OPQ Ltd is insolvent. Despite knowing this, the directors approve the purchase of new equipment on credit. The company later enters liquidation.

Which statements are correct regarding director liability?

Question

OPQ Ltd is insolvent. Despite knowing this, the directors approve the purchase of new equipment on credit. The company later enters liquidation.

Which statements are correct regarding director liability?

BlackTom AI · Accepted Answer

Directors' duties shift toward the company's creditors once insolvency is or should be apparent; continuing to incur credit while knowing (or when they ought to have known) insolvency can produce personal liability. Key statutory points: Companies Act 2006 imposes director duties (s.172) which, on insolvency, effectively require protecting creditor interests; Insolvency Act 1986 s.214 (wrongful trading) can require directors to contribute to the company’s assets where they failed to minimize creditor loss once insolvency was foreseeable; s.213 (fraudulent trading) can impose personal liability for debts where there was intent to defraud.

Step-by-step reasoning
1. Determine timing/knowledge: liability hinges on whether the debt was incurred before insolvency was apparent or after directors knew (or ought to have known) the company was insolvent. Constructive knowledge counts—directors cannot ignore clear signs of insolvency.  
2. If debts were incurred after that point, continuing to trade can increase creditor losses; courts assess whether directors took every step to minimize loss. Under wrongful trading, directors may be ordered to contribute amounts to the company’s assets to cover the added loss.  
3. If there is deliberate intent to defraud creditors when trading, fraudulent trading liability can make directors personally liable for debts or losses caused.  
4. If debts were incurred before insolvency without fraud or breach, liability normally remains with the company, not the directors personally.

Why the correct answers are correct
- "The timing of when the debt was incurred is critical": correct because the legal test focuses on whether the debt was contracted when directors knew or should have known of insolvency—liability arises for post-knowledge conduct.  
- "Directors may be personally liable for the debt incurred": correct in the sense that wrongful or fraudulent trading can lead to personal contribution orders or liability for debts/losses caused by continued trading.

Why other possible assertions would be wrong
- Any claim that directors are automatically personally liable for all company debts is incorrect; personal liability requires specific wrongful/fraudulent conduct or statutory grounds.  
- Any claim that timing is irrelevant is incorrect because pre‑insolvency debts are ordinarily company, not personal, liabilities.

Conclusion
Both statements—(1) timing is critical, and (2) directors may be personally liable—are correct and match the provided answers.

OPQ Ltd is insolvent. Despite knowing this, the directors approve the purchase of new equipment on credit. The company later enters liquidation. Which statements are correct regarding director liability?多项选择题

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