👔Business 7: Corporate Insolvency

Question 1

What 3 claims can be bought against directors of an insolvent company and what types of offence are they?

Answer 1

1. Wrongful trading (civil offence)
2. Fraudulent trading (s213 IA 1986) (criminal offence)
3. Misfeasance

Question 2

Who can bring a claim for wrongful or fraudulent trading?

Answer 2

only a liquidator/administrator

Question 3

Elements of wrongful trading?

Answer 3

1) Co has gone into insolvent liquidation/administration
2) Before commencement of winding up, dir knew, or ought to have known, that there was no reasonable prospect of the company avoiding insolvent liquidation
3) The person was a Dir of the Co at the time

Question 4

Defence to wrongful trading?

Answer 4

They took every step with a view to minimising the potential loss to creditors as they ought to have taken.
Judged to the standard expected if of a reasonably diligent person having both:
(a) Objective: the general knowledge, skill and experience reasonably be expected of a person carrying out the functions carried out by the dir in relation to the co
(b) Subjective: the general knowledge, skill and experience that the dir has.

Question 5

Examples of steps a director can take to minimise the chance of a sucessful wrongul trading claim?

Answer 5

*Seek professional advice (sol/accountant) at first sign of problem
*Limit spending
*Check cos accounts regularly
*Keep record of own actions

Question 6

What is fraudulent trading?

Answer 6

In the course of winding up, it appears the cos business has been carried on with intent to defraud creditors of the co or creditors of any other person or for any fraudulent purpose.

Question 7

What is misfeasance and what is the effect of it?

Answer 7

• Breach of fiduciary/other directors duty
• Effect: ordered to contribute to assets and/or repay/restore/ account for money/prop that’s been disapplied in breach of duty

Question 8

4 ways of proving a company is insolvent?

Answer 8

1. Creditor serves statutory demand for £750 or more, and Co doesn’t pay within 21 days
2. Creditor obtains judgment against Co, tried to enforce, but debt still not been paid in full
3. Cash flow test: Co is unable to pay its debts as they fall due (look at net current assets figure)
4. Balance sheet test: Cos liabilities exceed its assets (look at net asset value-should be hugely positive to take into account short term liabilities)

Question 9

Which way of proving insolvency is not conclusive and why

Answer 9

Cash flow test as it is just a snapshot in time

Question 10

5

Outcomes fo an insolvent company?

Answer 10

1. Liquidation (aka. winding up)
2. Administration
3. Company Voluntary Arrangement
4. Free standing Moratorium
5. Restructuring plan

Question 11

What is liquidation?

Answer 11

□ Process where business stops trading, assets sold, co ceases to exist
□ Dirs powers cease and liquidator runs co

Question 12

3 types

What are the types of liquidation?

Answer 12

a. Compulsory liquidation
b. Creditors voluntary liquidation
c. Members voluntary liquidation (MVL)

Question 13

How is each type of liquidation commenced?

Answer 13

Compulsory:3rd party (petitioner) presents winding up petition at court on basis co unable to pay debts (1 of 4 grounds)
Creditors voluntary liquidation: Commenced by co via agreement between Dirs and SH (usually bc of pressure from creditors/fears about wrongful trading claims ect)
Members voluntary liquidation: ONLY available if co solvent, Usually used when wants to cease trading or its dormant

Question 14

What happens during compulsory liquidation?

Answer 14

◊ Official Receiver automatically becomes cos liquidator
◊ Assets sold and proceeds used to pay creditors

Question 15

When will the petitioner be prevented from proceeding with compulsory liquidation proceedings?

Answer 15

Co can show theres a genuine and substantial dispute in relation to the money owed (BUT court has unlimate discretion to wind up co if shows its unable to pay debts)

Question 16

When may a court adjourn compulsory liquidation proceedings?

Answer 16

if co indicates itll be able to pay within reasonable period of time

Question 17

Which type of liquidation can ONLY be used when the company is solvent and what happens if the liquidator realises the company is insolvent during it?

Answer 17

1. Members voluntary liquidation (MVL)
2. MUST convert to CVL

Question 18

What order are assets distributed in for liquidation?

Answer 18

1. Fixed charge holder (surplus to liquidatior, shortfall=unsecured creditor)
2. winding up expenses
3. Preferential creditors (who rank and abate equally)
   *Employees (max £800)
   *HMRC
4. Money subject to floating charges (in order of priority, subject to ring fencing)
5. Unsecured creditors (who rank and abate equally)
6. Shareholders

Question 19

What does ‘Rank and abate equally’ mean?

