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Business Law and Practice > 10. Insolvency > Flashcards

10. Insolvency Flashcards

1
Q

What is an individual voluntary arrangement?

A

Agreement between individual debtor and all creditors where each agrees to accept less than is owed

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2
Q

What is the advantage of an IVA to a debtor?

A

They can avoid the restrictions and qualifications they would be subject to if made bankrupt

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3
Q

What is the advantage of an IVA to a creditor?

A

They may receive more money than in a bankruptcy proceeding, and more quickly

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4
Q

What must a debtor do before agreeing to an IVA?

A

Take professional advice

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5
Q

What is the protection offered by the court order received by an insolvency practitioner preparing and filing a statement of affairs on behalf of the debtor?

A

No bankruptcy proceedings can be brought when the order is in force

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6
Q

What percentage of unsecured creditors must agree to the agreement before it is binding on all ordinary unsecured creditors, whether they voted for it or not?

A

75% in value

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7
Q

Who are not bound?

A

Preferential and secured creditors

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8
Q

Who are two examples of a preferential creditor?

A
  1. Employees owed waged in the last four months
  2. HMRC in respect of VAT, PAYE, and National Insurance
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9
Q

What may the insolvency practitioner (now a supervisor) or a creditor do if a debtor does not adhere to the IVA, or if the debtor provided false or misleading information?

A

Petition for the debtor’s bankruptcy

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10
Q

What is bankruptcy?

A

A judicial process in which assets of a bankrupt debtor are passed to a third party, the trustee in bankruptcy, who liquidates the assets and uses the proceeds to pay off as many debts as possible, in a strict order set out by legislation

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11
Q

What period after a bankruptcy application is a debtor deemed discharged from the debts?

A

One year

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12
Q

What are the three ways a debtor can be placed into bankruptcy?

A
  1. Debtor applies online to declare themselves bankrupt
  2. One or more unsecured creditors owed at least £5,000 can apply
  3. Supervisor or creditor can apply if debtor has breached IVA
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13
Q

Who is the official receiver?

A

A civil servant who will act as the trustee in bankruptcy unless creditors seek to nominate their own.

Think Department of Justice Trustee in Bankruptcy in a U.S. context. Not to be confused with a secured creditor’s receiver, discussed further on.

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14
Q

Put simply, what are the two ways a creditor who applies to put a debtor in bankruptcy can prove that they are insolvent?

A
  1. Debt immediately payable and debtor does not have the funds
  2. Debt payable in future, and debtor has no reasonable prospect of being able to pay
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15
Q

What are the three specific ways in which insolvency can be demonstrated?

A

Insolvent if:

  1. Debtor owes £5,000 or more; creditor makes a statutory demand for payment; debt not paid within 3 weeks or debtor does not apply to set aside demand within 3 weeks
  2. Debtor owes £5,000 or more; creditor seeks to execute on the judgment; attempt to execute judgment fails
  3. Debtor owes future debt of £5,000 or more; creditor serves a statutory demand of proof of ability to pay; debtor does not show reasonable prospect of being able to pay
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16
Q

How does the bankruptcy estate vest in the trustee?

A

Automatically

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17
Q

What assets is a bankrupt able to retain?

A
  • Assets needed for day-to-day living, including furniture
  • Salary, and
  • Any tools required for their job
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18
Q

What is an income payments order, and what is the maximum length of one?

A

Although a bankrupt is entitled to retain any salary they make, if the salary exceeds the amount needed for the reasonable needs of them and their family, an income payments order can be made, for a maximum of three years

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19
Q

Does the bankrupt’s interest in their home pass to the trustee?

A

Yes

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20
Q

What are the four interests, which if they exist in a bankrupt’s home, mean that it cannot be sold within the first year without a court order?

A
  1. Held in joint names
  2. Equitable interest of spouse
  3. Right to occupy
  4. Children under 18 in occupation
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21
Q

What happens after one year?

A

The interests of creditor override those interests in the home

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22
Q

What three things is a debtor in a bankruptcy restricted from doing, until discharged?

A
  1. Apply for credit over £500 without disclosing the bankruptcy to the lender
  2. Act as company director or be a partner
  3. Trade under another name without disclosing the bankruptcy
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23
Q

What is the order of priority in a bankruptcy distribution?

A
  1. Costs of the bankruptcy
  2. Secured creditors with a fixed charge
  3. Preferential creditors
  4. Secured creditors with a floating charge
  5. Unsecured creditors
  6. Connected unsecured creditors
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24
Q

What conduct will prevent the bankruptcy from being discharged after the usual one year?

A

If the bankruptcy was caused by dishonesty, negligence, and recklessness

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25
Q

If a bankruptcy was caused by dishonesty, negligence, and recklessness, what is the label given to the debtor, and how long does this bankruptcy last?

A

Culpable. 15 years.

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26
Q

What occurs if a partner in a partnership at will is made bankrupt?

