7.13: Corporate insolvency and liquidation

Question 1

What are the two main legal tests for determining corporate insolvency in the UK?

Answer 1

• Cash-flow test: Company cannot pay debts as they fall due (Insolvency Act s 123(1)(e))
• Balance sheet test: Company’s liabilities exceed its assets (Insolvency Act s 123(2))

Question 2

What are the two types of voluntary liquidation?

Answer 2

• Members’ Voluntary Liquidation (MVL): For solvent companies. Decided by Directors. Debts are paid within 12 months of its winding up commencing.
• Creditors’ Voluntary Liquidation (CVL): For insolvent companies. Decided by creditors.

Question 3

What is compulsory liquidation?

Answer 3

Liquidation initiated by a creditor or another qualifying party through a court order due to the company’s insolvency.

Question 4

What is the primary role of the liquidator in liquidation?

Answer 4

To collect the company’s assets, potentially use clawback provisions, distribute the proceeds to creditors according to a statutory order, and ultimately dissolve the company.

Question 5

Name two main alternatives to liquidation for an insolvent company.

Answer 5

• Administration - decided by 75% of value of debts by creditors
• Company Voluntary Arrangement (CVA)

Question 6

What is the main objective of administration when a company enters this procedure?

Answer 6

The administrator’s primary initial objective is to rescue the company as a going concern.

Question 7

What is a Company Voluntary Arrangement (CVA)?

Answer 7

A legally binding arrangement between a company and its creditors to manage and repay its debts over a set period.

Question 8

What is fixed asset receivership?

Answer 8

An option for secured creditors holding a charge over specific assets to appoint a receiver to realize those assets to recover their debt. They are focused on purely covering their asset/debt and do not care about the health of the company.

Question 9

What is a moratorium in the context of insolvency?

Answer 9

A temporary suspension of legal actions by creditors against a company, providing it with a period of protection from creditors. Introduced during lockdowns to help companies going through insolvency.

Question 10

How can a creditor demonstrate a company’s cash-flow insolvency to the court?

Answer 10

Serving a formal statutory demand for a debt exceeding £750 that remains unpaid for 21 days. Threshold for a statutory demand.

Question 11

Who can typically apply to the court for an administration order?

Answer 11

The company itself, its directors, or its creditors.

Question 12

What is the threshold for a Company Voluntary Arrangement (CVA)?

Answer 12

Unsecured creditors who hold 75% or more in value must agree to the proposals

Question 13

What is a liquidator’s primary goal?

Answer 13

Doing all things necessary to facilitate the winding up of the company.

Question 14

What is the order of priority for paying debts?

Answer 14

Liquidator’s expenses, fixed charge holder, employees’ wages, and then the unsecured suppliers of goods

Question 15

How long does a moratorium last and how can it be extended?

Answer 15

The moratorium will last 20 business days and may be extended for a further 20 business days without the consent of the creditors. Can be extended by a maximum duration of a year with the consent of the creditors.

Question 16

How can creditor show to the court that a company is unable to pay off its debts?

Answer 16

• a statutory demand being a formal demand for payment has been served by a creditor who
  is owed more than £750 and who has not been paid by the company within 21 days (3
  weeks) of that demand being served on the company’s registered office; or
• an unsatisfied judgment being where the creditor has obtained a judgment against the
  company and has attempted to execute that judgment but the debt is still unsatisfied, in full
  or in part

Note that emails would be insufficient

Question 17

What is a ‘winding up order’

Answer 17

Court order to the court to commence compulsory liquidation. Any creditor who is owed over £750 can commence this order

Question 18

What is a member’s voluntary liquidation (MVL)?

Answer 18

Directors must make a declaration declaring solvency. This will commence the liquidation proceedings. Through making this, the directors are saying that they can pay off the debts within 12 months (solvency statement). Company is solvent, so the shareholders can control the choice of liquidator.

Question 19

Solvent means

Answer 19

That a business can meet its long terms debt obligations. To make a members voluntary liquidation, directors are declaring that the business remains solvent and can pay off its debts.

Question 20

Insolvent means

Answer 20

That a business cannot pay off its debts even after its liquidated (dissolved) all of its assets.

Question 21

Creditors voluntary liquidation

Answer 21

• company is insolvent. This means that it cannot pay off its debts.
• Creditors choose the liquidator as the company is insolvent.

Question 22

What is a statutory demand?

Answer 22

formal court demand by a creditor for payment. They have sent a statutory demand to the company’s registered office address for payment of a fee over £750 and still not received it. Has been over 21 days

Question 23

compulsory liquidation

Answer 23

creditor who is owed more than £750 has made a statutory demand and applies to the court for a ‘winding up’ petition and commences court proceedings.

Question 24

Examples of preferential debts

Answer 24

Employee’s wages, holiday pay and pension payments

Question 25

When is moratorium used?

Answer 25

when a company is close to insolvency and a moratorium will rescue it. Effect: suppliers cannot stop trade agreements, creditors cannot claim back debts, monitor (insolvency practitioner) is appointed.

Question 26

what are the time limits on a moratorium

Answer 26

exits for 20 days can be extended for another 20 business days without the consent of the creditors can be extended for a year (but no more) with the consent of the creditors.

Question 27

What is the main advantage with administration?

Answer 27

provides a statutory moratorium so that creditors cannot enforce any claims for debts.

Question 28

MVLs - Member's Voluntary Liquidation are only available for

Answer 28

solvent companies. Directors must make a pledge that they can pay off their debts.