Answer 19

all creditors in category, sharing the available money, receiving the same percentage of the outstanding debt that they are owed.

Question 20

How do you calculate how much unsecured creditors will get?

Answer 20

Amount (pence in the £) unsecured creditors will get: Total available for unsecured creditors (divided by) value of unsecured creditors

Question 21

What is ring fencing and how much can be ring fenced?

Answer 21

From 15 sept 2003
Is Setting aside portion of available money for floating charge holders for the benefit of unsecured creditors

Amount:
◊ 50% of first £10k of money received from prop is subject to floating charges
◊ AND20% remaining
◊ Up to a limit of £800k (or £600k for charges created before 6 April 2020 UNLESS ranks equally or in priority to pre April 2020 charge, £800k applies to both)

Question 22

What happens during administration?

Answer 22

□ Independent insolvency practitioner (administrator) appointed to manage company (is in charge of co assets although doesn’t own them)
□ Dirs powers to run co. cease but they remain in office

Question 23

What are the purposes of administration?

Answer 23

1. Primary objective:rescue co as going concern
2. If not practicable: achieve a better result creditors as a whole than if company was wound up
3. If not practicable: realise (sell) property to pay one or more secured or preferential creditors

Question 24

What does the administrator have a statutory duty to do?

Answer 24

increase assets available to creditors

Question 25

# 7 What are Administrators statutory powers

Answer 25

1. remove/app directors 2. pay creditors (need court’s permission for unsecured creditor) 3. callmeeting of creditors/SH 4. dealing with property subject to floating charge 5. dealing with property subject to fixed charge (with court permission) 6. Investigate and apply to have transactions set aside/challenged 7. commence fraudulent/wrongful trading proceedings against dirs

Question 26

What is the difference between an administrator and an administrative reciever?

Answer 26

* Administrator:duty to all creditors. * Administrative Receiver: primary duty to appointing party; secondary duty to others

Question 27

What are the 2 routes for commencing administration proceedings?

Answer 27

1. **Court Route** (court order following an application and hearing) 2. **Out-of-Court Route**: appointment by Co,Dirs/QFCH

Question 28

Who can use the out of court route for commencing administration (aka. appoint an administrator out of court)?

Answer 28

1. The company or its directors 2. A Qualifying Floating Charge Holder

Question 29

What is a QFCH (Qualifying Floating Charge):

Answer 29

A floating charge where the charge doc: 1. States para 14 of schedule B1 to the IA 1986 applies to it 2. Allows holder to appoint an administrator or administrative receiver. 3. Covers substantially all company property (or does so when added to other security held by the same lender)

Question 30

What must the court be satisfied of before commencing administration under the court route?

Answer 30

1. Company is likely unable to pay its debts. 2. Administration can likely achieve one of the three purposes of administration

Question 31

As soon as reasonably practicable after applying for the court route for commencing administration, who must the applicant must notify?

Answer 31

1. Any person who has appointed/is entitled to appoint an administrative receiver. 2. Any Qualifying Floating Charge Holder entitled to appoint an administrator

Question 32

What is the process for appointing an administrator out of court?

Answer 32

1. Appointment by Co/directors: *serve notice on Court, QFCH, Lenders entitled to appoint an administrative receiver *file statutorty dec that co cant pay debts and ISNT in liquidation 2. Appointment by QFCH: *Notify other QFCH with priority (so they can appoint an administrator if desired) *Floating charge must be enforceable (=charge holder entitled under the loan agreement to enforce the Security) *File a notice of appointment at court with A statutory declaration confirming QFC status, Floating charge enforceable, Appointment complies with IA 1986 (Sch B1)

Question 33

When cant the company commence administration?

Answer 33

if a winding-up petition is already filed: must apply for administration via the court.

Question 34

What comes into effect when administration is commenced and what is the effect of this?

Answer 34

Statutory Moratorium (freeze on creditor action)= * No Legal Action: Prevents initiation/ continuation of legal claims against co * No Judgment Enforcement by judgments. * No Winding Up Petitions without the administrator’s consent.

Question 35

Whats the process for administration?

Answer 35

1. Administrator puts forward **proposals** to creditors (can request info/suggest amendments) 2. Proposals approved if: **majority** in value of the creditors, present and voting, vote in favor PROVIDED that voting against arent more than 50% in value of creditors unconnected to the company

Question 36

# 3 When does administration end?

Answer 36

1. Automatically after 1y (can be extended) 2. By application to court if objective achieved/administrator feels it can no longer be achieved 3. By application to court by creditor (who may then present winding up petition)

Question 37

What is Pre packaged(pack) administration and what is it often used for?

