8. Insolvency Flashcards
(117 cards)
1
Q
When is a company deemed unable to pay their debts s123(1)(a) IA
A
Creditor is owed more than £750, has served a formal written demand, waited 3 weeks and has not been paid or come to an arrangement with the co
2
Q
When is a co deemed unable to pay their debts s123(1)(b)
A
Creditor has obtained judgment against the company and attempted to execute the judgment and the debt is still unsatisfied in full/in part
3
Q
When is a co deemed unable to pay their debts s123(1)(e)
A
It can be proved to the court that the co cannot pay its debts as they fall due (cash flow test)
4
Q
When is a co deemed unable to pay their debts s123(2)
A
It can be proved to the court that the company’s assets are less than its liabilities (balance sheet test)
5
Q
What are the insolvent company’s options?
A
- Take steps to put the company into liquidation
- Talk to creditors, see if they will wait for payment or come to a compromise
- Enter a formal arrangement with creditors (CVA) to pay creditors less than the full amount due, or wait longer to be paid
- Appoint administrator to take over running the co and return it to solvent trading or sell it as a going concern
- Utilise moratorium procedure (CIGA) as a breathing space
- Enter into restructuring plan created by CIGA
- Enter into a scheme of arrangement CA 2006
6
Q
What are the unsecured creditor’s options?
A
- statutory demand for debt in excess of £750, wait 3 weeks and petition for liquidation at court
- sue co, obtain judgment and attempt to execute, presenting petition for liquidation
- suggest CVA
- apply to court to put co into administration
7
Q
Secured creditor options
A
- Appoint administrator out of court
- Appoint LPA receiver
-Appoint administrative receiver
8
Q
What should the secured creditor ensure
A
not to take steps that would lead to losing security
9
Q
What is liquidation
A
When a co ceases to exist
10
Q
Steps for liquidation
A
- Liquidation proceedings are commenced
- Liquidator is appointed
- Liquidator collect’s co assets and may review past transactions
- Liquidator distributes assets in statutory order to creditors
- Co is dissolved
11
Q
What are the 3 different types of liquidation
A
- Compulsory liquidation (commenced against insolvent co by a third party)
- Creditors voluntary liquidation (commenced by co in response to creditor pressure)
- Members voluntary liquidation (commenced by solvent co wishing to cease trading)
12
Q
Compulsory liquidation
A
hostile process initiated against a co’s wishes
13
Q
Fees associated with compulsory liquidation
A
substantial deposit needed to cover costs of official receiver and court fee
14
Q
When might a court dismiss a petition for liquidation
A
if debtor co shows it may recover its financial position/if debt is disputed
15
Q
What happens after a winding up petition is accepted, and the winding-up order is made?
A
Official receiver becomes liquidator.
OR decides whether it is appropriate for creditors to appoint an insolvency practitioner as liquidator in their place
16
Q
Creditor’s voluntary liquidation
A
CVL initiated by co directors and taken forward by creditors of the co
17
Q
When does a CVL arise
A
in response to creditor pressure
18
Q
To whom is a MVL available to
A
Solven co
Directors must swear statutory declaration that the co is solvent & take appropriate advice
19
Q
Why would a solvent co want to wind u p
A
co is small, shareholder- directors all want to retire
group of co’s has become unwieldy and some cos within it are no longer operational
20
Q
What are the powers and duties of a liquidator sch 4 IA 1986
A
- to collect in the assets and distribute them in accordance with statutory order
- to sell assets
- to use the company bank account
- to appoint agents
- to litigate on the companies behalf and defend litigation on the companies behalf
- to carry on the co business
- to do all things necessary to facilitate winding up
- to investigate past transactions of the co and conduct of directors
21
Q
What happens if directors have transferred property after winding up begun, or in anticipation of it up to one year beforehand? s206, IA
A
director may be liable for the offence of fraud
22
Q
What happens if a liquidator discovers during the course of MVL that a co is insolvent s95 IA
A
liquidator must convert liquidation into CVL
23
Q
What are the effects of liquidation
A
- directors powers cease, liquidator takes over running of the co
- directors appointments are terminated Measures brothers v Measures
24
Q
When does liquidation conclude?
