Insolvency

Question 1

Meaning of insolvency?

Answer 1

• Unable to pay its debts
• S123 IA 86 goes on to describe 4 situations
• Unable to pay its debts as they fall due – known as cash flow test
• Has liabilities that are greater than its assets known as balance sheet test
• Does not comply with statutory demand for a debt of over 750, this provides evidence that the company is cash flow insolvent
• Has failed to pay a creditor to satisfy enforcement of a judgement debt

Question 2

Directors obligations towards their company in financial difficulties?

Answer 2

recognise when it is facing financial difficulties.
- Example of financial difficulty
- Company has unpaid creditors who are putting pressure on the company
- Company has an overdraft facility that is fully drawn and bank is refusing to provide further credit
- Directors who need to decide what action to take on behalf of the company.
Options
- Do nothing – potential breach under CA
- Do a deal
- Appoint an administrator
- Request appointment of a receiver to get a fixed charge and sell it
- Put the company into liquidation

Question 3

Informal agreements?

Answer 3

Informal agreements with creditors
- Avoid time and cost of formal insolvency arrangements or proceedings.
To obtain creditor agreement the company may have
- Grant new or additional security
- Replace directors or senior employees
- Sell failing business/subsidiaries
- Reduce costs – through a redundancy programme
- Issue new shares to the creditors
As a preliminary step to negotiating an informal arrangement with relevant creditors a company may ask the creditors to enter into a standstill agreement.

Question 4

What is an pre-insolvency moratorium?

Answer 4

• CIGA 2020 – introduces a new pre-insolvency moratorium for financially struggling companies that are not in a formal insolvency process.
• A mortarium is a period during which creditors are unable to take action to exercise their usual rights and remedies thereby creating a breathing space for the company to attempt to resolve the situation
• The actions restricted by moratorium include
• No creditor can enforce its security against the company’s assets
• There is a stay of legal proceedings again the company and a bar on bringing new proceedings against it
• No winding up procedures can be commenced in respect of the company and no shareholder resolution can be passed to wind up the company
• No administration procedure can be commended in respect of the company

Question 5

Procedure for obtaining the pre-insolvency moratorium?

Answer 5

• Can obtain one by filing documents at court including
• A statement that the company is or likely to become unable to pay its debts as they fall due.
• A statement from a licensed insolvency practitioner known as a monitor for this purpose stating in their view that a moratorium will result in rescue of company.
• Lasts for 20 business days but can be extended by directors for a further 20 business days. Maximum period is one year subject to a court order to extend further.
• Terminates automatically if company’s goes insolvent or court sanctions a restructuring plan.

Question 6

Effect of a pre-insolvency moratorium? Pre-moratorium debts?

Answer 6

PRE-MORTAORIUM DEBTS

DO NOT HAVE TO PAY THESE PRE-MORATROUM debts whilst the moratorium exists but the following must be paid

• Monitors remuneration
• Goods and services supplied during moratorium
• Rent in respect of a period during moratorium
  -Wages or salary
  -Loans under a contract involving financial services - SO STILL REMAIN IABLE DUE TO BANK BEFORE THE MORAROIUM WAS IN PLACE

Question 7

Moratorium debts?

Answer 7

Moratorium debts
If a company has obtained a pre-insolvency moratorium it must pay all its moratorium debts.
These are debts that fall due during or after the moratorium by reason of an obligation incurred
during the moratorium. They usually relate to payment for goods or services ordered by the
company during the moratorium period.
This means that in practice a company must be ‘cash flow’ solvent ie able to pay its debts as and
when they fall due and so is capable of paying its way during the moratorium period.

Question 8

Formal arrangements using statutory procedures - Company voluntary arrangement?

Answer 8

o Compromise between company and creditors. A composition in satisfaction of its debts or a scheme of arrangement of its affairs.
o Creditors agree to part payments of debts owned or to extended timetable for repayment.
o Once approved must be reported to court – but no requirement on court to approve it
o Its supervised and implemented by a supervisor who is an insolvency practitioner. Company’s directors REMAIN IN OFFICE.

Question 9

Setting up a CVA?

