BLP: Corporate Insolvency Flashcards
(42 cards)
What statute defines corporate insolvency and its primary tests?
The Insolvency Act 1986 defines insolvency, with tests including inability to pay debts as they fall due (cash flow test), liabilities exceeding assets (balance sheet test), failure to comply with a statutory demand of at least £750, and failure to satisfy a judgment debt.
What duty do directors have when a company is in financial difficulty?
Directors must continuously monitor the company’s financial performance, recognize signs of difficulty (e.g., unpaid creditors, fully drawn overdraft, liabilities exceeding assets), and consider options to avoid wrongful trading or breach of duties under the Companies Act 2006.
List five possible actions directors may take when a company faces financial distress.
Do nothing (risking personal liability), negotiate informal arrangements (e.g., standstill agreements, granting additional security, cost reductions), seek a pre-insolvency moratorium, propose a company voluntary arrangement (CVA) or restructuring plan, appoint an administrator or place the company into liquidation.
What is an informal standstill agreement in the context of insolvency?
An informal standstill is a contractual arrangement where creditors agree not to enforce their rights for a specified period, giving the company time to negotiate a more permanent arrangement without being subject to enforcement actions.
Name three measures a company might include in an informal arrangement with creditors.
Granting new or additional security, replacing key personnel, selling assets or subsidiaries, reducing costs (e.g., redundancies), or issuing new shares in a debt-for-equity swap.
What is a pre-insolvency moratorium and how is it obtained?
Introduced by CIGA 2020, a pre-insolvency moratorium grants a company breathing space during which creditors cannot enforce security, start legal proceedings, or wind up the company. It is obtained by filing statements at court, including a director’s insolvency likelihood statement and a monitor’s report from a licensed insolvency practitioner stating rescue prospects.
Who acts as the Monitor during a pre-insolvency moratorium, and what must they certify?
A licensed insolvency practitioner serves as Monitor and must certify that it is likely the moratorium will result in rescuing the company as a going concern.
How long does the initial pre-insolvency moratorium last, and can it be extended?
The initial moratorium lasts 20 business days, extendable by a further 20 business days at directors’ discretion; further extensions require creditor consent and/or court order, up to a maximum of one year subject to court approval.
Which debts must a company pay during a pre-insolvency moratorium?
Debts excluded from the pre-moratorium repayment holiday: the Monitor’s fees and expenses, goods and services supplied during the moratorium, rent for the period, wages, redundancy payments, and loans under financial services contracts. All “moratorium debts” incurred during the moratorium must also be paid as they fall due.
What binding effect does a company voluntary arrangement (CVA) have?
Once approved by at least 75% in value of voting unsecured creditors (excluding secured and preferential creditors without consent) and a simple majority of shareholders, a CVA binds all unsecured creditors to a proposed compromise or repayment timetable, even if they voted against it or were absent.
Outline the main steps to set up a CVA.
Directors appoint a Nominee (insolvency practitioner), prepare a proposal and statement of affairs, Nominee reports to court within 28 days, a creditors’ meeting is called (14 days’ notice), creditors vote (75% value threshold excluding secured/preferential), shareholders vote (simple majority), and the Nominee reports approval to court. Upon challenge period expiry without successful challenge, the CVA becomes binding.
Which creditors are excluded from being bound by a CVA unless they consent?
Secured and preferential creditors are not bound by a CVA unless they unanimously consent to the arrangement.
What is a restructuring plan under CIGA 2020, and how is it approved?
A court-sanctioned compromise between a company and its creditors or shareholders to restructure liabilities. Approval requires at least 75% in value of each voting class of creditors or shareholders, followed by court sanction, which can bind secured creditors and dissenting classes (cross-class cram down).
Explain the conditions for a cross-class cram down under a restructuring plan.
The court may sanction a plan over a dissenting class if the dissenting class would not be any worse off than in the next statutory insolvency outcome and at least one voting class with genuine economic interest approves the plan.
What are two advantages of a restructuring plan over a CVA?
A restructuring plan can bind secured and preferential creditors and dissenting classes if sanctioned by the court (via cross-class cram down), whereas a CVA cannot bind secured or preferential creditors without their consent and does not require court sanction.
What three objectives must an administrator pursue under Schedule B1 IA 1986, in order?
(a) Rescue the company as a going concern; if not, (b) achieve a better result for creditors as a whole than in liquidation; if not, (c) realize assets to distribute to secured or preferential creditors.
Who can appoint an administrator by court order, and what interim protection arises?
The court may appoint an administrator on application by the company, directors, a creditor, CVA supervisor, or liquidator if the company is insolvent or likely to become insolvent. An interim moratorium arises on application, temporarily freezing creditor actions until the administration order is made or dismissed.
Describe the out-of-court procedure for appointing an administrator by the directors.
Directors file a Notice of Intention to appoint (NOI) at court, then within 10 business days file the Notice of Appointment. If a qualifying floating charge holder (QFC) exists, they have five business days from NOI to appoint their own administrator; if they do not, directors’ choice is appointed.
What qualifies as a qualifying floating charge (QFC)?
A floating charge over substantially the whole of a company’s property that expressly grants the charge holder power to appoint an administrator under Schedule B1 para 14 IA 1986.
List three powers of an administrator under IA 1986.
Powers to carry on the company’s business, take possession and sell company property (with consent for fixed-charged assets), borrow money, execute documents in the company’s name, and bring proceedings against directors for wrongful or fraudulent trading.
What protections does a company gain upon entering administration?
A full moratorium under Schedule B1 IA 1986 prevents legal proceedings, winding up, enforcement of security, forfeiture of leases, and appointment of administrative receivers (subject to court or administrator consent).
What is a pre-pack administration?
A sale of a company’s business and assets to a pre-selected buyer arranged before administrators’ appointment, with the sale completed immediately upon appointment to preserve goodwill and achieve certainty, subject to pre-sale approval procedures for connected-party transactions.
What is an administrative receiver, and why are they rare today?
An administrator appointed by a QFC holder under pre-Enterprise Act 2002 charges to enforce security. Administrative receivership was restricted by EA 2002, making it available only for pre-September 15, 2003 charges or statutory exceptions, so it is now rare.
What is the role of a fixed charge receiver?
Appointed by a fixed charge holder to take control of and sell specific secured assets, applying proceeds to the appointor’s debt. They owe duties primarily to the appointor and cannot deal with assets outside the fixed charge.