A
- liquidator sells available assets
- distribution of money to creditors
- liquidator is released
- accounts forwarded to CH and courts
- 3 months later, co dissolved by Registrar
25
Duty of administrators/liquidators
To maximise the funds available to creditors
26
What can a liquidator do to preserve co assets?
They can investigate/set aside
- Transactions at an undervalue
- Preferences
- Extortionate credit transactions
- Floating charges
- Transactions defrauding creditors
27
What can liquidators/administrators investigate
- fraudulent trading
- wrongful trading
28
What is a transaction at undervalue s238(4)
either
- a gift; or
- a transaction where the co received consideration significantly lower in value than it provided. For example, a co sells a large amount of its office furniture to the wife of a director for £500. She immediately sells it to a hotel chain for £5000
29
What is an undervalue
Where co does not receive what it should for its assets for the benefit of a director to the detriment of creditors
30
How far back can the liquidator go?
Transaction must occur within the relevant time
31
Relevant time s240(1)(a)
2 years ending with the onset of insolvency
32
Does the co have to have been insolvent at the time of undervalue
yes 240(2)
33
Defence for transactions at an undervalue
if the transaction was entered into in good faith, for the purposes of carrying on the business, and when made there were reasonable grounds for believing it would benefit the co
34
Evidence director can produce to prove they were acting in the best interests of the co
board minutes, meetings with banks, legal advisers, accountants
35
what order can be made where a transaction was made at an undervalue
transaction is voidable at the discretion of the court and number of orders may be made by the court s241
36
court orders for undervalues
returning co property (s241(1)(a), returning sales of proceeds to the co (s241(b)) and discharge of security s241(1)(c)
37
What is a preference
Where one person is preferred by the company, in that it has been paid ahead of other creditors/put in a better position on insolvent liquidation
38
Preferred persons
- must be co creditor, surety or guarantor
- person preferred must have been put in a better position on liquidation/administration than they would have been in had the event not occurred
- the co must have desired to prefer the creditor s239(5)
39
Examples of a preference
Making an unsecured creditor secured
paying one unsecured creditor before other unsecured creditors
allowing supplier of goods to change terms and conditions where there were none previously
allows creditor to enter judgment when co has a good claim
40
Key characteristic of a preference
The co must have desire to prefer the creditor ss239(5) and (6)
41
Time periods for preferences
2 years for connected persons ending with the onsent of insolvency s240(1)
6 months for unconnected persons ending with onset of insolvency
42
What orders can be made for a preference?
Same as that for transactions at an undervalue
43
Does co have to have been insolvent at the time the preference was given
Yes- 240(2)
44
When can a liquidator/administrator apply to reopen credit transactions made within 3 years from when co went into liquidation
where credit transaction was extortionate
45
s244(3) definition of extortionate
payments must be grossly exorbitant or contravene ordinary principles of fair dealing
46
What types of floating charges can be voided
voidable as preference and/or
invalid and automatically void s245
47
Invalid floating charge
no application needed- office holder writes to charge holder stating they believe the charge to be invalid
48
How far back can liquidator go for floating charges
if given to a person connected with the co, time period is two years ending with onset of insolvency s245(5)
unconnected is one year s249
49
Does co have to be insolvent at t he time floating charge was given
yes s245(4)
50
what does s423 IA seek to do
Set aside transactions defrauding creditors
51
What is a transaction defrauding creditors
If the transaction is at an undervalue and the purpose of the transaction was to
- put assets beyond the reach of someone in relation to any claim they might make
- prejudice the interests of someone in relation to any claim they might make s423(3)
52
Is there a time limit for transactions defrauding creditors
no
53
Proving your debt
A standard form requiring creditors to detail their debt
54
What is the purpose of a proof of debt
liquidator approves/rejects proof and ranks it in liquidation
55
Small debts definition
Sums not exceeding 1000
56
What happens after assets have been collected in/realised?
