Chapter 9: Insolvency Proceedures Flashcards

Question

Company Voluntary Arrangement

Answer 1

A CVA, is a compromise between a company and its creditors. CVAs are defined in s 1(1) IA 1986 as: “a composition in satisfaction of its debts or a scheme of arrangement of its affairs”. The essence of a CVA is that the creditors agree to part payment of the debts owed to them and/or to a new extended timetable for repayment. The CVA proposal once approved in accordance with IA 1986, must be reported to court but there is no requirement for the court to approve the CVA.

Answer 2

The CVA is supervised and implemented by a Supervisor who is an Insolvency Practitioner. During the CVA the company's directors remain in office and will continue to run the company's affairs subject to the terms of the CVA. CVAs can also be used together with administration or liquidation, which we consider later.

Answer 3

1.The directors draft a CVA proposal and appoint a Nominee (who must be an insolvency practitioner). If the company is in liquidation or administration, the administrator or liquidator drafts the CVA proposal and acts as Nominee. 2.The directors must submit the CVA proposal and a statement of the company's affairs to the Nominee (although in practice it is the Nominee who drafts the CVA proposal).

Answer 4

3.The Nominee considers the CVA proposal and, within 28 days, must report to court on whether in their opinion, the company's creditors and shareholders should be asked to vote on the CVA proposal- s 2(1) and s2(2). 4.The Nominee must allow at least 14 days for creditors to vote on the CVA proposal. A meeting of the shareholders must take place within 5 days of the creditors' decision.

Answer 5

5.Voting – the CVA proposal will be approved if: * at least 75% in value (i.e, value of debts owed) of those voting on the CVA proposal (excluding secured creditors) vote in favour; * If the above majority is obtained, the decision of those creditors will be invalid if those voting against the CVA proposal include more than half of the total value of creditors unconnected to the company (e.g. not a related company, shareholder or director of the company proposing the CVA); and * a simple majority of shareholders/members vote in favour.

Answer 6

Note in practice, it is only the approval of the CVA proposal by creditors which matters. If the creditors vote in favour of the CVA proposal but the members vote against, the creditors’ vote will always prevail. 6.The Nominee reports to court that the CVA has been approved. 7.The Nominee usually becomes the Supervisor, and the Supervisor will implement the CVA proposal.

Answer 7

A CVA is binding on all unsecured creditors, including those who did not vote or voted against it. However, secured or preferential creditors are not bound unless they unanimously consent to the CVA (s 4 IA 1986) – this is a major disadvantage of the CVA procedure.

Answer 8

A creditor can challenge a CVA within 28 days of the CVA's approval by creditors being reported to the court on the grounds of 'unfair prejudice' that is the CVA treats one creditor unfairly compared to another or material irregularity relating to the procedure which the company has followed in seeking approval of the CVA, for example, the way in which the creditors' votes were calculated. Subject to that, the CVA becomes binding on all creditors at the end of the 28-day challenge period.

Answer 9

The Supervisor's role will be to agree creditors’ claims, collect in the unsecured funds to pay dividends (sums owed or a proportion thereof) to the creditors and generally ensure that the company complies with its obligations under the CVA. When a CVA has been completed, the Supervisor will send a final report on the implementation of the proposal to all shareholders/members and creditors who are bound by the CVA.

Answer 10

CVAs are commonly used within the retail sector to reach a compromise with creditors, particularly landlords to agree a reduction in rent in order to allow the company to attempt to continue trading. CVAs can be used alone or as part of an administration. Examples of companies which used CVAs during the coronavirus pandemic to agree rent reductions with landlords include All Saints (June 2020), and Clarks (October 2020). Wilko has also hit the news In May and June 2023 with mention of using a CVA in respect of their landlords too. As of August 2023, Wilko is in administration.

Answer 11

From the company's perspective, CVAs are advantageous as the directors remain in control of the company, and the company can continue to trade subject to the terms of the CVA proposal with the hope of the company surviving as a going concern. However, the major disadvantage is that a CVA cannot bind secured or preferential creditors without their consent.

