Chapter 8: Insolvency Flashcards
(81 cards)
1
Q
What is company insolvency?
A
Inability of company to pay debts
2
Q
What is personal insolvency?
A
Inability of individual to pay debts
3
Q
What is the aim of company insolvency?
A
To save companies in financial difficulties, control company directors, and protect companies’ creditors
4
Q
What is the aim of personal insolvency?
A
To protect creditors and to encourage entrepreneurship by allowing individuals who are bankrupt but have behaved honestly to be discharged from bankruptcy after one year
5
Q
When will a company be deemed insolvent?
A
- A creditor has served a statutory demand for an outstanding sum of £750 or more, and the company does not pay or come to an arrangement with the creditor within 21days of service of the statutory demand;
- A creditor has obtained judgment against the company, and has tried to enforce that judgment, but the debt still has not been paid in full or at all;
- It can be proved to the court that the company is unable to pay its debts as they fall due (the cash flow test);
- It can be proved to the court that the company’s liabilities exceed its assets (the ‘balance sheet test’)
6
Q
What is liquidation also known as?
A
Winding up
7
Q
What is liquidation?
A
The business stops trading, its assets are sold and the company ceases to exist
8
Q
What are the three types of liquidation?
A
- Compulsory liquidation (commenced by TP)
- Creditors’ voluntary liquidation (commenced by insolvent company)
- Members’ voluntary liquidation (commenced by solvent company)
9
Q
How does a third-party commence compulsory liquidation?
A
By presenting a winding up petition at court
10
Q
What is the most common ground for seeking compulsory liquidation?
A
Company is unable to pay debts
11
Q
In the case of compulsory liquidation, who is the petitioner?
A
The Third Party
12
Q
In the case of compulsory liquidation, what would happen if a company indicates that it will be able to repay debt within reasonable period of time?
A
The court may adjourn hearing to later date
13
Q
What will happen in the case of compulsory liquidation if a court orders that a company should be wound up?
A
An Official Receiver will automatically become the company’s liquidator
14
Q
When will a floating charge to a connected person be void?
A
If made within 12 months ending with the onset of insolvency
15
Q
When will a floating charge to a connected person be deemed void?
A
If made for no consideration within 2 years ending from the onset of insolvency
No need to show that the charge led to the company’s insolvency
16
Q
When will a floating charge to an unconnected person be deemed void?
A
- If made for no consideration within 1 years ending from the onset of insolvency; AND
- If, at the time the charge was granted, the company was insolvent or became insolvent as a result o fthe charge given
17
Q
Who is deemed a connected person?
A
- Directors
- Close relative of director
- Associate of the company (in the same group as the company)
18
Q
What is a preference?
A
When a debtor does something that puts a creditor in a better position on liquidation or administration than they would have been if the event had not occurred
19
Q
When must an event occur for it to be considered a preference (connected person)?
A
Within 2 years from onset of insolvency
20
Q
When must an event occur for it to be considered a preference (unconnected person)?
A
Within 6 months from onset of insolvency
21
Q
When is the onset of insolvency in compulsory liquidation?
A
The date of presentation of the petition
22
Q
When is the onset of insolvency in creditors’ voluntary liquidation?
A
The date that the company formally enters liquidation
23
Q
When is the onset of insolvency in administration?
A
Either:
- The date that the company files a Notice of Intention to Appoint an Administrator; OR
- The date when the company actually enters administration
Whichever comes first
24
Q
What is a transaction at an undervalue?
A
Where a company makes a gift to another person or enters into a transaction and receives consideration significantly lower in value than the consideration provided by the company
25
What is the relevant period for transactions at an undervalue?
| Two years
Within 2 years of company's insolvency or within five years of an individual's bankruptcy
26
What are the requirements for a company for a transaction to be set aside as an undervalue transaction?
The company must have been insolvent at the time of the transaction or become insolvent as a result. There is a presumption of insolvency if the transaction is to a **connected person**
*Note: Presumption can be rebutted (unlike with preferences)*
27
What are the requirements for an individual for a transaction to be set aside as an undervalue transaction?
There is no requirement to prove debtor was insolvent at the time the transaction was made if made within **two years** of the petition. There is a presumption of insolvency if the transaction is to a **connected person**
28
There is a defence for transactions entered at an undervalue. What is this?
If the transaction was entered into in good faith for the purpose of carrying on the business and, when it was made, there were reasonable grounds for believing it would benefit the company
*Example - Company cannot find a buer for a property at full price and had to sell it quickly to the only buyer showing any interest in it, just to obtain some money, even though the buyer was not willing to pay market value*
29
What is a transaction defrauding creditors?