Answer 9

) The directors draft a CVA proposal and appoint a Nominee (who must be an insolvency
practitioner). If the company is in liquidation or administration, the administrator or liquidator
drafts the CVA proposal and acts as Nominee.
(b) The directors must submit the CVA proposal and a statement of the company’s affairs to the
Nominee (although in practice it is the Nominee who drafts the CVA proposal).
(c) The Nominee considers the CVA proposal and, within 28 days, must report to court on
whether in their opinion, the company’s creditors and shareholders should be asked to vote
on the CVA proposal (s 2(1) and s 2(2)).
(d) The Nominee must allow at least 14 days for creditors to vote on the CVA proposal. A meeting
of the shareholders must take place within 5 days of the creditors’ decision.
(e) Voting – the CVA proposal will be approved if:
- At least 75% in value (ie, value of debts owed) of those voting on the CVA proposal
(excluding secured creditors) vote in favour;
- If the above majority is obtained, the decision of those creditors will be invalid if those
voting against the CVA proposal include more than half of the total value of creditors
unconnected to the company (eg not a related company, shareholder or director of the
company proposing the CVA); and

AND - A simple majority of shareholders/members vote in favour.

Note. In practice, it is only the approval of the CVA proposal by creditors which matters. If the
creditors vote in favour of the CVA proposal but the members vote against, the creditors’ vote will
always prevail.
(f) The Nominee reports to court that the CVA has been approved.
(g) The Nominee becomes a supervisor and implements the CVA proposal.

Question 10

Effect of a CVA?

Answer 10

 A CVA is binding on all unsecured creditors, including those who did not vote or voted against it. BUT a secured or preferential creditor is not bound unless it specially consents to be bound.
 Creditor can challenge a CVA within 28 days on grounds - of UNFAIR PREJIUDICE OR THE APPROVAL OF THE CVA PROCEDURAL IRREGULATORTY subject to which is becomes binding on all creditors
 Supervisors’ role will be to agree to creditors claims, collect in unsecured funds to pay dividends.
o How are they used
o Helps secure rent reductions during pandemic
o Adv – directors remain in control
o Disavd – doesn’t bind secured creditors or preferential creditors without their consent

Question 11

Formal arrangements using statutory procedures - Restructuring plan under CIGA?

Answer 11

• Compromise a company’s creditors and shareholders and restructure its liabilities so that a company can return to solvency.
• Only used by companies which have or are likely to encounter financial difficulty.
  It requires a court approval called a sanction – creditors and shareholders must be divided into classes and each class which votes on the plan must be asked to approve it. 75% approval in value needed by each voting class.
  Plan only becomes binding if court sanctions it – binds all creditors including secured creditors.

Question 12

Advantages of restructuring plan?

Answer 12

ovel features of the Plan include:
* The court can exclude creditors and shareholders from voting even if they are affected by the
Plan if they have no genuine economic interest in the company;
* The court can sanction a plan which brings about a ‘cross-class cram down’ if it is just and
equitable to do so even if one or more classes do not vote to approve the Plan.
A cross class cramdown means that one rank of creditor can force the Plan on another class of
creditor who has voted against the Plan. A cramdown of shareholders means forcing shareholders
to accept a debt for equity swap in which creditors are able to hold new shares in the company in
place of their debt claims.
The Plan is likely to be used by directors alongside the pre-insolvency moratorium but can also be
used by administrators and liquidators considered later in these materials.
The Plan may be better than a CVA because it can compromise the rights and claims of secured
creditors and shareholders. A CVA cannot do this. The other advantage of a Plan is that it can be
sanctioned by the court to bind all creditors even where the requisite majority approval is not
obtained in every voting class of creditors and shareholders.

Question 13

Comparison between CVA and restructuring plan?

