Directors' Duties in Insolvency: Master the Essentials for LLM Students

Question 1

A company is experiencing imminent insolvency. Which action by the directors would be a breach of their duties in insolvency?

Accepted Answer

Continuing to trade despite knowing the company is insolvent and incurring further debt.

Answer

Negotiating with creditors to restructure the company's debt.

Answer

Seeking professional advice from insolvency practitioners.

Question 2

A director of an insolvent company has a personal loan with the company. What is their legal obligation regarding this loan?

Accepted Answer

To disclose the loan to the creditors and ensure it is treated as a preferential debt.

Answer

To ignore the loan as it is a personal matter.

Answer

To prioritize the repayment of the loan over other creditors.

Question 3

What is the primary purpose of the 'duty to avoid insolvent trading' under the Insolvency Act 1986?

Accepted Answer

To prevent directors from continuing to trade when the company is insolvent, potentially incurring further debt that creditors may not be able to recover.

Answer

To force directors to liquidate the company immediately upon insolvency.

Question 4

Which of the following is NOT a potential consequence for a director who breaches their duty in insolvency?

Accepted Answer

Imprisonment for a term of up to 10 years.

Answer

A personal liability for the company's debts.

Answer

Disqualification from acting as a director for a specified period.

Answer

A fine imposed by the court.

Question 5

A director of a company is aware that the company is facing financial difficulties. What is the recommended course of action for the director to take?

Accepted Answer

Seek professional advice from insolvency practitioners and explore all available options for the company, including restructuring and administration.

Answer

Ignore the financial difficulties and continue trading as usual.

Question 6

What is the key difference between the 'duty to act in good faith' and the 'duty to avoid insolvent trading'?

Accepted Answer

The 'duty to act in good faith' applies to all company decisions, while the 'duty to avoid insolvent trading' only applies when a company is insolvent or on the verge of insolvency.

Answer

The 'duty to avoid insolvent trading' is more important than the 'duty to act in good faith'.

Question 7

Which scenario would likely constitute a breach of the duty to avoid insolvent trading?

Accepted Answer

A director continues to trade the company, knowing it is insolvent and that further debt will be incurred.

Answer

A director enters into a new business venture that ultimately fails, causing the company to become insolvent.

Question 8

What is the legal basis for the director's duty to promote the success of the company for the benefit of its members as a whole, even in the context of insolvency?

Accepted Answer

The Companies Act 2006, Section 172.

Answer

The common law duty of care and skill.

Answer

The principle of 'salvage value' in insolvency law.

Answer

The Insolvency Act 1986, Section 214.

Question 9

In the context of insolvency, what is the primary objective of the 'duty to creditors'?

Accepted Answer

To ensure that the creditors are treated fairly and that their interests are protected.

Answer

To maximize the return to the company's shareholders, even if this means sacrificing the interests of creditors.

Answer

To prioritize the interests of the company's employees over those of the creditors.

Question 10

When a company becomes insolvent, to whom do directors primarily owe their duties?

Accepted Answer

The company's creditors as a whole

Answer

The company's shareholders

Answer

The company's employees

Answer

The government

Question 11

Which of the following is NOT a potential consequence for directors who breach their duties during insolvency?

Accepted Answer

Imprisonment for negligence

Answer

Personal liability for company debts

Answer

Disqualification as a director

Answer

Contribution orders to compensate the company

Question 12

The 'wrongful trading' provision in the Insolvency Act 1986 applies when directors:

Accepted Answer

Knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation.

Answer

Failed to maintain adequate financial records.

Answer

Failed to file annual accounts on time.

Answer

Made significant business decisions without consulting with shareholders.

Question 13

Which action by directors is MOST likely to be considered 'fraudulent trading' under the Insolvency Act 1986?

Accepted Answer

Continuing to trade with the intent to defraud creditors, even if the company is insolvent.

Answer

Failing to pay taxes owed to the government.

Answer

Granting security for existing debts to a connected party in preference to other creditors.

Answer

Selling company assets below market value to a connected party.

Question 14

What is the significance of the 'point of no return' in a company's insolvency journey?

Accepted Answer

It marks the stage where directors' duties shift decisively towards prioritizing creditor interests.