Answer 12

Trade creditors tend to support CVAs as they are likely to recover more than if the company goes into administration or liquidation. For landlords, a CVA may result in heavily discounted rents and a loss of income. Equally, retail properties are not easy to re-let so a landlord may prefer to receive reduced rents rather than have empty properties generating no income at all if CVA proposals are not approved.

Answer 13

The other formal agreement to be considered is the Restructuring Plan (the Plan). Introduced by CIGA 2020, the purpose of the Restructuring Plan (Plan) is to compromise a company’s creditors and shareholders and restructure its liabilities so that a company can return to solvency. A Plan is a hybrid of a CVA and a ‘scheme of arrangement’ under CA 2006, (the latter is a type of restructuring mechanism that may be used for solvent or insolvent companies). The Plan, however, can only be used by companies which have or are likely to encounter financial difficulty.

Answer 14

A Plan requires court approval which is called a ‘sanction’. Creditors and members must be divided into classes and each class which votes on the Plan must be asked to approve it. The votes needed by the class meetings for approval are similar to those under a CVA, so that the Plan must be approved by at least 75% on value of those voting in each class.

Answer 15

Novel features of the Plan include: * The court can exclude creditors and shareholders from voting even if they are affected by the Plan if they have no genuine economic interest in the company; * The court can sanction a plan which brings about a “cross-class cram down” if: * the dissenting class would not be any worse off than they would be in the event of the cross-class cram down not being approved; and * the restructuring plan has been approved by at least one class of creditors or members who would receive payment or have a genuine economic interest in the company in the event of the cross-class cram down not being approved.

Answer 16

A cross class cramdown means that one rank of creditor can force the Plan on another class of creditor who has voted against the Plan. A cramdown of shareholders means forcing shareholders to accept a debt for equity swap in which creditors are able to hold new shares in the company in place of their debt claims. The Plan is likely to be used by directors alongside the pre-insolvency moratorium but can also be used by administrators and liquidators, considered in later topics.

Answer 17

The Plan may be better than a CVA because it can compromise the rights and claims of secured creditors and shareholders. A CVA cannot do this. The other advantage of a Plan is that it can be sanctioned by the court to bind all creditors even where the requisite majority approval is not obtained in every voting class of creditors and shareholders.

Answer 18

After liquidation, administration is the next most common insolvency procedure. Recent examples of companies that have gone into administration include amongst others, Laura Ashley, Debenhams, Cath Kidston and Carluccios and now Wilko. Administration is a 'collective' procedure, meaning that the administrator acts in the interests of the creditors as a whole rather than on behalf of a particular creditor.

Answer 19

They are also officers of the court (even if appointed out of court) and owe duties to the courts as well as to the creditors of the company. Relevant law for adminstrations is contained in Schedule B1 IA 1986 (Sch B1). Individuals who are appointed as administrators must be licensed insolvency practitioners.

Answer 20

Sch B1 provides that the administrators must perform their functions with the objective of achieving one of the three objectives. These objectives are in a specific order and are: (a) First, to rescue the company as a going concern, or if that is not reasonably achievable, (b) Secondly, to achieve a better result for the company's creditors as a whole than would be likely if the company were wound up..., or if that is not reasonably achievable, and (c) Thirdly, to realise the company's property in order to make a distribution to one or more secure or preferential creditors.

Answer 21

These cascading objectives are extremely important as they guide the actions of the administrator throughout the process. Objective (b) is most likely to be achieved.

Answer 22

There are two different procedures for the appointment of an administrator: the court procedure and the out of court procedure. We will deal first with the court procedure. The court may appoint an administrator where the company is or is likely to become unable to pay its debts (Sch B1 para 11(a)) on the application of: the company, the directors, a creditor, the supervisor of a CVA or a liquidator. The court when deciding to make an administration order must consider that the appointment is reasonably likely to achieve the purpose of the administration (Sch B1 para 11(b)). I

Answer 23

An interim moratorium temporarily freezing creditor action comes into effect on the application to court and until the administration order is made and lasts until either, until the administration order is made, or the court dismisses the application. Appointments by court order are fairly uncommon. The usual case when this happens is where a creditor has begun winding up proceedings against the company and the directors wish to appoint administrators before the court has made a winding up order. In this situation, the out-of-court appointment procedure is not available to the directors and they must apply to court for an order to appoint administrators. If the court makes an administration order, the pending winding up proceedings are automatically dismissed.

