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Business Law & Practice > 7. Insolvency in Companies > Flashcards

7. Insolvency in Companies Flashcards

1
Q

When is a company deemed insolvent?

A
  1. Debt exceeding £750 and a written demand in the proper form has been served, and debt remains unpaid for 3 weeks
  2. Creditor has obtained judgement against the company and has tried to enforce the judgement
  3. Cash flow test
  4. Balance sheet test

ALSO can just prove to court’s satisfaction that company is unable to pay their debts

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2
Q

In proving a company is unable to pay it’s debts, is it required to serve a statutory demand?

A

No, although it is recommended

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3
Q

What is the balance sheet test?

A

Where the company has liabilities which exceed its assets then it fails the balance sheet test - i.e. Net Assets

Net Assets = Fixed Assets PLUS Current Assets LESS Long Term Liabilities LESS Current Liabilities

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4
Q

Why is the cash flow test hard to prove from the balance sheet?

A

A balance sheet is only a snapshot of accounts therefore not possible to fully understand company’s accounts

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5
Q

What are the three types of liquidation?

A
  1. Compulsory liquidation
  2. Creditors’ voluntary liquidation (CVL)
  3. Members’ voluntary liquidation (MVL)
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6
Q

When is an MVL available and when are they commonly used?

A

Only if company is solvent

Commonly used if companies are dormant

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7
Q

When is CVL used?

A

When a company becomes insolvent and is unable to sustain its operations due to financial obligations

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8
Q

What is the role of directors in a CVL?

A

Director remains in office, but liquidator takes over the running of the company from the director

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9
Q

What key potential claims can a liquidator / administrator bring in order to increase assets available to creditors?

A

o Avoidance of certain floating charges
o Preferences
o Transactions at an undervalue
o Transactions defrauding creditors
o Extortionate credit transactions

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10
Q

When is a floating charge invalid?

A

When a charge is granted without the company receiving fresh consideration in exchange for granting security, within the relevant time

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11
Q

What is the relevant time period for an invalid floating charge granted to a non-connected person?

A

12 months prior to onset of insolvency

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12
Q

What else is required in order to make a floating charge invalid, if granted without fresh security to a person non-connected to the company, within the relevant time?

A

Company must have been insolvent at the time the floating charge was given or insolvent as a result

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13
Q

What is the relevant time period for an invalid floating charge granted to a person connected to the company?

A

2 years prior to onset of insolvency

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14
Q

Is it necessary for a company to have been insolvent at the time of / insolvent because of a floating charge granted to a person connected to the company without fresh consideration, within the relevant time period?

A

No

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15
Q

What constitutes a person “connected” to the company?

A

Director / shadow director

Someone who is a close relative / business associate of a director / shadow director

Associate of the company

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16
Q

In a CVL, when is the formal onset of insolvency?

A

Date company formally enters into liquidation

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17
Q

In compulsory liquidation, when is the formal onset of insolvency?

A

When company files notice of intention to appoint an administrator

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18
Q

What is a preference?

A

Where the company puts the other person in a better position in the event of liquidation / administration

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19
Q

What is the relevant time, if a preference is given to a person who is connected with the company?

A

2 years ending with onset of insolvency

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20
Q

What is the relevant time, if a preference is given to a person who is not connected with the company?

A

6 months ending with onset of insolvency

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21
Q

Must the company have been insolvent as the time of / as a result of the preference?

A

Yes

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22
Q

What is the rule highlighted in MC Bacon regarding preferences?

A

Must desire to prefer the other party - i.e. not give the preference in order to survive rather than due to a desire to give that creditor preference

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23
Q

What is the rebuttable presumption if a company prefers a connected person?

A

Presumption that they did have the desire to prefer that person - i.e. company intended to put the connected person in a better position on insolvency than otherwise would have been the case

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24
Q

What is a transaction at an undervalue?

A

When a company makes a gift to the other person, or enters into a transaction and receives consideration which is significantly lower in value than the consideration provided by the company for the asset

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25
Q

What is the relevant time regarding transactions at an undervalue?

A

2 years ending with onset of insolvency

For both connected and non-connected persons

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26
Q

What is the rebuttable presumption if a company makes a transaction at an undervalue with a connected person?

A

Presumption of the company’s insolvency / inability to pay its debts at the time of the transaction

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27
Q

What defence is available for transactions at an undervalue?

A

That the transaction was entered into in good faith, for the purpose of carrying on the business

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28
Q

What is the relevant time in which an extortionate credit transaction can be challenged?