Answer

It signifies the company's formal entry into liquidation proceedings.

Answer

It triggers automatic disqualification of the company's directors.

Answer

It signals the beginning of a restructuring plan to save the company.

Question 15

Which statement BEST describes the directors' duty to consider creditors' interests during insolvency?

Accepted Answer

Directors must balance creditor interests with the company's long-term viability, where possible.

Answer

It only applies when the company is formally placed into liquidation.

Answer

It completely overrides all other duties, including any duty to consider employee interests.

Answer

It requires directors to prioritize creditor interests above all other considerations.

Question 16

Under the Company Directors Disqualification Act 1986, what is a possible disqualification period for unfit conduct by directors?

Accepted Answer

2 to 15 years

Answer

A fine up to £50,000

Answer

Life imprisonment

Answer

6 months to 2 years

Question 17

What is the main purpose of the 'antecedent transaction' provisions in insolvency law?

Accepted Answer

To prevent directors from unfairly benefiting themselves or others at the expense of creditors before insolvency.

Answer

To provide financial assistance to struggling companies before they become insolvent.

Answer

To protect the interests of shareholders in the event of a company's insolvency.

Answer

To punish directors for making poor business decisions that led to the company's insolvency.

Question 18

Which of the following actions might a liquidator take to recover assets for the benefit of creditors?

Accepted Answer

Challenge transactions that unfairly prejudiced creditors before insolvency.

Answer

Force directors to personally guarantee the company's debts.

Answer

Negotiate with the government for financial aid to the company.

Answer

Initiate criminal proceedings against directors for negligence.

Question 19

How can directors potentially mitigate their personal liability when facing insolvency?

Accepted Answer

Seek professional advice early on and act in good faith to minimize losses to creditors.

Answer

Transfer personal assets to family members to shield them from creditors.

Answer

Resign from their positions and leave the company to its fate.

Answer

Continue trading aggressively in hopes of a turnaround, even if insolvency is likely.

Question 20

Which of the following is NOT a general duty of directors when a company becomes insolvent?

Accepted Answer

Maximizing returns for shareholders

Answer

Acting in good faith

Answer

Protecting the interests of creditors

Answer

Minimizing losses

Question 21

Under the Insolvency Act 1986, directors may be personally liable for wrongful trading if they:

Accepted Answer

Knew or ought to have known that the company was insolvent and continued to trade

Answer

Failed to file annual accounts on time

Answer

Made a loss in the previous financial year

Question 22

Which of the following duties is owed by directors to the company itself?

Accepted Answer

Fiduciary duties

Answer

Common law duties

Answer

Statutory duties

Answer

Equitable duties

Question 23

In the event of insolvency, directors have a duty to:

Accepted Answer

Cooperate with the liquidator

Answer

Resign immediately

Answer

Pay off creditors in full

Answer

Appoint a new board of directors

Question 24

The "pari passu" rule in insolvency means that:

Accepted Answer

All unsecured creditors are treated equally

Answer

Shareholders are given priority

Answer

Directors are personally liable for all debts

Answer

Secured creditors are paid first

Question 25

Which of the following is a defense to a claim for breach of directors' duties in insolvency?

Accepted Answer

The director acted in the best interests of the company

Answer

The director relied on the advice of experts

Answer

The company was insolvent at the time of the breach

Question 26

Directors may be disqualified from acting as directors in the future if they:

Accepted Answer

Have been convicted of a relevant offense

Answer

Have been negligent in their duties

Answer

Have failed to file annual accounts on time

Answer

Have caused the company to lose money

Question 27

Which of the following is a key consideration for directors when deciding whether to continue trading in the face of financial difficulty?

Accepted Answer

The interests of creditors

Answer

The interests of shareholders

Answer

The personal liability of the directors

Answer

The reputation of the company

Question 28

The Insolvency Act 1986 introduces a duty for directors to file a notice of intention to appoint an administrator:

Accepted Answer

Within 10 business days of becoming aware of the company's insolvency

Answer

Within 14 business days of becoming aware of the company's insolvency

Answer

Within 21 business days of becoming aware of the company's insolvency