Answer 24

A summary of the court procedure is below: Apply to court - Interim Period including interim moratorium – Hearing and order Appointment of administrator – out of court procedure Appointing administrators out of court is far more common than using the court procedure. There are two out of court procedures for the appointment of administrators. First under Sch B1, the directors or the company may appoint an administrator out of court (in practice it is usually the directors who appoint under Sch B1 Para 22 rather than the company). Secondly, under Sch B1 Para 14 a holder of a qualifying floating charge holder (“QFC” ) may appoint an administrator out of court.

Answer 25

A QFC means a floating charge which (i)together with any other security that the holder of the floating charge holds relates to the whole or substantially the whole of the company's property and (ii) the document that creates it provides that either Sch B1 para 14 IA 1986 applies to the charge or that the holder has the power to appoint an administrator or an administrative receiver.

Answer 26

Most floating charges held by creditors will be QFCs. If a bank lends to a company, it will usually request a QFC to secure the loan. If there is an appointment under Para 22 by the directors, they must file a notice of intention to appoint ('NOI') at court and, not less than 10 business days later file a notice of appointment at court. The administrators' appointment takes effect when the second notice is filed at court.

Answer 27

If the company has granted a QFC then the process is different. When the directors file the NOI at court, they must also send the NOI to the holder of the QFC. The QFC then has 5 business days to appoint its own choice of administrator. If the QFC does not do this, the directors can file the notice of appointment in the usual way and the directors' choice of administrator is appointed.

Answer 28

If a QFC holder wishes to appoint an administrator out of court, it must first enforce its security in accordance with the terms of the QFC and the appointment will take effect when it has filed a notice of appointment at court. Where there is more than one holder of a QFC, a holder of a QFC which ranks below another QFC in priority (normally determined by a priority agreement entered into by the QFC holders), it must first give two business days’ notice to the holders of a QFC which have priority and can only proceed with the appointment if the higher ranking QFC holders consent to the appointment.

Answer 29

A summary of the out of court procedure is below: · Company/Directors File NOI &serve QFCH - Wait 5 business days - Appoint and file Notice of Appointment - Administrator appointed! · QFCH (1st ranking) Appoint and file notice of appointment - Administrator appointed!

Answer 30

The administrator is an officer of the court and has a duty to act in the interests of all the creditors to achieve the purposes of the administration. When an administrator is in office, The directors are unable to exercise any of their management powers without the consent of the administrator, but the directors remain in office. Employees also remain employed by the company . An administrator’s powers include the power to carry on the business of the company, take possession and sell the property of the company, (only with the consent of the fixed charge holder or the court if the property is subject to a fixed charge), borrow money and execute documents in the company’s name. Generally, administrators do not have the power to pay a dividend to unsecured creditors without obtaining court permission.

Answer 31

Once appointed, the administrator has up to eight weeks to produce a report setting out proposals for the conduct of the administration which may include proposals to restructure liabilities through a scheme of arrangement, a restructuring plan or a CVA . This is sent to all creditors for their approval. If the administrator's proposals are rejected, the company will usually be placed into liquidation. However, if the administrator's proposals are accepted, the administrator will proceed with their proposals. If their proposals are achieved, the company will exit administration. There is a 12-month fixed time limit for the completion of administrations, although it is possible to obtain extensions.

Answer 32

One key benefit of administration is that during administration, the company has the benefit of a full moratorium (Sch B1 para 42-44 IA 1986). During this time, all business documents and the company's website must state that the company is in administration. During the moratorium (except with consent of the court or the administrator): 1.No order or resolution to wind up the company can be made or passed; 2.No administrative receiver of the company can be appointed; 3.No steps can be taken to enforce any security over the company’s property or to repossess goods subject to security, hire purchase and retention of title;

Answer 33

4.No legal proceedings, execution or other process can be commenced or continued against the company or its property, and 5.A landlord cannot forfeit a lease of the company’s premises. Note: Where there is an interim moratorium following a court application to appoint an administrator or the directors file a NOI, items (a), (c)-(e) above apply, but only the court can consent to the creditor taking the step in question. In addition, the interim moratorium does not prevent a QFC holder from appointing an administrator

