Business Law VI Insolvency

Question 1

What kind of creditor will be bound an IVA

Answer 1

The proposals become binding on every ordinary unsecured creditor who has notice of the meeting, even if they do not attend or vote

Question 2

4 solutions for companies or sole trader/partnerships when the entity is unable to pay its debts

Answer 2

Negotiation with creditors to delay/give up enforcement of the debts

entering an individual voluntary arrangement

applying for bankruptcy

a creditor may present a creditor’s petition for bankruptcy

Question 3

-Define an IVA (individual voluntary arrangement)

Answer 3

An individual voluntary arrangement is a negotiated agreement between the debtor and all of their creditors.

it is preferred over renegotiation since the latter is not binding since the delay/forbearance does not offer fresh consideration for it to be enforceable.

Question 4

Steps of initiating an IVA

Answer 4

1) the debtor can not proceed alone. The debtor needs to commission an insolvency practitioner.
2) the debtor will have to prepare for a statement of affairs and will apply to the insolvency court for an interim order
3) the insolvency practitioner then prepares a report advising whether there are any realistic proposals to offer to the creditors. if 75% in value of the unsecured creditors agree to the practitioner’s proposal, the proposals become binding on every ordinary secured creditor who has notice of the meeting.
4) The insolvency practitioner (now called the supervisor) now oversees and implements proposals.

Question 5

How does the treatment for the ordinary unsecured creditor and preferential creditors and secured creditors differ (in the context of IVA)

Answer 5

IVA proposals, when passed, is binding on ordinary unsecured creditors

IVA proposals are not binding on the other creditors unless they have agreed to the proposals.

Question 6

if during the implementation of the IVA proposals, the debtor tries to put money out of reach for creditors, by making transactions at an undervalue or giving preferences, who can act and what can they do?

Answer 6

Only the trustees in insolvency can bring an action to set aside those transactions, and petition for the debtor’s bankruptcy.

Question 7

Define bankruptcy

Answer 7

Bankruptcy is a judicial process in which the assets of the bankrupt debtor are passed to a third party, the trustee of bankruptcy, who liquidates the assets and uses the money from the liquidation to pay off the debtor’s debts.

The debtor will be discharged from most of their debts after one year.

Question 8

The procedure of filing a bankruptcy

Answer 8

1) The debtor can apply online to declare themselves bankrupt. the adjudicator will declare bankruptcy if certain criteria are met.
2) or creditor can apply for debtor insolvency by showing the debtor cannot pay, may not pay for payable in future, and if there is a judgement debt which the debtor does not honour. The strike threshold is £50,000
3) when a bankruptcy order is made, then an official receiver is appointed. the official receiver is a civil servant who will act as the trustee in bankruptcy unless the creditors seek to appoint their own.

Question 9

in what situation an adjudicator may declare a debtor bankrupt?

Answer 9

If,

1) one or more unsecured creditors who is/are owed at least £5,000 combined can present a petition for an order of bankruptcy to the bankruptcy court; or
2) the supervisor of an IVA can petition for the debtor’s bankruptcy if the debtor has breached the terms of the IVA, hidden assets, or given a preference to a creditor

Question 10

When a debtor is declared bankrupt, all his estate will vest in the trustee of bankruptcy. The trustees automatically have the rights to sell the assets.

What kind of assets is exempted from falling into the receiver’s hands?

What about the bankrupt’s home?

Answer 10

assets for day-to-day living (furniture or tools for their jobs)

salary (unless an income payments order has been made)

the bankrupt’s home cannot be sold if
it is held in joint names

a trust may have an equitable interest

the spouse/children under 18 have a right of occupation

a court order or lapse of time (over a year) can override this right.

Question 11

Restriction of rights on the bankrupt (3)

Answer 11

He cannot,

apply for credit for more than a prescribed amount

act as a company director/partner

trade under another name without disclosure of bankruptcy.

Question 12

Order of distribution to creditors (in bankruptcy)

Answer 12

costs of the bankruptcy

Preferential debts (employees, HMRC, NI)

Ordinary unsecured creditors; and

Postponed creditor (spouse/civil partner)

Question 13

The meaning of debts rank and abate equally

Answer 13

that if the liquidated assets cannot fully satisfy one class of creditors, all the creditors in that category will receive the same percentage of their original debt.

Question 14

Meaning of culpable bankrupts

15

Answer 14

A bankrupt who has caused bankruptcy by their own dishonesty, negligence or recklessness is considered culpable and can be subject to a court bankruptcy order for up to 15 years.

Question 15

Options for corporate bankruptcy

Answer 15

Receivership: this enables secured creditors to recover what is owed solely to them

Administration and company voluntary arrangements: These seek to rescue the company; and

Liquidation: this causes the company’s assets to be sold to pay off debts and the company will cease to exist

Question 16

Meaning of receivership 接管

Answer 16

When a company raises debt finances, the creditors will charge their fixed assets and set out what comprises a breach. the agreement will often give the creditor the right to appoint a receiver to take possession of the charged asset and sell it to pay the secured lender. receivership ends when the charged asset is sold.