Answer 13

CVA
- WHO CAN INITIATE
- Directors, liquidator or
administrator

Approval
- AT LEAST 75% in value of unsecured creditors but without more than 50% of unconnected creditors voting against it
- Over 50% of shareholders

Who does it bind - ALL unsecured creditors

Advantages - no court sanction required so quicker and less costly

Limitations
- Prefernetial and secured creditors not bound without express consent

Restructuring plan
Who can initiate - Company, creditor, member or liquidator or administrator

Approval = sanctioned by the court
- at least 75% in value of each affected class of creditors and shareholders

• Who does it bind - BINDS ALL CREDITORS AND SHAREHOLDERS

Adv
- Binds all creditors including
dissenting creditors and
potentially classes of
creditors which do not
approve the Plan
The court may sanction a
Plan even if one or more
classes do not approve

Court process can be costly
and time consuming and
need to consider if creditors
are in separate classes for
voting purposes

Question 14

Administration objectives?

Answer 14

Administration – objectives of the administrator
- Administrators are required to perform their duties in the interests of the creditors as a whole rather than in interests of a particular one.
- Also, officers in court who owe duties to court.
- Must be licensed insolvency practitioners
Statutory objectives of administration
- Must perform their functions with the objective of achieving one of three objectives
- First – to rescue company as a going concern, or if that’s not reasonably achievable
- Secondly to achieve a better result for the company’s creditors as a whole that would be likely if wound up or if that’s not reasonably achievable
- Thirdly to realise the company’s property in order to make a distribution to one or more secured or preferential creditors.

Question 15

Appointment of an administrator - procedure?

Answer 15

2 procedures
Court and OUT OF COURT

Court procedure
The court may appoint an administrator where the company is or is likely to become unable to
pay its debts (Sch B1 para 11(a)) on the application of: the company, the directors, a creditor, the
supervisor of a CVA or a liquidator. The court must, when deciding to make an administration
order, consider whether the appointment is reasonably likely to achieve the purpose of the
administration (Sch B1 para 11(b)).
An interim moratorium temporarily freezing creditor action comes into effect on the application to
court and lasts until either, the administration order is made or the court dismisses the
application

Appointments by court order are uncommon. The usual case when a court makes an
administration order is where a creditor has begun winding up proceedings against the company
and the directors wish to appoint administrators before the court has made a winding up order. In
this situation, the out-of-court appointment procedure is not available to the directors, and they
must apply to court for an order to appoint administrators.
If the court makes an administration order, the pending winding up proceedings are automatically
dismissed

Question 16

Appointment of administrator - OUT of court procedure?

Answer 16

First under Sch B1, the directors or the company may appoint an administrator out of court (in
practice it is usually the directors who appoint under Sch B1 Para 22 rather than the company).

they must file a notice of intention to
appoint (NOI) at court and, not less than 10 business days later file a notice of appointment at
court. The administrators’ appointment takes effect when the second notice is filed at court.

OR BY
a holder of a qualifying floating charge holder (QFC) may
appoint an administrator out of court
- means a floating charge which together with any other security that’s held relates to the whole or substantially the whole of the company property AND the document that creates it provides that either sch b1 para-IA applies or they have power to appoint an administrator

have power to appoint an administrator.
o Many banks will request a QFC to secure the loan.
o If a QFC holder wishes to appoint an Administrator it must enforce its security in accordance with terms of the QFC and appointment will take effect when it has filed a notice of appointment at court.
o If more than one QFC holder – normally determined by priory agreement entered into by them.
o Must first give two business days’ notice to holders of a QFC which have propriety and can only proceed if the higher priority holder agrees.

Question 17

Role of administrator?

Answer 17

• Officer of court
• Duty to act in interest of all creditors
• Directors are unable to exercise any of their management powers without consent of administrator
• Administrators’ powers include power to carry on business of company, take possession and sell company’s property.
• Borrow money and execute documents in company’s name.
• Generally, do not have power to pay a dividend to unsecured creditors without obtaining court permission.
• Once appointed have 8 weeks to produce a report setting out their proposals for conduct of administration which may include proposal to restructure liabilities through a scheme of arrangement, a restructuring plan or a CVA.
• This is then sent to creditors for their approval, if rejected company will usually be placed into liquidation. If accepted administrator will proceed with proposals. And if achieved will exit from administration.
• There is a 12-month fixed time limit for completion of administration.

Question 18

Administrative moratorium?

Answer 18

Administrative moratorium
- Company has benefit of a full moratorium
- Which means: except with consent of court or administrator
- No order or resolution to wind up company can be made
- No administrative receiver of company may be appointed
- No steps may be taken to enforce any security over company’s property
- No legal proceedings
- A landlord may not forfeit a lease of company’s premises.