A

Partnership is dissolved and the trustee receives any money due to the insolvent partner

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27
Q

What occurs if a partner in a partnership not at will is made bankrupt, and what is required for this?

A

If the partnership agreement provides that bankruptcy of a partner will not terminate the partnership, the remaining partners will usually purchase the bankrupt partner’s interest from the trustee

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28
Q

What occurs if a partner in an LLP is made bankrupt?

A

The partnership does not terminate, but the trustee will usually sell the interest to the remaining partners

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29
Q

How does bankruptcy proceed in a partnership:

  1. Of individuals
  2. Of companies
  3. Of a mix of both?
A
  1. Bankruptcy processes apply to each partner
  2. Liquidation applies to each company
  3. Bankruptcy applies to individuals; liquidation to the companies
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30
Q

Are the insolvency procedures for limited companies and LLPs broadly the same?

A

Yes, and reference to company will probably apply to LLP

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31
Q

What are the six insolvency options available to companies?

A
  1. Receivership
  2. Restructuring plan
  3. Moratorium
  4. Administration
  5. Company voluntary arrangement
  6. Liquidation
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32
Q

What is fixed asset receivership?

A

Where a secured creditor exercises their right to appoint an administrative receiver because a company has breached a term, through which the receiver takes possession of the charged asset and usually disposes of it to use the proceeds to pay back the creditor

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33
Q

What are the most common breaches giving rise to fixed asset receivership?

A

Failure to pay interest or capital of a loan

34
Q

Is it required to show a company is insolvent before fixed asset receivership can be commenced?

A

No

35
Q

Why does fixed asset receivership usually place a company into insolvency anyway?

A

Because charges are usually granted against assets which are crucial to the functioning of the business, e.g. buildings and machinery

36
Q

What percentage of creditors must agree to a restructuring plan, and does it bind those who do not vote for it?

A

75% in value of the unsecured debt, and binds all if this threshold is reached

37
Q

What three things are prohibited when a company seeks a moratorium?

A
  1. Creditors cannot take action to enforce their rights or launch proceedings
  2. Landlord may not forfeit lease of company premises
  3. Floating charge holder may not crystallise charge
38
Q

What is the exception to the payment holiday a company enjoys during a moratorium?

A

Wages and other payments to employees, including holiday pay

39
Q

What is administration?

A

Procedure whereby an administrator (independent insolvency practitioner) can run, reorganise, or sell the company as a going concern

40
Q

What are the three aims of an administrator, in order of importance?

A
  1. Rescue the company
  2. Achieve a better result for creditors than if it was wound up
  3. Realise property to distribute to creditors
41
Q

What is the difference between an administrator and a receiver?

A

An administrator acts in the interests of creditors as a whole

42
Q

What are the two ways an administrator can be appointed to a company?

A
  1. Court appointment
  2. Company, directors, or holder of a qualifying floating charge file certain documents in court
43
Q

If the court appointment is used, what two things must the court be satisfied of?

A
  1. Company unable to pay debts
  2. Administrator likely to achieve better result for the creditors than liquidation
44
Q

If the company or directors appoint the administrator, who must they notify and what can they do?

A

They must notify any qualifying charge holders, who can agree or appoint an alternative administrator

45
Q

What is a qualifying floating charge?

A

Charge over the whole or substantially whole of the company’s assets, containing a provision enabling to holder to appoint an administrator if a breach allowing the creditor to terminate their agreement occurs

46
Q

What are four powers of an administrator?

A
  1. Take control of and sell company assets
  2. Bring and defend legal proceedings on behalf of the company
  3. Carry out the company’s business
  4. Remove and replace directors
47
Q

Generally, what proportion of the value of the creditors must agree to an administrator’s proposals?

A

Majority

48
Q

What are the effects of the moratorium which gets imposed during administration?

A
  1. Restricts ability of third parties to enforce their rights
  2. Prevents commencement of insolvency proceedings
49
Q

What is a Company Voluntary Arrangement?

A

Basically an IVA for companies, subject to the same 75% approval threshold and binding on dissenters if passed

50
Q

Only who is bound by a CVA?

A

Unsecured creditors

51
Q

Even if a CVA is in place, what can secured and preferential creditors still do?

A

Put the company into administration or liquidation

52
Q

What two groups can start a voluntary liquidation, and what are the two types?

A

Voluntary liquidation can be started by the members or directors, and the two types are:

  1. Members’ voluntary liquidation
  2. Creditors’ voluntary liquidation
53
Q

In a Members’ Voluntary Liquidation, who controls the process from start to finish, and what are the two requirements for it to be available?

A

The members and directors control it and to be available:

  1. The company must be solvent, and
  2. The individuals involved in running the company must wish to wind it up
54
Q

Within what time period after the final step of a MVL is the company dissolved?

A

Three months

55
Q

In a Creditors’ Voluntary Liquidation, who starts the process and who takes it over?