Answer 34

Administrators have wide powers under IA 1986 to 'do all such things as may be necessary for the management of the affairs, business and property of the company' (s 14(1) IA 1986). These include the powers to: * Remove and appoint directors (s 14, Sch 1 and para 61 Sch B1); * Dispose of property subject to a floating charge (para 70 Sch B1); * Dispose of property subject to a fixed charge (with the court's consent) (Para 71 Sch B1) In addition, administrators may bring proceedings against directors for fraudulent and wrongful trading (see later topic).

Answer 35

A pre-packaged administration is where the business and assets of an insolvent company is prepared for sale to a selected buyer prior to the company's entry into administration. The terms of the sale agreement are negotiated and agreed before the administrators’ appointment and the administrators complete the sale with the buyer immediately following their appointment. Pre-packaged sales have the advantage that the goodwill and continuity of the business are not damaged by the administration and certainty of result is achieved for the creditors. Often the pre-pack buyer will be an entity associated with the holder of the QFC, one or more of the existing shareholders or directors of the company.

Answer 36

Pre-packaged sales are controversial, particularly where the sale is to existing shareholders or directors. The concern is often that the sale does not take place at the proper price and that creditors are given insufficient information to determine whether the sale was in their best interests.

Answer 37

The Administration (Restrictions on Disposal to Connected Persons) Regulations 2021 restrict the ability of an administrator to enter into a pre-packaged sale with the company's directors or shareholders (or persons connected to them) unless the sale has been approved in advance by the creditors or the buyer has obtained an evaluator's qualifying report. This report must be sent to Companies House and all creditors.

Answer 38

The UK department store group appointed administrators for a second time in May 2020 to protect itself from its creditors. The administrators were pursuing three strategies; a sale of the business, a restructure of the business and the wind-down of the business. Debenhams had heavy debts of around £600m. Debenhams initially closed its Irish division, which had eleven stores, 958 staff and 300 concessions, and also closed its Hong Kong and Bangladeshi subsidiaries. The Debenhams brand was bought by fashion retailer Boohoo for £55m in January 2021. The stores reopened to clear stock and then began to close. The last remaining UK stores closed in May 2021. The Debenhams brand continues its operations online as part of the internet-only fashion retailer Boohoo.

Answer 39

The fashion and accessories chain appointed administrators in April 2020. Like many fashion retailers, the company had longstanding problems in maintaining sales and profitability. It lost £27m between 2018 - 2020, resulting in its closing stores and cutting head-office staff. There were 200 stores globally. In May 2020, the company’s parent company, Baring Private Equity Asia, bought the company’s brand and online operations through a pre-packaged deal from the administrators. This led to the closure of all 60 UK stores The company went on to trade in the UK as an online-only retailer.

Answer 40

In December 2020, Cath Kidston returned to the UK high street with the re-opening of its flagship store in London’s Piccadilly. In July 2021, it was bought by restructuring experts, Hilco Capital. Unfortunately, it was put up for sale again and the brand name was bought in March 2023 by Next plc who closed the remaining four stores.

Answer 41

We have seen that administration is a collective procedure; in contrast, receivership is an enforcement procedure which is conducted in the interests of a secured creditor. There are three types of receivers that we will consider in this topic: 1.Administrative receivers (note that this is now a rare procedure); 2.Fixed charge receivers; 3.Court-appointed receivers.

Answer 42

Administrative receivership is now a rare procedure and is prohibited in most cases. When applicable, a secured creditor with fixed and floating charges over all of the company's assets may appoint an AR. The AR will take control of the secured assets, sell them and use the proceeds to repay the debt owed to the secured creditor.

Answer 43

It is an enforcement procedure carried out in the interests of the secured creditor) which appointed the AR rather than a collective procedure, such as administration or liquidation, which is conducted in the interests of creditors as a whole. Only a licensed insolvency practitioner can be appointed as an AR. ARs may only be appointed by QFC holders in two cases, where the floating charge was created before 15 September 2003; or where one of the statutory exceptions applies.