Liquidator must pay assets in the order prescribed in ss175
57
Creditor distribution order
- Expenses of the winding up (liquidators and their prof advisers)
- Preferential debts
- Monies secured by floating charges by priority order
- Unsecured creditors (rank and abate equally)
- Any surplus to shareholders
58
WHat about fixed charges
Will have been paid out already
59
What are preferential debts ss175
Wages and salary of employees for work done in the 4 months before the insolvency date
Holiday pay to employees whose contracts were terminated, whether that was before or after insolvency date
HMRC
60
What is ring fencing? s176 A
before distributing assets to floating charge holders, sum must be set aside for unsecured creditors
61
Can secured creditors access ring fenced fund for any unsecured part of their debt
no re airbase
62
What does rank and abate equally mean
All creditors in a particular category shares the money available
63
Alternatives to liquidation
- Administration Sch B1
- CVA
- Moratorium
- Restructuring plan procedure
- Scheme of arrangement
- informal arrangement with creditor
64
Administration
Procedure allowing independent insolvency practitioner to run, reorganise and sell as a going concern
65
Advantage of administration
mortatorium (freeze on creditor actions)
66
What does the administrator have to perform their duties with the object of Sch B1 para 3(1)
Rescuing the co as a going concern
achieving a better result for the co's creditors as a whole than would be likely if the co were wound up
realising property to make a distribution to one or more secured/preferential creditors
67
In which order must administrator work through their duties
from a and move down where the alternative is not practicable
68
To whom must an administrator perform their duties for
The co's creditors as a whole
69
What are the 2 routes into administration
1) court order by open hearing, upon formal application to court Sch B1, para 10
2) filing at court of prescribed series of docs by
the co
its directors or
the holder of a qualifying floating charge holder
70
What is a qualifying floating charge
Where the charge document purports to empower the holder of the floating charge to appoint an administrator of the co
Purports to empower the holder of the floating charge to make an appointment which would be the appointment of an administrative receiver within the meaning given by s29(2) IA
71
What happens following the route to administration Sch B1, para 42, 43
Statutory moratorim throughout administration
72
Purpose of moratorium
Restricts third parties to enforce rights without administrators consent & prevents commencement of other insolvency procedures
73
When will a court make an administration order
- where the court is satisfied that the co is/is likely to become unable to pay its debts
-AO liekly to achieve the purpose of administration (better result for creditors than liquidation)
74
After making administration application, who must the applicant notify
any person who has appointed (or is entitled to appoint) an administrative receiver of the co
any qualifying floating charge holder who may be entitled to appoint administrator
such other persons as may be prescribed by IR 2016
75
Difference between a receiver and administrator
ADministrator has a duty to all creditors v receiver who has a duty only to their appointer
76
What if another QFCH exists whose charge would have priority
Lender cannot appoint administrator until it has given 2 business days written notice of intention to appoint
77
What must be included in floating charge
Enforceable
loan agreement provides for a trigger event entitling QFCH to enforce the charge
78
Can QFCH appoint administrator out of court
No- Sch b1 para 14 only if
79
What must be filed at court by the lender
notice of appointment including statutory declaration that
- lender is holder of QFC in respect of co property
- floating charge has become enforceable
- appointment in accordance iwth sch b1
80
When does administration begin
When docs are filed at court notifying appointment
81
What happens if appointment is made by the co.directors
Moratorium effected immediately where notice of intention is filed - first step is to call GM to seek member approval
82
First stage of appointment where it is made by co directors
notice of intention served on
court
QFCH
any lender entitled to appoint administrative receiver sch b1 para 26
83
what must the directors file with notice of intention
statutory declaration that
- co is unable to pay its debts
- co is not in liquidation
- restirctions in para 23-25 do not apply (no administration within prev 12 months)
84
What happens after administration starts
main moratorium effected and protects co
administration puts forward their proposals schb1 para 53(1)(B)
85
How are proposals approved
if majority of creditors approve in favour of propsal
86
effects of administrative order
- co managed by administrator
- directors powers cease
- administrator controls co assets
- adminsitrator carries out the proposals that are approved by creditors
87
statutory powers of administrator sch b1
- to remove and appoint directors 61
- call a meeting of creditors and members para 62
- apply to court for directons 63
- pay money to creditor 65
pay money to any party likely to aid with administration
