Insolvency (corporate)

Question 1

What is the definition of Insolvency?

Answer 1

A company is deemed insolvent when it is unable to pay its debts

Question 2

List the 4 types

How do you prove insolvency? s123 Insolvency Act 1986 tests:

Answer 2

1. Statutory demand
2. Unsatisfied Judgement
3. The cashflow test
4. The balance sheet test

Question 3

List the 3 parts

What is the statutory demand test? s 123 IA

Answer 3

• If a creditor is owed £750 or more;
• Has served a statutory demand on the company requiring it to pay the sum; and
• the company has for 3 weeks thereafter failed to pay or come to an alternative arrangement with the creditor

Question 4

Unsatisfied judgement test under s123 IA?

Answer 4

If a creditor
- Obtains judgement against the company; and
- Tries to enforce it;
- But the debt hasn’t been paid in full/ at all

e.g. you’ve tried to send in bailiffs and failed to recover the sum due

Question 5

The cashflow test under s123 IA?

Answer 5

Can be proved to the court that the company is unable to pay its debts as they fall due

e.g. C is having fin. difficulties - restructuring arrange. w/ creditors

Question 6

What is the balance sheet test under s 123 IA?

rarely used bc balance sheet = snapshot in time, hard for credz to prove

Answer 6

Can be proved to the court that - total value of the company’s liabilities exceed its assets

easy for company to argue the figures are out of date

Question 7

Why is it important to know when a company is insolvent?

What is a pre-requisite for winding up?

Answer 7

Insolvency - A creditor must be able to show that the debtor is insolvent before the creditor can apply for the company to be wound up

Question 8

When is the point of insolvency - if the directors appoint an administrator?

Answer 8

The time at which the notice of intention to appoint is filed at Companies House

Question 9

What are the 3 different types of liquidation processes?

One possible outcomes for an insolvent company

Answer 9

1. Compulsory liquidation (3rd party commences involvency proceedings against insolvent company)
2. Creditors voluntary liquidation (commenced by company itself when insolvent, usually from creditor pressure)
3. Members voluntary liquidation (commenced by solvent company because it wants to stop trading or b/c its dormant and wants to bring its affairs to an end in orderly manner)

Question 10

When might a petitioner be prevented from proceeding with a winding up petition?

Answer 10

• If the company can show that there is a genuine and substantial dispute in relaton to the money owed
  (If petitioner already obtained judgement it would be difficult for company to argue that there is a dispute unless it succeeds in setting the judgement aside)

court has ultimate discretion (IA 1986) = may still wind up company

Question 11

Compulsory liquidation petition- when might the court adjourn the hearing to a later date?

Answer 11

If the company indicates that it will be able to pay the debt within a reasonable period of time

Question 12

If the court orders that the company should be wound up - who becomes the company’s liquidator/ whats their role/ can they appoint someone else?

Answer 12

• The Official Reciever (O.R) will automatically become the company’s liquidator
• The O.R is a civil servant and court official and employed by the Insolvency Service
• the O.R can appoint a private insolvency practioner depending on the nature of the case and the creditors’ wishes (as long as the company has sufficient assets to pay the Insolvency Practioner’s fees)

Question 13

Options for insolvent companies

Advantages of talking to creditors

2 main advantages

Answer 13

• Creditors may agree to defer payment or come to some other compromise
• This may allow the company to continue to trade

Question 14

What is a company voluntary arrangement (CVA)

Option for insolvent company - alternative to liquidation

Answer 14

Entering into a formal arrangement with creditors
Where the parties agree to a compromise

Question 15

Define - What is administration?

Option for insolvent company -alternative to liquidation

Answer 15

• Administration is the process whereby an administrator (an independent insolvency practitioner) is appointed to run the company and make whatever changes are necessary
  to improve its financial performance.
• Alternatively, the administrator will aim to get the company into a position where it can be sold as a going concern

Question 16

What is CIGA 2020 Moratorium? + who is in control +how long does it last?

(3 points)

Answer 16

• In this moratorium, the company is protected from actions by creditors relating to pre-moratorium debts but must pay debts incurred during the moratorium in full.
• During the moratorium - the company’s directors remain in control, BUT a qualified insolvency practitioner acts as an independent monitor who has oversight of the moratorium and can terminate it in
  certain circumstances.
• 20 days but can be extended

Question 17

Moratorium under CIGA 2020 - What debts are excluded from the payment holiday?

Answer 17

• Employees’ wages or salary arising under a contract of employment
• The monitors remuneration or expenses
• Goods or services supplied during the moratorium

Question 18

Moratorium under CIGA 2020 - What are the requirements for a company to participate?

Answer 18

• Company must be unable to pay its debts or likely to become unable to pay its debts
• If the company has not already entered into a moratorium during the previous 12 months
• Only available to English companies with no outstanding winding up petitions against them

Question 19

Moratorium under CIGA 2020 - Who cannot use this?

