7. Insolvency

Question 1

What is insolvency?

Answer 1

The inability of a company or an individual to pay their debts.

Question 2

Under what circumstances is a company deemed insolvent based on the statutory demand?

Answer 2

A company is deemed insolvent when a creditor has served a statutory demand for an outstanding sum of £750 or more, and the company does not pay or come to an arrangement with the creditor within 21 days of service of the statutory demand.

Question 3

In what situation is a company considered insolvent after a creditor obtains judgment against it?

Answer 3

A company is considered insolvent when a creditor has obtained judgment against the company, and despite efforts to enforce that judgment, the debt has not been paid in full or at all.

Question 4

What are the criteria for insolvency based on the ‘cash flow test’ and ‘balance sheet test’?

Answer 4

A company is deemed unable to pay its debts and therefore insolvent when:
* It can be proved to the court that the company is unable to pay its debts as they fall due (the ‘cash flow test’).
* It can be proved to the court that the company’s liabilities exceed its assets (the ‘balance sheet test’).

Question 5

What are the two main reason for needing to know whether a company is insolvent?

Answer 5

1. insolvency is a prerequisite to a creditor commencing insolvency proceedings
2. certain remedies against directors of the company, which could result in a director being held personally liable to the company, depend upon whether the company is insolvent or was
   insolvent at the time of the director’s actions.

Question 6

What are the three possible outcomes for an insolvent company?

Answer 6

1. Liquidation
2. Administration
3. Company Voluntary Arrangement (CVA)

Question 7

What is liquidation also known as?

Answer 7

winding up

Question 8

What is the process of liquidation?

Answer 8

• company stops trading
• assets are sold
• company ceases to exist

Question 9

When liquidation proceedings begin, who is appointed?

Answer 9

a liquidator

Question 10

What is the effect of appointing a liquidator?

Answer 10

the directors’ powers cease, and the liquidator runs the company.

Question 11

What can a liquidator review to see if they can be challenged? And what is the purpose of this?

Answer 11

liquidators can review a company’s past transactions to see if they can be challenged

the purpose of doing this is to obtain more money than can be paid to the company’s creditors.

Question 12

After reviewing past transactions, what will a liquidator do?

Answer 12

distribute the assets of the company to the creditors in an order set down by statute, and the company will be dissolved at Companies House within a few months.

Question 13

What are the three types of liquidation?

Answer 13

1. Compulsory liquidation
2. Creditors’ voluntary liquidation (CVL)
3. Members’ voluntary liquidation (MVL)

Question 14

What is a compulsory liquidation?

Answer 14

Where a third party (usually a creditor) commences insolvency proceedings against an insolvent company

Question 15

What is a creditors’ voluntary liquidation (CVL)?

Answer 15

commenced by the company itself when it is insolvent, in response to pressure from creditors

Question 16

What is a members’ voluntary liquidation (MVL)?

Answer 16

commenced by a solvent company, because it wishes to cease trading or because it is dormant and it wishes to bring its affairs to an end in an orderly manner.

Question 17

Who is the third party in a compulsory liquidation known as?

Answer 17

the petitioner

Question 18

What is the most common ground under s 122 IA 1986 which the petitioner will seek compulsory liquidation?

Answer 18

on the basis that the company is unable to pay its debts

Question 19

What is the first stage in a company’s liquidation?

Answer 19

a winding up petition

Question 20

When a company’s assets are sold during a compulsory liquidation, what are the proceeds used for?

Answer 20

to pay creditors

Question 21

Why do creditors issue winding up petitions?

Answer 21

To get paid from proceeds of sale

Question 22

What does a creditor do for compulsory liquidation to occur?

Answer 22

a creditor will serve a statutory demand that if remains unsatisfied for 21 days will prove that the company is unable to pay its debts.

Question 23

Who is a winding up order made by once a credit has proved the company is unable to pay its debts?

Answer 23

by the court

Question 24

What may happen if a company indicates it can pay a debt within a reasonable period after a court hearing on insolvency?

Answer 24

the court may adjourn the hearing to a later date.

Question 25

Who automatically becomes the liquidator if the court orders the winding up of a company?

Answer 25

the Official Receiver (OR) will automatically become the company’s liquidator.

Question 26

What is the role of the Official Receiver (OR) in the context of company liquidation?

Answer 26

The OR is a civil servant and court official employed by the Insolvency Service. In the event of a company winding up, the OR becomes the company’s liquidator.

Question 27

Can the Official Receiver appoint a private insolvency practitioner in certain cases?

Answer 27

Yes, the Official Receiver can appoint a private insolvency practitioner, depending on the nature of the case and the creditors’ wishes, as long as the company has sufficient assets to cover the insolvency practitioner’s fees.

Question 28

Why do unpaid creditors typically face challenges in obtaining detailed financial information about a company?

Answer 28

They often can only access the contents of the company’s last set of filed final accounts, which may be a year old.

Question 29

What demonstration of insolvency does an unsatisfied judgment against a company provide?

Answer 29

An unsatisfied judgment against a company demonstrates its insolvency, as the inability to pay debts as and when they fall due is a critical factor in determining insolvency

Question 30

How do creditors commonly establish a company’s insolvency, given the limited financial information available to them?

Answer 30

By issuing a statutory demand.

Question 31

After issuing a statutory demand, if its not paid after three weeks what option do creditors have to establish a company’s insolvency?

Answer 31

they may issue a winding-up petition or obtain a judgment, highlighting the company’s inability to pay debts as a key indicator of insolvency.

Question 32

In a Creditors’ voluntary liquidation, why are creditors likely to be more affected?

Answer 32

because the directors of the company do not make a statutory declaration of solvency

Question 33

When does a CVL process begin?

Answer 33

when the members of a company pass a special resolution that the company should be wound up.

Question 34

In a CVL how involved are the creditors and what are they entitled to?

Answer 34

involved in the appointment of a liquidator + entitled to receive reports on the progress of the liquidation

Question 35

What is the harm to directors of continuing and then the company goes into liquidation?

Answer 35

risk of facing personal claims for:
* misfeasance; and
* fraudulent; or
* wrongful trading

Question 36

What is an administrator looking to do with antecedent transactions?

Answer 36

review and investigate them

Question 37

What are antecedent transactions?

Answer 37

types of transactions a company has made before they go into liquidation or administration.

Question 38

What is the definition of a preference?

Answer 38

A transaction that puts a creditor, surety, or guarantor in a better position on insolvency and the company desired this.

Question 39

What is the effect of a connected person?

Answer 39

To extend the relevant time period.

Question 40

What is the definition of the avoidance of a transaction at an undervalue?

Answer 40

Company transfers asset for no consideration or significantly less than value of asset.