Answer 44

Fixed charge receivers are the most common type of receivership and the receiver does not have to be a licensed insolvency practitioner. Fixed charge receivers are appointed by the holders of a fixed charge pursuant to the terms of the relevant security document. They are appointed to enforce the security, manage and sell the secured assets (most commonly, land and buildings) and out of the sale proceeds, repay the debt that is owing to their appointor, often a bank. They owe their duties primarily and exclusively to the appointor (otherwise known as the chargee or mortgagee;

Answer 45

They owe a limited duty to the debtor (otherwise known as the chargor or mortgagor) to act in good faith in the course of their appointment. In exercising their powers receivers usually act as an agent for the chargor/mortgagor which is a legal anomaly but facilitates the conduct of the receivership. Receivers usually have extensive powers set out in the security document and some limited powers under the Law of Property Act 1925 These powers typically include the ability to sell, mortgage and collect rents from the secured assets.

Answer 46

A fixed charge receiver becomes the receiver and manager only of the assets secured by the security document and is only entitled to deal with those and not any other assets of the company. A fixed charge receiver cannot be appointed while a pre-insolvency moratorium subsists or if the company is in administration.

Answer 47

Court-appointed receivers are relatively rare at the moment. They are appointed by the court and their powers and duties are set out in the court order. Appointments are sometimes made where shareholders are locked in dispute. Receivers may also be appointed by the court under the Proceeds of Crime Act 2002 and associated legislation. Given the move towards imposing criminal sanctions for corporate misconduct, such orders are likely to become more common. The court-appointed receiver’s duty is typically to run the business until the dispute is determined.

Answer 48

* Administration is a collective procedure conducted in the interests of a company's creditors as a whole. Administrators are insolvency practitioners who may be appointed by the court but are more likely to be appointed using the out of court procedure by either the directors or a QFC holder. * The administrator performs their duties in accordance with the statutory objectives. * Once the administrator is appointed, the directors are unable to exercise any of their powers without the consent of the administrator. The administrator has wide powers to manage the company and may also bring actions against directors. * The appointment of an administrator gives rise to a moratorium, protecting the company from hostile actions by creditors. * Receivership is an enforcement procedure for the benefit of a secured creditor. There are three types of receivership : (1) administrative receivership; (2) fixed charge receivership; and (3) court-appointed receivership.

Answer 49

The directors must file a notice of intention to appoint an administrator at court and serve this on any QFCH 5 business days before they file the notice of appointment to appoint an administrator.

Answer 50

During an administrative moratorium, a QFCH can appoint its own choice of administrator.

Answer 51

A fixed charge receiver owes its duties primarily to its appointor.

Answer 52

Liquidations are the most common type of insolvency procedure. In 2019 more than 87% of all company insolvencies were liquidations. The bulk of these were creditors' voluntary liquidations. You have seen references to "liquidation" earlier in this module, but it is important to understand the meaning of this term. Liquidation is the process by which a company's business is wound up and its assets transferred to creditors and (if there is a surplus of assets over liabilities) to its members.

Answer 53

The company will then be removed from the register of companies and dissolved. The terms "liquidation" and "winding up" are used interchangeably. However, it is important to note that it is not only insolvent companies which are wound up or liquidated. Solvent companies may also be wound up and this is not uncommon. Companies may be wound up simply because the business opportunity has come to an end, due to internal disputes, or where the members wish to move on to new ventures.

Answer 54

Liquidation is the most basic and oldest of the corporate insolvency procedures. The liquidator’s function is to realise the company’s assets for cash, determine the identity of the company’s creditors and the amount owed to each of them and then pay a dividend to the creditors on a proportionate basis relative to the size of their determined claims (creditors of the same rank are said to rank "pari passu"). The ranking of creditors’ claims (that is, the order in which they must be repaid) is set out in the IA 1986, the IR 2016 and by general law.

Answer 55

Liquidation is the end of the road for the company and a liquidator has only very limited powers to carry on the business of a company. They will usually close a company’s business and dismiss employees very soon after their appointment. They will usually sell assets on a piece-meal basis rather than selling the assets and business as a going concern. The stay on legal proceedings which applies in a liquidation is very limited. For these reasons, it is common for companies to enter into liquidation after having been through a different insolvency procedure (eg administration) first.