Question 19

Powers of administartor?

Answer 19

• Wide powers under IA 1986 – ‘do all such things as may be necessary for management of the affairs, business and property of the company.
• Include
• Remove and appoint directors
• Dispose of property subject to a floating charge
• Dispose of property subject to a fixed charge

Question 20

Pre-packaged sale in administration?

Answer 20

• Where business and assets of a company is prepared for sale to a selected buyer prior to company’s entry into administration – terms of sale are negotiated before administrator comes in. and administrators complete the sale with buyer.
• Have advantage of goodwill and continuity of business and certainty result for creditors.
• Controversial especially where the sale is to a shareholder or a director. Often felt creditors aren’t given enough information to see if it’s in their best interests.
• Administration regulations 2021 restrict the ability to enter into pre-packaged sales with shareholders or directors unless sale approved in advance by creditors or buyer has obtained an evaluator qualifying report.

Question 21

Recievership?

Answer 21

We have seen that administration is a collective procedure. In contrast, receivership is an
enforcement procedure which is conducted in the interests of a secured creditor.

Question 22

Administrative recievership?

Answer 22

o Rare procedure and prohibited mostly.
o Where applicable a secured creditor with fixed and floating charges over all company’s asset may appoint an administrative receiver. Who will take control of secures assets, sell them and use it to pay debt owed to secured creditor.
o Enforcement procedure
o Only a licensed practitioner can be one
o Can only be appointed by QFC holders in two cases – where floating charge was created before 2003 or where one of the statutory exceptions apply.

Question 23

Fixed charge recievership? AND court appointed recievership?

Answer 23

o Most common type. Receiver does not have to be a licensed insolvency practitioner.
o Appointed by holders of a fixed charge pursuant to terms of relevant security document. They owe a duty to appointer. Usually act as an agent for charger/mortgagor.
o Usually have extensive powers.
o Can only control the assets secured by the security document and is only entitled to deal with those and not any other assets of the company.
- Court-appointed receivership
o Relatively rare
o Sometimes when shareholders are locked in dispute

Question 24

Liquidation?

Answer 24

It is – the process by which a company’s commercial life comes to an end.
- Liquidators tasked with collecting in company’s assets and selling them, identifying creditors of company and determining the amounts owed to them and paying creditors dividend out of funds obtained. If there is surplus after liquidation has paid creditor claims in full the liquidator will pay that surplus to company shareholders.
- Not only insolvent companies which are wound up. Liquidation and winding up are used interchangeably but do have different meanings.
- Creditors of same rank are said to rank Pari passue with each other – sharing an equal and proportionate basis in relation to assets available for distribution to them.

Question 25

Compulsory liquidation?

Answer 25

o Court based process
o Applicant presents a winding up petition to court.
o If court makes a winding up order – usually the official receiver will become the first liquidator and continues in office until another person is appointed.
o Official receiver will notify registrar of companies and all known creditors.
o They have power to summon separate meetings with creditors for purpose of choosing a person to become liquidator.
 Who can apply for a winding up order
 A creditor
 The company – shareholder – where insufficient assets in company to fun a creditors voluntary liquidation
 Creditors voluntary liquidation directors by board resolution for same reason as above
 An administrator
 An administrative receiver

Question 26

Company can prove its unable to pay its debt by?

Answer 26

• Failure to comply with a creditors statutory demand – it’s written and in in prescribed form requiring a company to pay a specifies debt
• Creditor sues company, obtains judgement and fails in an attempt to execute the judgement debt
• Proof to satisfaction of court tat the company is unable to pay its debts as they fall due
• Proof to satisfaction of the court that the value of company assets is less that the amount of its liabilities.

Question 27

Consequences of a winding up order?

Answer 27

o To prevent a company losing value from time of presentation of petition to making of winding up order a disposition of company’s property will be void if made after the presentation of the winding up petition.
o On the making of a winding up order –
o there is a limited statutory moratorium under which no legal proceedings can be commenced against the company and any proceedings which have already bee commenced are stayed.