A transaction at an undervalue which the company entered into in order to put assets out of the reach of someone making a claim against it. Generally difficult to prove
30
What is a small debt?
A debt not exceeding £1,000
31
Once a liquidator has sold the company's assets and paid holders of valid fixed charges, who will be paid next and in what order?
1. Expenses of winding up (liquidator's and professional adviser's fees)
2. Preferential debts (holiday and employee wages due in last for months, VAT, NI contributions etc)
3. Debts secured by floating charges in order of priority
4. Unsecured debts which rank and abate equally
5. Shareholders
32
What does it mean if debts 'rank and abate equally'?
Creditors will receive a proportionate split if there is not enough money to fully satisfy all creditors at one level
33
What are preferential debts?
The most common preferential debts are wages/salaries of employees for the four months before the winding up order up to a **maximum** of £800 per employee.
Employee holiday is also a preferntial debt.
HMRC rank **behind** employees in respect of preferential debtors. These debts will be for taxes which companies collect on HMRC's behalf such as PAYE and VAT
34
What is ring-fencing?
A liquidator must set aside the following:
50% of the first £10,000 of money received from the property which is subject to floating charges
20% of the remaining money
*Up to a maximum of £80,000*
35
What is administration?
A process whereby an administrator (independent insolvency practitioner) is appointed to run the company and make whatever changes are necessary to improve its financial performance. Alternatively, the administrator will aim to get the company into the position where it can be sold as a going concern
36
In order of importance, what are the three aims of administration?
1. Rescue the company as a going concern.
2. Achieve a better result for the company's creditors than would be achieved if the company were to be wound up.
3. Sell property to pay one of more secured creditors.
37
What are the two ways of commencing administration?
1. Formal court hearing (the Court rote)
2. Company, its directors or holder of qualifying floating charge file certain documents at court (the non court route)
38
If the court rote is used, when will the court make an administration order?
Only if satisfied company is unable to pay its debts and that the order is likely to achieve a better result for the company's creditors than liquidation
39
Can the company use the out-of-court route for administration if a compulsory winding up petition has already been presented to the court?
No, the directors would need to apply to the court for an order that the company go in administration instead of the winding up petition being allowed to proceed
40
What is the difference between receivers and administrators?
Administrators have a duty to all of the company's creditors whereas receivers only have a duty to the party which appointed them
41
What is a qualifying floating charge?
A qualifying floating charge is a floating charge over the whole or substantially the whole of the company's assets where the charge document contains a provision empowering the lender to appoint an administrator or an administrative receiver if a breach occurs
42
What is the process of administration?
Once administration starts, a moratorium comes into effect.
Administrators put forward proposals to creditors who can suggest amendments to proposals.
Administrator's proposals will be approved if a majority in the value of creditors vote
43
What number of votes are required for an administrator's proposals to be approved?
A majority in value of the creditors present and voting provided that those who vote against do not constitute more than 50% in value of creditors who are unconnected to company
44
Can an administrator remove and appoint directors?
Yes
45
Can an administrator pay secured and unsecured creditors?
Yes, but court's permission required if payment is to unsecured creditor
46
Can an administrator call a meeting of creditors and shareholders?
Yes
47
Can an administrator deal with property that is subject to a fixed charge?
Yes, with the permission of the court
48
Can an administrator commence fraudulent or wrongful trading proceedings against directors?
Yes
49
When will administration end?
Administration will automatically end one year from the date that administration took effect
50
What is a Company Voluntary Arrangement?
An agreement where creditors usually agree to take less than the full debt owed to them
51
When will a Company Voluntary Arrangement be used?
When a company has a short-term cash flow issue but is generally financially sound
52
Who must agree to the proposals in a Company Voluntary Arrangement?
75% or more in value of the unsecured creditors
50% or more of non-connected creditors
53
Are secured creditors allowed to vote in a Company Voluntary Arrangement?
No
54
What is a restructuring plan?
Court supervised arrangement between company and all of its secured and unsecured creditors and shareholders
55
What is a moratorium?
A measure which prevents creditors from taking action to enforce their pre-moratorium financial rights or from commencing formal insolvency proceedings during the moratorium.
The company has a payment holiday.
56
How is a moratorium obtained?
Directors file relevant documents at court and an insolvency practitioner is appointed as 'monitor' to oversee the company's affairs and ensure that it is likely that the moratorium will rescue the company
57
For how long does a moratorium last?
20 business days beginning with the business day after the moratorium comes into force, but can be extended for a further 20 business days
58
What is fixed asset receivership (LPA receiver)?