Answer 19

• Banks (financial services exception)
• Non UK companies
• Companies that have entered into a moratorium in the previous 12 months

Question 20

Moratorium CIGA 2020 procedure: How can the company obtain the CIGA 2020 moratorium?

Answer 20

• Directors must file the relevant documents at court and
• the proposed monitor must confirm that it is likely that the moratorium will result in the rescue of the company as a going concern

Question 21

Moratorium CIGA 2020 - How long does it last and for how long can it be extended (subject to what confirmation)? (2 points)

Answer 21

• Lasts 20 business days
• but it can be extended for a further 20 business days by filing certain docs at court
• Can be extended by the directors for a period of up to 1 year if the creditors who are not going to get paid because of the payment holiday consent to this

Question 22

What is CIGA 2020 Restructuring Plan

Answer 22

Eligible companies can enter into a court-supervised arrangement/compromise between the company and its secured and unsecured creditors and shareholders

Question 23

How does CIGA 2020 restructuring plan work?

4 stages

Answer 23

• The directors (or SH/creditors can) prepare a restructuring plan and apply to court for approval to call
  meetings of the company’s creditors and shareholders.
  *Implementation of plan involves 2 court hearings *:
• In first court hearing - creditors can make representations
• Between hearings - the creditor and shareholder meetings will be held where they vote to approve plan
• In second court hearing - court will decide whether to sanction the proposed plan

directors prep plan in practice bc they have the detailed info needed

Question 24

CIGA 2020 Restructuring - how is the plan approved at the meeting of shareholders and creditors?

Answer 24

• Creditors and shareholders are divided into classes
• each class will be deemed to have approved the plan if 75% by value of that class vote in favour.

Contrast Sch.of.arragement = require overall majority in no. to approve)

Question 25

CIGA 2020 restructuring plan - 2 key advantages

Answer 25

• Flexibility of “cross-class cram down provision” = enables a dissenting class of creditors to be crammed down so that they cannot block otherwise viable plans
• **It must be sanctioned by the court **= court will only sanction it where it is satisfied that no member of the dissenting classes would be any worse off under the plan than they would be if the court were not to sanaction the plan

Question 26

What is a “Scheme of Arrangement”

Answer 26

• It is a formal, court-supervised statutory procedure under Part 26 of the Companies Act 2006 involving a compromise with creditors
• Similar to a CVA and CIGA restructuring plan
• They tend to be used to restructure large companies with complex capital structures

Question 27

What are secured creditor’s options if a company is insolvent?

Answer 27

• Appoint an LPA reciever
• Appoint an administrator out of court
• For security created before 15th September 2003 - appoint an administrative reciever

Question 28

Who can you appoint LPA reciever and what is the aim and where does power to appoint come from? If the sum realised is more/ not enough?

Answer 28

• A reciever appointed by a fixed charge holder - Power to appoint is usually in the charge document
• Aim is to sell the charged property so that the creditor can be repaid
• If the sum realised is not enough to pay what creditor is owed then the creditor will become an unsecured creditor for the remainder
• If sale realises more than whats owed = surplus returned to the company + available for unsecured creditors
• LPA recievers don’t have to be licensed insolvency practioners

Question 29

When are administrative recievers used?

Answer 29

• Appointed by floating charge holders when the floating charge is over the company’s whole undertaking
• Only used for floating charges created before 15th September 2003 (subject to some exceptions)

charges created on/after 15th Sept 2003 use administration route instead

Question 30

Role of the administrative reciever?

Answer 30

• The administrative receiver runs the company and sells the charged assets.
• They will use the
  proceeds to pay their own costs and pay the charge holder what they are owed under
  the loan secured by the charge.
• In theory, the administrative receiver then resigns, and the
  directors take over the management of the company once more (but usually company too broke to continue at this point)

Question 31

LIquidators powers? (6 main powers)

Answer 31

1) Carrying on the company’s business
2) Commencing and defending litigation on the company’s behalf
3) Investigating the company’s past transactions
4) Investigating the directors’ conduct
5) Collecting and distributing the company’s assets
6) Doing all that is necessary to facilitate the winding up of the company

Question 32

What does the liquidation process involve? (4 stages)

Answer 32

1. The liquidator will sell the company’s assets and distribute the money to the company’s creditors
2. Prepare final accounts
3. After this liquidator will apply to be released
4. Registrar of Companies dissolves the company 3 months later

Question 33

Order of distribution of company’s assets during liquidation [7 points]

Answer 33

1. Fixed charge holders
2. Expenses of winding up (liquidators fees and their professional advisors)
3. Preferential debts (rank and abate equally)
4. Set aside/Ringfence for unsecured creditors
5. Monies secured by floating charges (by order of priority)
6. Unsecured creditors (rank and abate equally)
7. Surplus distributed amongst shareholders