- deal with property subject to floating charge
- deal with property subject to fixed charge
- deal with property subject to hire purchase agreement
- investigate past transactions and apply to have them set aside
88
How can administration be ended
- automatically after 1 year from date administration took effect 76
- on application by administrator to court 79
-by termination where object has been achieved 80
- court ending administration out of application from creditor
- court converting administration to liquidation
- administrator converting administration into CVL
- administrator dissolving co
- administrator resigns, is removed, ceases to be qualify, or is replaced
89
What is pre pack administration
co placed in administration, almost immediately assets and business are sold
90
CVA
company voluntary arrangement
91
What is a CVA
a written agreement dealing with financial affairs of the co and binding all relevant parties provided statutory procedures are followed
92
what does cva consist of
agreeing with creditors that they will
wait longer to be paid
accept part payment
combo of two
93
To whom is cva available to
Directors, liquidators, administratos
94
WHen is a cva most likely to be used
where co business is sound but they have a cash flow problem
95
why would creditor approve cva
likely to be paid more than they would should co liquidate
96
CVA process
- no moratorium
- proposals must be approved by majority of 75% creditors
- second test that it is approved by 50% non connected creditors
- all unsecured creditors get the opportunity to vote on whether to approve, reject, or modify CVA proposal
97
What is a CIGA moratorium
Co is protected from various creditor actions in respect of pre moratorium debts but must continue to pay moratorium debts
98
What happens during CIGA moratorium
-creditors cannot petition for winding up
- no winding up or administration proceedings can progress
- no right of forfeiture can be exercised
- no enforcement of security over co possessions
- no repossessions of goods
- no legal process can be issued or continued against co
99
fundamental requirement for CIGA
co must be, or likely to become unable to apy debts
100
How do directors obtain moratorium
filing relevant docs at court
101
Excluded pre moratorium debts
monitor renumeration
goods or services supplied during
rent during
wages or salary under employment contract
redundancy payemnts
debys or liabilityies arising under contract
102
What happesn if monitor deems co unable to pay pre moratorium debts
Terminate moratorium if they consider co is unable to pay
103
Initial period of moratorium
20 business days beginning with the business day after moratorium comes into force
104
Can moratorium be extended
Yes, for 20 business days without creditor consent by filing docs at court
105
What if creditors consent to moratorium
Extention by directors fo rup to one year
106
When might a monitor end a moratoirum
- they think moratorium no longer likely to result in rescue of co
- objective deemed to have been achieved
- unable to carry out functions as directors have not provided them with relevant info
- co unable to pay moratorium debts which co does not have payment holiday for
107
What is a restructuring plan
An arrangement between co and creditors.
108
Restructuring plan process
Preparation of restructuring plan
application for court approval
109
What happens when implementing restrucuring plan
2 court hearings
1. convening (whether to convene creditor and member meetings to consider
whether co meets eligibility criteria
creditor classes have been formulated correctly
any creditors wo genuine economic interest in thee outcome and ought to be excluded from voting
any jurisdicitional issues
110
Scheme of arrangemetn ss895-901
Not an insolvency procedure- can be taken at any stage of co lifetime
Restructures large co with complex capital structures where creditors are given shares in exchange for debts
111
Receivership
Only for secured creditors
Receiver takes possession of charged property and deals with it for charge holders benefit
112
administrative receives
s29 - may be appointed only for floating charges created before that date
113
events triggering appointment of administrative receiver
- failure to meet demand to pay capital/interest
- presentation of winding up petition
- presentation of petition for administration or cva
- levying of distress against co assets
- failure to comply with loan doc restrictions
- co ceasing to trade
-assets being in jeopardy
- inability of co to pay debts
114
what is a phoneix co s216
prohibits reuse of co name where they have gone into insolvent liquidation
115
Why are phoenix co prohibited
to prevent on co put into liquidation and transferring assets to another in a new name, the debts of the old co having been left behind
116
Consequences of setting up phoenix co
directors may be personally liable for debts of new co s216, unless they obtain consent of the court to be new directors
117
exception to phoenix co rule
where succeeding co acquires the whole/substantially the whole of the insolvent co's business under arrangements made by insolvency practitioner
permission to directors to reuse name by the court. application must be made no later than 7 days from the date co went into liquidation