Answer 56

There are two types of liquidation: 1. Compulsory liquidation 2. Voluntary liquidation – which is further subdivided into: * Members' voluntary liquidation * Creditors' voluntary liquidation.

Answer 57

Following liquidation, the company’s life is generally brought to an end automatically by dissolution. In the case of a compulsory liquidation, this will be three months after notice by the liquidator to the Registrar of Companies that the winding up of the company has been completed. In the case of voluntary liquidation, dissolution will occur three months from the filing by the liquidator of the final accounts and return. On dissolution, the company ceases to exist.

Answer 58

Compulsory liquidation is a court-based process for placing a company into liquidation. To begin the process, an applicant presents a winding up petition to the court under which the applicant requests the court to make a winding up order against the company on a number of statutory grounds. When the court grants a petition for compulsory liquidation, the order operates in favour of all the creditors and contributories (members and some former members) of the company.

Answer 59

The Official Receiver will become the liquidator and continue in office until another person is appointed (s 136(2) IA 1986). The Official Receiver will notify Companies House and all known creditors of the liquidation. The Official Receiver has the power to summon separate meetings of the company's creditors and contributories for the purpose of choosing a person to become the liquidator of the company in his place (s 136(4)).

Answer 60

The following persons can apply to the court for the issue of a winding up petition: a creditor; the company (acting by the shareholders; this would happen where there are insufficient assets in the company to fund a voluntary liquidation); the directors (by board resolution); again, this would happen where there are insufficient assets to fund a voluntary liquidation; an administrator; an administrative receiver; the supervisor of a CVA; and the Secretary of State for Business, Energy & Industrial Strategy (on public policy grounds).

Answer 61

The key grounds on which the court can order a company to be wound up, are set out in s 122(1) IA 1986 and include: (1) the company is unable to pay its debts; and (2) it is just and equitable for the company to be wound up.

Answer 62

The most common ground for a winding up petition is the company's inability to pay its debts under s 122(1)(f) IA 1986. This can be evidenced by (s 123 IA 1986): Failure by the company to comply with a creditor’s statutory demand. A statutory demand is a written demand in a prescribed form requiring the company to pay a specific debt. The statutory demand can only be used if the debt exceeds £750 and is not disputed on substantial grounds. The company has 21 days in which to pay the debt, failing which the creditor has the right to petition the court to wind up the company.

Answer 63

The creditor sues the company, obtains judgment and fails in an attempt to execute the judgment debt. Proof to the satisfaction of the court that the company is unable to pay its debts as they fall due (the "cash-flow test"). The cash flow test is usually satisfied by going through the statutory demand process in 1 above but that is not essential. Proof to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account contingent and prospective liabilities**(the "balance sheet test")**.

Answer 64

To prevent an insolvent company from transferring its assets to third parties at the expense of its creditors, under s 127 IA1986 certain dispositions of a company's property, transfers of its shares and changes to its members will be void if made after the commencement of the winding-up. This means if these dispositions etc were made during the period between the presentation of the winding up petition and a winding up order being made, then they will be void. Once a court finds that the grounds for a winding up order are satisfied and it makes a compulsory winding up order, the consequences include as follows: * an automatic stay will be granted on commencing or continuing with proceedings against the company; * all employees will be automatically dismissed, and * the directors lose their powers and they are automatically dismissed from office.

Answer 65

Section 84(1) IA 1986 allows for the company to be wound up without a court order in 3 situations: 1. Where the company's purpose according to the articles has expired and resolution of the shareholders – RARE 2. Where the company resolves by special resolution to wind up the company. The company must be solvent – MVL 3. Where the company resolves that it is advisable to wind up the company due to its inability to carry on its business. Here the company is insolvent – CVL

Answer 66

This method of voluntary winding up may only be used for companies which are solvent. The directors are required to swear a declaration of solvency stating that they have made a full enquiry into the company's affairs and they have formed the opinion that the company will be able to pay its creditors in full, together with interest at the official rate, within a period not exceeding 12 months from the commencement of the winding up (s 89(1) IA 1986). The declaration must also contain a statement of the company's assets and liabilities as at the latest practicable date before making the declaration.