Answer 37

* Co assets and business sold immediately on entering administration (pre arranged), often to the existing management. * Legal way of selling business as a going concern. * Increases the likelihood of saving jobs. * BUT unsecured creditors not consulted and unlikely to receive much for debts owed

Question 38

What 5 claims can a liquidators/administrators may bring to preserve/increase assets?

Answer 38

1. Avoidance of floating charges 2. Preferences 3. Transaction at undervalue 4. Transactions defrauding creditors 5. Extortionate credit transactions

Question 39

What is a claim for the avoidance of floating charges?

Answer 39

1. Charge **automatically void** where 2. At the **‘relevant time’**: ◊ Charge for connected person=2y ending with onset of insolvency ◊ Anyone else= 12mo before onset of insolvency. 3. **Before the onset of insolvency:** ◊ Compulsory liquidation=date winding up petition presented ◊ CCL=date co formally enters liquidation (files notice of intention to app administrator or actual date it goes into admin if earlier) 4. **charge was granted without the co receiving fresh consideration** in exchange for granting security. 5. And can show that: If charge to unconnected person: co was insolvent at time floating charge was given OR became insolvent as a result Charge to connected person: not necessary to show this

Question 40

Avoidance of floating charges: who is a Person connected with co?

Answer 40

1. Director/shadow director 2. Close relative or business associate of a director or shadow director 3. Associate of co (co in same group/co controlled by dir of insolvent co)

Question 41

Defences to Avoidance of floating charges

Answer 41

none, charge automatically invalid

Question 42

What is a preferences claim by liquidators/administrators?

Answer 42

Can challenge any transaction where co: 1. Has given **preference** to another party: co positively desires to put someone in a better position, on insolvency, liquidation or administration, than they would have been in otherwise. 2. At the **relevant time**: ◊ preference to connected person=**2y** ending with onset of insolvency ◊ non connected person=**6mo** months ending with onset of insolvency 3. If can show co was **insolvent**: at time of OR as a result of entering transaction (NO presumption of insolvency for preferenceto connected person) ,

Question 43

Effect if a preference is proven?

Answer 43

Court may order: 1. Release of security given by co 2. Payment of proceeds of sale of prop forming part of transaction to co Put co into position it would have been in if hadn't entered transaction

Question 44

Defences to preference vs transaction at undervalue ?

Answer 44

**Preference:** Commercial pressures-had no option ie bank would call in other loans if didn’t pay up/ preference a condition of a loan **TaU**: Transaction was entered into : 1. in good faith 2. AND for purpose of carrying on the business 3. AND when it was entered into, there were reasonable grounds for believing that it would benefit co Eg. Couldn’t find another buyer at market price

Question 45

What is a claim for a transactions at an undervalue?

Answer 45

Can challenge any transaction: 1. Entered at**'undervalue'**: gift/ transaction for no consideration or significantly lower consideration than the consideration provided by the company 2. At the **relevant time**: 2y before insolvency 3. If can show co was **insolvent**: at time of OR as a result of entering transaction (transaction with connected person: Insolvency rebuttably presumed)

Question 46

Transactions at an undervalue: what transaction will never be included?

Answer 46

Granting of floating charge as this doesn’t deplete cos assets

Question 47

effect of succesful claim for Transactions at an undervalue

Answer 47

* Court try restore the position to what it would have been if the company had not entered into that transaction * Unless sold to Bonafide purchaser for value, director may be liable

Question 48

What is a claim for transactions defrauding creditors

Answer 48

Atransaction at an undervalue which the co entered into in order to put assets beyond the reach of someone making a claim against it or to prejudice the interests of that person in relation to any claim they might make

Question 49

Is there a time limit for transactions defrauding creditors?

Answer 49

No

Question 50

What can the court order for transactions defrauding creditors?

Answer 50

Challenge bought at discretion of court who will: *Order prop be returned *Discharge any security given by co as part of the transaction

Question 51

Other than liquidators/administrators, who else can bring a claim for transactions defrauding creditors

Answer 51

Creditors as a ‘victim’ of the transaction.

Question 52

What is a claim for an Extortionate credit transaction

Answer 52

Can challenge extortionate transactions made 3y ending with the day company went into administration/liquidation 'Extortionate'=Payments which are grossly exorbitant, or which otherwise grossly contravene ordinary principles of fair dealing.

Question 53

What is a Company Voluntary Arrangement (CVA) and when is it generally used?

