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Review Your SQE 1 Practice Records

Examination Timing: 00H00M01S

Global Traders Ltd. is unable to pay its debts and a liquidator is being appointed. The liquidator is considering whether the directors' actions constituted wrongful trading or fraudulent trading. 

What must the liquidator establish to prove wrongful trading?

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To establish wrongful trading under section 214 of the Insolvency Act 1986, the liquidator must demonstrate that the directors continued to trade beyond the point when they knew, or should have known, that there was no reasonable prospect of avoiding insolvent liquidation. There is no requirement to prove any intent to defraud, as would be necessary for fraudulent trading.

Key Point: Wrongful trading occurs when directors fail to take appropriate action upon realising that the company is insolvent, thereby worsening the position of creditors. Directors have a legal duty to minimise potential losses to creditors once insolvency becomes apparent.

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