There is a usually a gap of 2-3 months between the presentation of the winding up petition and
the court hearing when the court decides whether or not to grant the petition and make a winding
up order.

On the making of a winding up order:
* There is a limited statutory moratorium under which no legal proceedings can be commenced
against the company and any proceedings which have already commenced are stayed;
* All employees are automatically dismissed; and

• The directors lose their powers.
  o Occurs 3 months after liquidator has filed final accounts and return with registrar of company’s house.
  o Directors lose their powers
  o All employees are automatically dismissed.
  Once liquidation is complete – company’s life is brought to an end by dissolution.

Question 27

Members voluntary winding up - solvent?

Answer 27

• May only be used for companies that are solvent
• Directors must swear a declaration of solvency – within a period not exceeding 12 months
• Any director who makes such a declaration without reasonable grounds is liable for a fine or imprisonment
• Members must then pass a special resolution to place company into members voluntary winding up and an ordinary resolution to appoint a nominated liquidator. winding up commences after special resolution.
• If liquidator consider company will be unable to pay its debts – liquidator must convert MVL to a creditor’s voluntary liquidation

Question 27

Voluntary winding up order?

Answer 27

• S81 IA allows for a company to be wound up without a court in these 3 situations
• Where company purpose according to articles has expired and resolution of shareholders
• Where shareholders of a company resolve by special resolution to wind up company after directors have made a declaration of solvency
• Where the shareholders of a company resolve by special resolution to wind up company because its unable to pay its debts. Insolvent liquidation

Question 27

Creditors voluntary winding up?

Answer 27

• Most common form
• Commences by SPECIAL RESOLUTION of shareholders and it is shareholders who appoint liquidator
• Where a declaring of solvency has not been made this will occur
• Shareholder pass special resolution to place company into CVL and ordinary resolution to appoint a nominate liquidator creditors nomination will take preference if dispute with shareholders.
• Director must draw up statement to company’s affairs and send it to company’s creditors.

Question 28

Liquidators powers?

Answer 28

• Terminated powers of directors
  Liquidators’ powers to manage company
• All the same things as administrator
  Liquidators’ powers to avoid certain transactions
• Challenge certain antecedent transactions
• • transaction at an undervalue
• A preference
• An exterminate credit transaction
• A transaction defrauding creditor
  A floating charge granted in certain time period before liquidation begins will be void except to extend company granted fresh consideration for floating charge.

Question 29

Statutory order of priority?

Answer 29

Step 1 Liquidator’s fees and expenses of preserving and realising assets subject to fixed
charges.
Step 2 Amount due to the fixed charge creditor out of the proceeds of selling assets subject to
the fixed charge.
Step 3 Liquidator’s other remuneration, costs and expenses
Step 4 Preferential creditors (the first tier and then the secondary tier).
Step 5 Creation of the prescribed part fund (if available) for unsecured creditors.
Step 6 Amount due to creditors with floating charges.
Step 7 Unsecured creditors such as trade creditors (including payment of the prescribed part).
Step 8 Interest owed to unsecured creditors.
Step 9 Shareholders.

Question 30

Fixed charge assets?

Answer 30

he proceeds of the sale of the assets subject to fixed charges are applied as follows:
Step 1: Liquidator’s costs of preserving and realising assets subject to a fixed charge
Step 2: Fixed charge creditors (in respect of assets subject to a fixed charge)
The proceeds of selling assets which are subject to a fixed charge (or mortgage) must first be used
to pay off the debt secured by such charge (or mortgage). The proceeds will be paid net of the
liquidator’s remuneration, costs and expenses of selling the assets (eg the liquidator’s fees, legal
costs and surveyor or estate agent fees in selling property).
If the proceeds are not sufficient to discharge the debt in full, then the creditor may be able to
recover the balance lower down the order of priority if it also has a floating charge which secures
the debt but if not, the unpaid part of the debt will rank as unsecured debt

Question 31

Assets subjects to the floating charge?

Answer 31

Step 3- expenses of liquidations
Step 4 - Preferential debts - First employees, Second Crown HMRC
Step 5 - Prescribe part fund - unsecured creditors
Step 6 - Floating charge creditors
Step 7 - Unsecured creditors
Step 8 - Interests on unsecured debts
Step 9- Shareholders

Question 32

Personal insolvency ? Individual voluntary arrangments?