A

Started by the directors and then taken over by the creditors

56
Q

What is the main reason the directors would commence a CVL?

A

The directors are advised the company is insolvent, and do not wish to be personally liable for the debts of the company through fraudulent or wrongful trading if they continue to trade

57
Q

What are the steps required within the company to begin a CVL?

A
  1. Directors resolve that the company is insolvent and should be placed into liquidation
  2. Members pass special resolution to start the liquidation
58
Q

What must the directors do within 7 days of the resolution to liquidate being placed in the London Gazette?

A

Prepare a statement of company affairs and send it to the company’s creditors

59
Q

Within what time period after the final step of a CVL is the company dissolved?

A

Three months

60
Q

What must any creditor be able to show to petition the court to wind up a company, and what will cause the court to dismiss the petition if shown by the company?

A

Creditor must show company is unable to pay debts, and court will dismiss if company can show it may recover financially or that the debt upon which the petition is based is disputed

61
Q

What is the order of priority in a liquidation of a company?

A
  1. Costs of the liquidation
  2. Secured creditors with a fixed charge
  3. Preferential creditors
  4. Secured creditors with a floating charge
  5. Unsecured creditors
  6. Connected unsecured creditors
  7. Shareholders
62
Q

What is a preference?

A

When a debtor intentionally does something that puts a creditor or other similar party in a better position on liquidation/administration than they otherwise would be

63
Q

What is the required level of intent to be deemed to have given a preference?

A

Company or individual must intend to prefer the creditor or party

64
Q

When is intent to prefer presumed?

A

If the preference is to a connected person, e.g. director, their spouse, other close family member or associate

65
Q

To constitute a preference within what time limit of the onset of insolvency must it have occured for:

  1. Non-insiders, and
  2. Insiders?
A
  1. Six months
  2. Two years
66
Q

When is the onset of insolvency for:

  1. Company compulsory liquidation
  2. Company voluntary liquidation
  3. Administration, and
  4. An individual?
A
  1. Company compulsory liquidation: date petition is presented
  2. Company voluntary liquidation: date company enters liquidation
  3. Administration: earlier of date Notice of Intention to Appoint Administrator is filed or when it enters administration
  4. Individual: date of bankruptcy petition
67
Q

Is it required that the preference cause the insolvency?

A

No

68
Q

What is the status of a preference?

A

Voidable by the court

69
Q

What is the insolvency requirement for a transaction at an undervalue by a company?

A

A company must have been insolvent at the time of the transaction, or became insolvent as a result

70
Q

In the context of a transaction at an undervalue by a company, when is insolvency presumed?

A

When the transaction is made to a connected person

71
Q

Regarding a transaction at an undervalue made by an insolvent individual, there is no requirement to prove insolvency if a transaction is made within what time limit before insolvency?

A

Two years

72
Q

In the context of a transaction at an undervalue by an individual when is insolvency always presumed?

A

If a transaction is made to a close relative or business associate at any time in the relevant five years

73
Q

What are the three defences available to a company for a transaction at an undervalue claim?

A

Transaction entered into:

  1. In good faith
  2. For the purpose of carrying on the business
  3. With reasonable grounds to believe it would benefit the company
74
Q

What is one thing which will not amount to a transaction at an undervalue, and why?

A

Granting a security interest in a company asset, because this does not change the value of the company’s assets

75
Q

When does the criminal offence of fraudulent trading arise?

A

When a director (or other person who knowingly participates) carries on business of the company, knowing it is insolvent, with the intent to defraud creditors

76
Q

When does wrongful trading arise?

A

When, at some time before a company became insolvent, the directors knew or ought reasonably to have known that was no prospect the company would avoid insolvency, and failed to take adequate steps to minimise losses for creditors

77
Q

In a wrongful trading situation, when does a director’s duty shift and to whom does it shift?

A

The duty shifts from what is best for the shareholders to what is best for the creditors, once the director knows or ought reasonably to know insolvency is unavoidable

78
Q

What can a director show in defence to a wrongful trading claim?

A

That they took every step with a view to minimising potential loss to creditors

79
Q

In what situation is a floating charge void if given to (1) an unconnected person and (2) a connected person?

A

Unconnected:

  1. If it was created for no consideration within 12 months ending with insolvency and
  2. At the time it was created, the company was insolvent or became insolvent as a result

Connected:

If it was created for no consideration within two years ending with insolvency (no insolvency step 2)

80
Q

What amount of assets subject to a floating lien is a liquidator required to ringfence for the benefit of unsecured creditors?

A

50% of the first £10,000 and 20% of amounts above, up to a maximum of £800,000

81
Q

What is a transaction at an undervalue?

A

When property that would otherwise have formed part of the bankruptcy estate is gifted or sold for significantly less than market value within two years of a company’s insolvency or five years of an individual’s bankruptcy

82
Q

What companies cannot avail of a moratorium?

A

Companies subject to insolvency proceedings currently or within the last 12 months

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