A

Transaction made in the 3 years ending with insolvency

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29
Q

Is there a time limit in which transactions defrauding creditors must have been made in order for a liquidator / administrator to bring a claim against it?

A

No

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30
Q

What is the order for payment of debts during liquidation?

A
  1. Secured debts
  2. Liquidator’s fees
  3. Preferential debts
  4. Money subject to floating charges (in order of priority)
  5. Unsecured creditors
  6. Remainder to shareholders
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31
Q

What are preferential debts?

A

Employees
HMRC, only in relation to PAYE and VAT

32
Q

How much of their unpaid salary are employees entitled to in winding up?

A

£800 maximum

If salary is more / are owed more, then remainder ranks as unsecured creditor

33
Q

What are alternatives to liquidation?

A

Administration

CVA

Schemes of arrangement

Restructuring plans

Free-standing moratorium

Informal agreements with creditors

34
Q

What is a statutory moratorium which is in place during administration?

A

Means that it is not possible for anyone to commence or continue with legal action against the company, enforce a judgement, or issue a winding up petition without the administrator’s consent

35
Q

What are the two ways in which administration can be commenced?

A

Court route

Out of court route

36
Q

What is the “three tier” purpose for administration?

A

Order of objectives for administrator:

  1. Primary objective to rescue company as a going concern
  2. If not possible, must try achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up
  3. If not possible, must sell property to pay one or more secured or preferential creditors
37
Q

When can the court make an administration order?

A

If it is satisfied that the company is likely to become unable to pay its debts and the order is likely to achieve the purpose of administration

38
Q

Who must the applicant notify when applying to the court for an administration order?

A

Any person who has appointed or is entitled to appoint an administrative receiver of the company, and any qualifying floating charge holder who is entitled to appoint an administrator

39
Q

How can a Director commence the out of court route for administration?

A

Serving a notice of intention of administration on the court, and filing at court a statutory declaration that the company is unable to pay its debts and is not in liquidation

Also serving notice on any holder of a qualifying floating charge and any lender who is entitled to appoint an administrative receiver

40
Q

What type of creditors can appoint an administrator using the out of court route? What triggers this ability?

A

The holder of a qualifying floating charge in respect of a company’s property

Event of default by the company, e.g. insolvency

41
Q

What constitutes a “qualifying” floating charge with regards to the out of court route?

A
  1. Created by an instrument that expressly states that para 14 applies and which purports to empower the holder of the floating charge to appoint an administrator
  2. Relates to the whole or substantially the whole of the company’s property
42
Q

Who serves notice of intention of administration for the out of court route?

A

The company or its directors

43
Q

What must the company or its directors do when appointing an administrator out of court?

A

Serve notice of intention of administration on the court; any person entitled to appoint an administrative receiver of the company; any qualifying floating charge holder who is entitled to appoint an administrator

44
Q

When does administration automatically end?

A

1 year from date it took effect

45
Q

What is a company voluntary arrangement?

A

A written agreement with creditors which binds all of the parties to it, as long as the statutory procedures are followed

46
Q

When would a CVA be used?

A

When the company’s business is generally sound, but it has a temporary cash flow problem - aim is to prevent liquidation by giving the company time to continue to trade

47
Q

What percentages must approve proposals put forward for payment of creditors in a CVA?

A

75% of more in value of the company’s creditors, AND

50% or more of non-connected creditors

48
Q

Under a CVA, do all companies have the benefit of a moratorium? How long is it?

A

No, only small companies (none for larger)

28 days only

49
Q

What types of companies are specifically excluded from applying for statutory moratoriums?

A

Financial services firms (e.g. banks, insurance companies)

Companies party to capital gains over £10 million

50
Q

What is a restructuring plan under CIGA 2020?

A

A court-supervised arrangement or compromise between the company and all of its secured and unsecured creditors and shareholders

51
Q

When is a moratorium not possible under CIGA 2020?

A

If the company has already entered into a moratorium during the previous 12 months

52
Q

How long does a moratorium last when granted under the CIGA?

A

20 business days, beginning with business day after moratorium comes into force

53
Q

What are the two types of receivers to be considered in insolvency?

A

LPA receivers

Administrative receivers

54
Q

What is an LPA receiver?

A

A receiver appointed by a fixed charge holder

55
Q

What is an administrative receiver?

A

A receiver appointed by floating chare holders, when the floating charge is over the company’s whole undertaking

56
Q

When is a person deemed insolvent?

A
  1. Debt is payable IMMEDIATELY but debtor does not currently have enough money to pay

OR

  1. Debt is payable in the future and there is no reasonable prospect that the individual will pay
57
Q

What 3 ways can a creditor prove personal insolvency?

