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Review Your SQE 1 Practice Records

Examination Timing: 00H00M01S

Four chartered surveyors set up together in business as a Limited Liability Partnership (‘the LLP’). Two of them are designated members and two are ordinary members of the LLP and all work full time. The members all meet formally once a month to discuss profit and loss, cash flow, and financial forecasts. This financial information has indicated for the past 12 months that the LLP is unable to pay its debts. 

The LLP has continued in business, and the members have discussed ways of limiting costs. As a result, they have made considerable reductions in office expenditure. At one meeting (‘the Meeting’) a few months ago, one of the ordinary members (‘the Ordinary Member’) suggested that they should obtain financial and/or legal advice on their position. This suggestion was rejected on the basis that it would be too expensive. 

A liquidator is appointed on the insolvent winding up of the LLP. The liquidator considers it clear that at the date of the Meeting there was no reasonable prospect that the LLP would avoid insolvent liquidation and is considering whether to bring a claim for wrongful trading against all the members. 

Which of the following must the Ordinary Member show to establish a defence against a claim by the liquidator?

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To defend against a claim of wrongful trading under the Insolvency Act 1986, the Ordinary Member must demonstrate that he took every step to minimise potential losses to the LLP’s creditors once he knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation. Simply reducing expenditure or arguing limited liability as a non-designated member is insufficient. The critical defence lies in proving proactive measures were taken to mitigate creditor losses, which would include actions such as seeking professional advice, even if initially deemed too expensive. 

Key Point: This question focuses on the responsibilities and defences available to members of an LLP in cases of wrongful trading. Understanding the legal obligations and appropriate measures to take when insolvency is imminent is crucial for members to mitigate liability and protect creditors' interests.

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