Answer 53

Written agreement (statutory contract) between Co and its creditors where creditors agree to wait longer to receive debts OR accept part payment When: business fundamentally sound BUT facing temporary cash flow issues (to prevent liquidation)

Question 54

How is a CVA proposal approved and what is the effect of its approval?

Answer 54

By: ○ 75% or more (in value)of creditors ○ 50% of non-connected creditors (Secured creditors can only vote on unsecured debt owed to them) If approved: 1.proposal binding on all unsecured creditors in relation to past (not future debts) 2.Does not affect the rights of secured or preferential creditors unless they agree. 3.No moratorium unless use free standing one

Question 55

Who is chair of CVA meeting and whats their role?

Answer 55

○ Is generally the insolvency practitioner seeking to be appointed to supervise ○ Decides if creditors connected or not

Question 56

What is a scheme of arrangement?

Answer 56

*Not strictly an insolvency procedure. *Can use at any time *Requires two court hearings and creditor/shareholder meetings. *Costly and complex used for large companies to restructure, often pre-takeover.

Question 57

When is a company eligible for a free-standing moratorium? (under CIGA 2020)

Answer 57

1. Co unable/likely to become unable to pay its debts. 2. Hasnt entered a moratorium in the past 12 months. 3. Excludes certain companies (e.g., banks, financial services). 4. English co without ongoing winding-up petitions.

Question 58

How is a Free standing Moratorium obtained, what is the effect of it and how long does it last?

Answer 58

How to obtain: 1. Directors file relevant docs at court 2. Proposed monitor must confirm the moratorium could help rescue the company as a going concern. Effect: *Dirs remain in control, BUT a qualified insolvency practitioner oversees the moratorium and can terminate in some circumstances *Pre-moratorium debts: Suspended (with some exceptions). Lasts: ***20 business days**, starting the business day after filing. *Can be **extended by up to 1y** with creditors consent

Question 59

Which pre-moratorium debts are NOT suspended during the moratorium and must be paid in full?

Answer 59

1. Wages 2. monitor’s fees 3. new goods/services supplied during the moratorium

Question 60

What is a restructuring plan?

Answer 60

*A court-supervised tool for restructuring Co *Is a compromise/arrangement between co and creditors/shareholders.

Question 61

Process of a restructuring plan?

Answer 61

1. Dirs prep plan and apply to court to convene meetings of creditors/ OR Creditors/SH initiate 2. First hearing: Creditors can make representations 3. creditor and SH meetings: (Creditors and SH grouped into classes, A class approves the plan if 75% (by value) vote in favor) 4. Second hearing: Court decides whether to sanction the plan.

Question 62

What is a key feature of a restructuring plan?

Answer 62

Cross-Class Cram Down: Dissenting classes of creditors can be forced to accept the plan ("crammed down") if: ◊ Plan is deemed viable. ◊ Court ensures no dissenting class would be worse off than in a liquidation scenario before sanctioning the plan.

Question 63

What are options for secured creditors on insolvency/if a co defaults on its loan agreement?

Answer 63

1. Fixed charge holder: **Appoint an LPA receiver** to sell secured property to repay creditor. If surplus: returned to co and can be distributed to unsecured creditors. If deficit: Becomes unsecured creditor for amount 2. Floating charge holder where charge is over cos whole undertaking created before 15/10/2003 : **Appoint an administrative receiver** to run co and sell charged assets. Use proceeds to pay one costs and charge holder. 3. Floating charge holder created AFTER 15/10/2003: use administration

Question 64

What are triggers for going into Receivership?

Answer 64

* Charging doc/loan agreement will events triggering lenders ability to appoint receiver * Usually when company defaults on the loan agreement.

Question 65

Does a company need to be insolvent to go into receivership?

Answer 65

no

Question 66

Must an LPA receiver be a licensed insolvency practitioner?

Answer 66

no

Question 67

What happens to an administrative receiver post-sale?

Answer 67

Generally resign, but liquidation often follows since the company typically cannot continue as a going concern after asset sales.

Question 68

What type of creditors vote on the approval of a CVA?

Answer 68

unsecured only, secured creditors have no vote, apart from in relation to any part of the debt owed to them which is unsecured.

Question 69

How do companies correctly execute contracts vs deeds?

Answer 69

CONTRACT 1. Seal 2. On behalf of co by person acting under authority (dir/employee if contracts part of their rile) DEED 1. Affixing seal (MA: +signature of at least 1 authorised person n the presence of a witness who attests)) 2. Signatures of 2 authorised signatories (Dir or Sec) 3. Signatures of 1 dir in presence of a witness who attests)