A
  1. By serving a statutory demand for liquidated sum of £5,000 or more and waiting 3 weeks to see if they pay, or apply to court to set aside demand
  2. Serving statutory demand for future liability to pay £5,000 and waiting 3 weeks to see whether debtor either shows reasonable prospect of being able to pay the sum, or applies to court
  3. Obtaining a court judgment for a debt of £5,000 or more and attempting execution of the judgment without success
58
Q

How long does bankruptcy last and what happens at the end?

A

Discharged after 1 year and bankrupt is free from all debts

59
Q

What happens once a bankruptcy order has been made?

A

The Official Receiver acts as the trustee in bankruptcy and takes control of the bankrupt’s assets

60
Q

Is the bankrupt entitled to still receive their salary?

A

Yes but if it is more than what is sufficient to meet reasonable needs of bankrupt and their family then trustee can ask them to enter into an income payments agreement (IPA), normally lasting max 3 years

61
Q

What happens if the bankrupt is a homeowner?

A

Their interest in the home passes to the trustee

Court order must be obtained for sale / eviction if someone else has an interest in the house

Ownership passes back to bankrupt after 3 years

62
Q

What powers do trustees in bankruptcy have to challenge past transactions of the bankrupt?

A

Disclaim onerous property

Apply to set aside transactions at an undervalue (do not have to show insolvency at the time AND within FIVE years prior to presentation of bankruptcy petition)

Apply to set aside preferences (must have been insolvent at time of preference or become insolvent as a result)

Apply to set aside transaction defrauding creditors

Avoid extortionate credit transactions (applicable to credit 3 years prior to bankruptcy order)

63
Q

What order must assets be distributed in personal bankruptcy?

A
  1. Cost of the bankruptcy
  2. Preferential debts (as in corporate)
  3. Ordinary unsecured creditors
  4. Postponed creditors (bankrupt’s spouse / civil partner)
64
Q

What are the business restrictions on a bankrupt person?

A

Criminal offence for a bankrupt to obtain credit of more than £500 without disclosing their bankruptcy

Cannot act as a director of a company

Cannot be involved in management / promotion / formation of a company (unless court grant permission)

Cannot trade under a different name than the one in which the bankruptcy order was made

Cannot continue in partnership unless the partnership agreement varies the default position in the Partnership Act 1890

65
Q

What is a bankruptcy restriction order?

A

Order made by the court, designed to protect the public from those bankrupts who are considered to be ‘culpable’ and to have caused their own bankruptcy by being dishonest, negligent or reckless

Last between 2 and 15 years

66
Q

What is a bankruptcy restriction undertaking?

A

Agreement made outside the court, designed to protect the public from those bankrupts who are considered to be ‘culpable’ and to have caused their own bankruptcy by being dishonest, negligent or reckless

Last between 2 and 15 years

67
Q

What is an individual voluntary agreement (asides from being an alternative to bankruptcy)?

A

A binding agreement between UNSECURED creditors setting out how much each will receive from bankrupt in settlement of their debts

68
Q

What is a “supervisor” in an IVA?

A

An insolvency practitioner who will effectively formulate the proposals and supervise their implementation if the creditors approve the process (different to a trustee in bankruptcy and without powers to apply to have a transaction at an undervalue set aside)

69
Q

Under an IVA, how long is a moratorium usually in force?

A

14 days

70
Q

What percentages of creditors need to approve an IVA?

A

75% or more of the UNSECURED creditors in value - i.e. based on total VALUE not number of creditors

Of which at least 50% in value are not associates of the debtor

71
Q

Are secured creditors bound by an IVA?

A

No, unless they specifically agree to it

72
Q

If an IVA is entered into on false or misleading information from the debtor (e.g. they have entered into a transaction at an undervalue previously), what steps should happen next?

A

Any of the parties to the IVA can petition for debtor’s bankruptcy

73
Q

When is a debt relief order NOT available for personal insolvency?

A

If debtor has
1. Total unsecured liabilities exceeding £20,000

  1. Total gross assets exceeding £1,000
  2. A car worth £1,000 or more (unless adapted for debtor’s disability)
  3. Disposable income in excess of £50 per month after deducting normal household expenditure
  4. Been subject to a DRO in the preceding 6 years, or
  5. Is subject to another formal insolvency procedure
74
Q

What is a standard debt respite scheme (“breathing space”)?

A

Scheme available to any client, giving them legal protection from creditor action for up to 60 days

75
Q
A

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