as a result of it. It is also the case that the desire to prefer is presumed if it is with a connected person.
Option E is wrong because the Court can make such order as they see fit for restoring the position to what it would have been if the company had not entered into that transaction.
A company has decided to keep trading despite the fact it is insolvent, and is very unlikely to recover from the insolvency. The directors have decided to continue trading temporarily on the basis that they are minimizing the loss to creditors.
Which one of the following would you advise the directors to do to help avoid being accused of wrongful trading?
A) Make no further purchases.
B) Ensure the bank is paid before other creditors.
C) Ensure purchases are on credit where possible.
D) Assess whether the directors’ salaries and other benefits should continue to be paid.
E) Grant debtors more time to pay.
CORRECT ANSWER D - When there is a risk of liquidation, good advice to directors of the company would be to:
Minimise further purchases on credit.
Rigorously collect debts
Produce proper management accounts frequently in order to monitor the situation.
Raise financial concerns with the board of directors at the earliest opportunity.
Keep a full and proper record of all decisions made, in board minutes and otherrecords.
Assess whether the directors’ salaries and other benefits should continue to be paid.
It may well be impractical to not make any further purchases at all (so option A is wrong) and there is no reason to prefer the bank over other creditors (so option B is wrong).
Making purchases on credit should be minimized (so option C is wrong) and debts should be chased rigorously (so option E is wrong).
In the months leading up to the insolvency of a company, two directors both missed important clues that the financial health of the company was failing, and the company would soon be insolvent unless action was taken. One of the directors was a farmer for 12 years before she was a director and the other director was an accountant for 4 years before she was a director.
Which of the following is true in this case about the duty of reasonable care and skill?
A) The former farmer is more likely to be in breach of the duty to exercise reasonable care and skill.
B) The former accountant is more likely to be in breach of the duty to exercise reasonable care and skill.
C) Both directors are as likely as each other to be in breach of the duty to exercise reasonable care and skill.
D) Neither director can be in breach of the duty to exercise reasonable care and skill.
E) Both directors are certainly guilty of breaching the duty to exercise reasonable care and skill.
CORRECT ANSWER B - The duty of care and skill has two parts (s174 CA06) - it is both objective and subjective. The objective part requires a minimum level of skill from all directors. The subjective part can raise (but not lower) the skill and care required from directors with specific skills or experience. Here the accountant would be expected to have more knowledge of financial affairs than someone who does not have financial qualifications.
A private limited company owes £600 to a creditor. The creditor has chased the company and only has access to the financial information available at Companies House about the company. The accounts at Companies House accounts are 6 months’ old.
What advice would you give to the creditor in order to best pursue the money owed to them?
A) Do nothing.
B) Sue the company.
C) Issue a written demand in the proper form and wait 3 weeks.
D) Purse the debt through letters/email/calls but do not instruct solicitors.
E) Appoint an administrator.
CORRECT ANSWER D - The creditor would be best advised to pursue the debt by not involving solicitors and writing their own emails/letters/phone calls to pursue the debt as best they can.
The cost of suing for the debt would outweigh the money that would be recovered. It would be possible to sue, but it would be impractical.
The creditor is owed £500 which is not more than £750. That means the option of serving a written demand in the proper form is not available.
It is not possible to appoint an administrator on the current facts