Answer 67

Any director making a declaration of solvency who does not have reasonable grounds for their opinion is liable to a fine or imprisonment (s 89(4) IA 1986). If the debts are not actually paid in full within the specified period it will be presumed that the director did not have reasonable grounds for his opinion. The members must then pass a special resolution to place the company into MVL and an ordinary resolution to appoint a liquidator. The winding up commences when the special resolution is passed (s 84(1) and s 86 IA 1986). On a MVL, if the liquidator considers that the company will be unable to pay its debts, they must change the members' winding up into a creditors’ voluntary liquidation.

Answer 68

This is the most common insolvency procedure and in 2019 almost 80% of all liquidations were CVLs. It is a form of insolvent liquidation commenced by resolution of the shareholders, but under the effective control of the creditors who can choose the liquidator. Where a directors' declaration of solvency has not been made, the liquidation will be a creditors' voluntary liquidation. The procedure is for the shareholders to pass a special resolution to place the company into a CVL and an ordinary resolution to appoint a nominated liquidator.

Answer 69

Within 14 days of the special resolution being passed the directors of the company must ask the company’s creditors to either approve the nominated liquidator or put forward their own choice of liquidator. Where the creditors’ choice of liquidator differs from that of the company’s shareholders, the creditors’ nomination will take precedence. The directors must also draw up a statement of the company’s affairs (setting out the company’s assets and liabilities) and send it to the company’s creditors.

Answer 70

As noted above, the appointment of a liquidator terminates the management powers of the company's directors, and these powers are transferred to the liquidator together with their fiduciary duties, meaning that liquidators must act in good faith, avoid conflicts of interest and not make a secret profit. The liquidator must be either a qualified Insolvency Practitioner (s 230 IA 1986) or the Official Receiver (appointed by the court in the short term) and acts as an officer of the court.

Answer 71

The liquidator in both a CVL and a compulsory liquidation have extensive statutory powers. The principal functions of a liquidator in a winding up by the court are: * To secure and realise the assets of the company then distribute to the company's creditors (s 143 IA 1986); and * To take into their custody or under their control all the property of the company (s 144 IA 1986).

Answer 72

The liquidator's powers to manage the company are set out in Part I to III Sch 4 IA 1986 and include the ability to: * Sell any of the company's property; * Execute deeds and other documents in the name of the company; * Raise money on the security of the company’s assets; * Make or draw a bill of exchange or promissory note in the name of the company; * Appoint an agent to do any business that the liquidator is unable to do;

Answer 73

* Do all other things that may be necessary to wind up the company's affairs and to distribute its assets. * Carry on the business of the company, but only to the extent that is necessary for the beneficial winding up of the company. * Commence or defend court proceedings in the name of the company, for example to recover debts owed to it or dispute debts alleged to be owed by the company. * Pay debts and compromise claims.

Answer 74

Liquidators have a duty to preserve the company's property and to maximise the value of the company's assets available for distribution. They are empowered to avoid certain antecedent transactions in order to maximise the amount of assets available for distribution to creditors as follows: § Disclaim onerous property (s178 IA 1986); § Apply to court to set aside a transaction at an undervalue (s238 IA 1986); § Apply to court to set aside a preference (s 239 IA 1986); § Apply to court to set aside, or vary the terms of, an extortionate credit transaction (s 244 IA 1986); § Claim that a floating charge created for no new, or inadequate, consideration is invalid (s 245 IA 1986); § Apply to court to set aside a transaction that will defraud creditors (s 423 IA 1986). Note that many of these powers also apply to administrators.

Answer 75

* There are two main types of liquidation: compulsory liquidation or voluntary (members' or creditors' voluntary liquidation). * A members' voluntary liquidation applies only to solvent companies where the directors swear a statutory declaration of solvency. * Compulsory liquidation may be ordered by the court on any of the grounds under s 122(1) IA 1986. The most common ground is that the company will be unable to pay its debts.