Answer 32

• Similarities to a company’s voluntary arrangement
• Debtor makes a proposal for compromise of their liabilities with their creditors. A debtor’s proposal for an IVA will usually involve debtor paying only a part of the contractual debt owed or having a longer period
• Flexible procedure.
• Usually requires debtor to pay funds to IVA supervisor out of their income
• This supervisor will then pay a dividend to creditors based on their determined claims against the debtor.
• If approved by creditors – percentage of them – then IVA binds the debtor and all of their creditors to terms of IVA
• A licensed insolvency practitioner must do this
• Can last any length of time

Question 33

Setting up an IVA?

Answer 33

• Debtor drafts a proposal for compromise of their liabilities and a statement of their affairs with assistance of insolvency practitioner – known as nominee
• Nominee submits report to court stating their opinion on whether its reasonable
• A debtor can apply to court for an interim order. If court grants the order, it brings about a mortarium. Court order is needed for a creditor to exercise any right to remedy otherwise restricted by moratorium. BOTH Last 14 days and can be extended
• Iin order for proposal to become binding – must be approved by creditor holding at least 75% of total debt.

Question 34

Effect of approval of an IVA?

Answer 34

• Binds debtor and all their unsecured creditors
• Cannot bind a secure creditor or preferential creditor without that creditors consent
• Nominee become supervisor of IVA and is responsible for its implementing.
• At the end if complied with IVA 0 then creditors will have to write off any balance of their pre-IVA debts against debtor
  Adv
• Alternative to bankruptcy
• Bind all unsecured creditors
• A mortarium is available
  Disavd
• May last longer than a bankruptcy
• Cannot bind a secured or preferential without consent
• Can be expensive and time consuming

Question 35

Bankruptcy?

Answer 35

Begins with bankruptcy petition being brought
Creditors petition
- the debt is one the debtor is unable to pay or has no reasonable prospect of paying
- the debt owed the creditor is for an unsecured liquidated sum exceeding 5,000
-The debtor must be domiciled or present in England and wales.

Debtors pettiton
- Debtor is unable to pay its debts

Question 36

Inability to pay debts and bankruptcy order?

Answer 36

Evidenced by

• Statutory demand that has not been satisfied within 3 weeks from service of that demand
• An unsatisfied execution of a judgement or of another legal process
  If grounds are met court has discretion to make a bankruptcy order
  Upon it – official receiver will become first trustee – a majority of creditors can seek appointment of another one – must be a licensed insolvency practitioner.
• The bankrupt – is prohibited form obtaining credit of more than 500, making gifts and certain professions

Question 37

Bankruptcy order of priority of payments?

Answer 37

• Secured creditors
• Expenses of bankruptcy including trustees’ remuneration
• Two trier preferential creditors
• Ordinary unsecured creditors
• Statutory interest
• Debt owed to a spouse
• Finally, any surpluses are payable to bankrupt
  Bankrupt duties
• Owes a number of duties to trustee – provide info to help their job
  Bankruptcy discharge
• Automatically discharged from bankruptcy after a year
• Official receiver or trustee may order suspending automatically discharge if bankrupt fails to comply with duties

Question 38

Voidable transactions?

Answer 38

If bankruptcy order in place – trustee has power to challenge voidable transactions and do this with aim of increasing assets available to all creditors

Principles are same as company.
- Transaction at an undervalue
o * Transaction for an undervalue (as defined) * Within five years preceding the day of presentation of bankruptcy petition * Individual insolvent at time/as a result (this is presumed with associates)
- Preferences
o Individual puts a creditor in better position and influenced by desire to prefer
o * Within six months preceding the day of presentation of bankruptcy petition
o * Within two years preceding the presentation of bankruptcy petition if an associate and
o presumption of preference if with an associate
o * Individual insolvent at time/as a result
- Defrauding creditors
- * Must be a transaction for an undervalue.
- * Need intention to defraud creditors or to put assets beyond their reach.
- * No need for individual to be insolvent and no relevant time to consider.