Question 17

Define administration

where does the loyalty of an administrator lie?

Answer 17

administration is a procedure that enables the administrator to run, reorganise, and/or sell the company as a going concern. The aim is to

rescue the company as a going concern
Achieve a better result for the company’s creditors than would be achieved if the company were to be wound up

Realise property to distribute to one or more secured creditors.

The administrator acts in the interests of all the creditors

Question 18

Procedure for going into administration (Non CVA)

Answer 18

Through a formal court hearing; or

By the company, its directors, or the holder of a qualifying floating charge filing certain documents with the court,

The court will only make the order if the company cannot pay its debts and administration will offer a better result than liquidation.

Question 19

Power of an administrator

4

Answer 19

An administrator must be a licensed insolvency practitioner:

they can

take control of the company’s property can sell it

bring or defend legal proceedings on behalf of the company

carry out the company’s business

remove or replace director; take action against them for wrongful or fraudulent trading

Question 20

Define moratorium 谅解备忘录

Answer 20

A moratorium is a pact that
restricts the ability for third parties to enforce their rights

prevents the commencement of other insolvency procedures

Question 21

Two types of voluntary liquidation:

Answer 21

Members’ voluntary liquidation

Creditor’s voluntary liquidation

Question 22

Explain CVL

BSG7L3

Answer 22

Directors resolve that the company is insolvent and the member pass a special resolution to start the liquidation

The resolution is then advertised in the London gazette. within 7 days the directors must make a statement of affairs which is then sent to the creditors.

the board nominates a liquidator which is then advertised in the London Gazette and the Companies House is notified

The liquidator collects in the assets of the company and distributes funds to the creditors in the statutory order. The company is dissolved after 3 months

Question 23

Explain MVL

BSOLG3

Answer 23

The directors must make a statutory declaration of insolvency.

The member will pass a special resolution to start the liquidation and an ordinary one to appoint a liquidator

The appointment is advertised in the London Gazette

The liquidator collects in the assets of the company and distributes funds to the creditors in the statutory order. The company is dissolved after 3 months

Question 24

Order of priority for distribution to creditors in corporate insolvency (5)

Answer 24

Expenses of winding up

Preferential debts

Secured debts (subject to ring-fencing)

Unsecured debts

Shareholders

The principle of rank and abate will apply

Question 25

Meaning of clawback of assets

Answer 25

The company can set aside transaction and recover assets sold/security given to put the creditors in a better position

Question 26

Meaning of preference in insolvency

Answer 26

Preference arises when a debtor does something that puts a creditor surety, or guarantor in a better position on liquidation or administration than they would have been if the event not occurred.

The transaction will be voidable at the discretion of the court. the court can order property/proceeds of sale be return or security discharged.

Question 27

time lapse of preference

6 2

Answer 27

for an unconnected person, within six months of the onset of insolvency

for a connected person, within 2 years.

Question 28

Meaning of transaction at an undervalue

2 5 仔

the consequence of selling an asset at undervalue

circumstantial evidence to qualify a sale as undervalue

Answer 28

when a property that would have otherwise been part of the bankruptcy estate was given as a gift or was sold for significantly less than market value within two years of a company’s insolvency or 5 years of an individual’s bankruptcy.

consequence is the transaction will be voidable at the court’s discretion. the transaction must have been at the time the company was insolvent, became insolvent as a result, or there was a presumption of insolvency if the transaction relates to a connected person.

Question 29

Defences for preference or transaction at an undervalue

Answer 29

if they were carried out in good faith with a view that they would genuinely benefit the company

Question 30

Define fraudulent trading and wrongful trading

Answer 30

Fraudulent trading arises when a director carries on the business of the company with the intention to defraud creditors. directors may be liable to contribute to the company’s assets and it is a criminal offence.

Wrongful trading is a claim that at some time before a company became insolvent, the director knew or ought to have known that there was no reasonable prospect that the company would avoid insolvency and failed to minimise losses. The consequence is personal contribution to the company’s assets

Question 31

Defences for fraudulent trading and wrongful trading

Answer 31

they approved the transactions before becoming aware of the risk of insolvency

Question 32

When may a floating charge be void in the case of insolvency

Answer 32

if it is created for no consideration within 12 months before the onset of insolvency (2 years for a connected person); and

at a time the company was insolvent or became insolvent as a result if the charge was given to a person unconnected to the company

Question 33

Explain ring-fencing

Answer 33

A liquidator is required to set aside part of the assets subject to a floating lien for the benefit of unsecured creditors. the amount is

50% of the first 100k in property subject to floating charges, and

20% on amounts above up to 600k