Receiver takes possession of asset and sells it to pay secured lender. Once the asset is sold, receiver has no further interest in the propert
59
What is personal insolvency?
When a person is unable to pay a debt or when there is a reasonable prospect person will be unable to pay future debt
60
In which three ways can a creditor prove that an individual is insolvent?
1. Serving a statutory demand on the debtor for the liquidated sum of £5,000 or more and waiting 3 weeks to see whether the debtor pays or applies to the court to set aside the demand
2. By serving a statutory demand on the debtor in respect of future liability to pay a debt of £5,000 or more and waiting to see whether the debtor either:
a) shows reasonable prospect of being able to pay sum when it falls due; or
b) applies to court to set aside demand
3. By obtaining a court judgment for a debt of £5,000 or more and attempting execution of the judgment without success
61
What is bankruptcy?
Debtor's assets pass to trustee in bankruptcy who pays as many debts as possible to creditors
62
When will a bankrupt person be discharged from bankruptcy?
After 1 year
63
What are the two ways in which the bankruptcy procedure can begin?
1. Petition brought by creditor
2. Debtor's application
64
If a creditor is to present a bankruptcy petition to the Court, how much must they be owed?
£5,000 or more
65
If a creditor is owed less than £5,000 what can they do if they still want to petition for bankruptcy?
Join other creditors and petition together if their collective sum owed is £5,000 or more. They must also pay a deposit for administration fees
66
How would a debtor apply for bankruptcy?
Online and by paying a deposit for administration fees
67
Once a bankruptcy order is made, who is appointed?
An official receiver who acts as trustee in bankruptcy and takes control of bankrupt's assets
68
Which assets are exempt from the bankruptcy estate?
Items needed for day-to-day living and items needed for work
69
Are bankrupts entitled to be paid their salary? If so, on what condition?
Yes, but if the salary is more than what is necessary to meet the 'reasonable needs' of them and their family, the trustee can ask the bankrupt to enter into income payments agreement (IPA) where they will need to pay some of their salary towards liabilities
70
How long can an income payments order last?
A maximum of 3 years
71
What happens to a person's home if they are subject to bankruptcy?
The legal interest passes to the trustee in bankruptcy. If someone else has a legal or equitable interest, the trustee in bankruptcy will not be able to sell the home without a court order.
*N.B. After a year, the interests of creditors are paramount and will take precedence over any other people claiming an interest unless there are 'exceptional' circumstances*
72
In personal bankruptcy, can a trustee disclaim onerous property?
Yes
73
# Personal bankruptcy
In the case of transactions at an undervalue, does the trustee need to show that the bankrupt was insolvent at the time of the transaction?
No, unless it was made more than 2 years prior to the petition
If the transaction was with a business associate more than 2 years prior to insolvency, there is a rebuttable presumption that the bankrupt was insolvent
74
What can a person not do whilst bankrupt?
* Apply for credit for more than £500 or more w/o disclosing undischarged bankruptcy
* Act as company director
* Be companny partner
* Trade under another name without disclosure of bankruptcy
75
In personal bankruptcy, what is the order of priority for distribution to creditors?
1. Costs of bankruptcy
2. Preferential debts (holiday pay, employee wages in last 4 months and VAT, PAYE and NI)
3. Ordinary unsecured creditors
4. Postponed creditors (spouse)
If there are insufficient funds to fully satisfy creditors at one level, the debts rank and abate equally
76
What is a culpable bankrupt?
Person who has caused bankruptcy by own dishonesty, negligence or recklness. Can be subject to order for up to 15 years
77
What is an individual voluntary arrangement?
Negotiated binding agreement between debtor and all of their creditors where creditors agree to accept less in payment than is owed to them (similar to CVA)
78
If a debtor wishes to agree to an IVA with their creditors, can they do it alone without professional advice?
No, the debtor must find an insolvency practitioner who will draw up proposals and supervise the IVA
79
# IVA
Once an insolvency practitioner has been appointed, what must the debtor do?
Prepare a statement of affairs and apply to the bankruptcy court for an interim order in order to obtain a moratorium
80
# IVA
When an insolvency practitioner prepares a report advising whether there are any realistic proposals to offer to the creditors, they will also need to consider whether it is worth calling a meeting of creditors. If a meeting is called, how many people must vote for proposals to be binding?
If at least 75% in value of the debtor's unsecured creditors agree to the practioner's proposals, they will be binding on every unsecured creditor even if they did not vote
81
# IVA
When will an insolvency practitioner become a supervisor?
Once creditors approve proposed IVA