Answer 76

* Once the liquidation commences, the directors lose their powers and the liquidator takes control of the company. * The role of the liquidator is to realise the assets of the company and to distribute these in accordance with the statutory order of priority.

Answer 77

In order to make a payment to creditors (known as a dividend), a liquidator will (and an administrator may) be required to distribute the assets of the company to its creditors in a specified order of priority in payment in accordance with complex rules. Inconveniently, these rules have no single source: they are found piecemeal in different parts of the IA 1986, the Insolvency Rules 2016 and general law. The following (simplified) order of priority in payment summarises the cumulative effect of these rules. This order assumes that that there is a qualifying floating charge (QFC) granted on or after the Relevant Date (15 September 2003).

Answer 78

Administrators may also pay dividends to (another name for amounts paid to creditors in respect of sums that they are owed) unsecured creditors if they have court permission to do so and the rules set out below will also apply to them. It should also be noted that the statutory order of distribution can be affected by priority or subordination agreements entered into by creditors under which one class of creditor agrees to rank behind another.

Answer 79

1.Liquidator’s fees and expenses of preserving and realising assets subject to fixed charges. 2.Amount due to fixed charge creditor out of the proceeds of selling assets subject to the fixed charge. 3.Liquidator's other remuneration, costs and expenses. 4.Preferential creditors (the first tier and then the secondary tier). 5.Creation of the prescribed part fund (if available) for unsecured creditors. 6.Amount due to creditors with floating charges. 7.Unsecured/trade creditors (including payment of the prescribed part). 8.Interest owed to unsecured creditors. 9.Shareholders.

Answer 80

Fixed Charged Assets: The assets subject to fixed charges are realised first by the liquidator and the proceeds are applied as follows:

Answer 81

a. Liquidator’s costs of preserving and realising assets subject to a fixed charge b. Fixed charge creditors (in respect of assets subject to a fixed charge) The proceeds of selling assets which are subject to a fixed charge (or mortgage) must first be used to pay off the debt secured by such charge (or mortgage). The proceeds will be paid net of the liquidator's costs and associated fees of selling the assets (e.g. the liquidator's fees, legal costs and surveyor or estate agent fees in selling property). If the proceeds are not sufficient to discharge the debt in full, then the creditor may be able to recover the balance lower down the order of priority if it also has a floating charge which secures the debt but if not, the unpaid part of the debt will rank as unsecured debt.

Answer 82

In this example we assume that a creditor has been granted a floating charge over all of the company's assets not otherwise subject to fixed charges. The proceeds of sale of assets subject to the floating charge will be applied as follows:

Answer 83

This includes all other costs and expenses of the liquidation, including the costs of selling assets secured by a floating charge and the costs and expenses incurred in pursuing litigation (such as actions in respect of wrongful trading or voidable transactions). Such litigation will require prior approval from preferential creditors and floating charge holders, or alternatively from the Court, otherwise the liquidator cannot claim the costs of litigation. The reason for this rule is that it is these creditors who will effectively pay the costs of litigation should it fail.

Answer 84

For insolvencies that commence on or after 1 December 2020, there are two tiers of preferential creditors: a first tier and secondary tier. The first tier consists of (i) employee claims for unpaid remuneration due in the four months before the ‘relevant date’ (generally the date of the winding up resolution or petition) but subject to a maximum of £800 per employee plus accrued holiday pay, and (ii) for certain contributions owing to an occupational pension scheme.

Answer 85

The secondary tier consists of Crown debts comprising (i) the PAYE and employee national insurance deductions made by the company from employee salaries and wages not paid over to HMRC and (ii) the VAT the company has received on supplies it has made and which it has not paid over to HMRC. Note that these Crown debts used to be preferential until the EA 2002 reforms came into force when they were removed from the list of preferential debts. The Government has now restored their preferential status. Tier 1 preferential debts must be paid in full before tier 2 preferential debts are paid.

Answer 86

The Enterprise Act 2002 introduced the "prescribed part" fund into the IA 1986 to increase the chance that unsecured creditors would get paid something in a liquidation. The idea is that some money is reserved for the unsecured creditors and does not flow into the pocket of floating charge holders. The prescribed part fund is sometimes referred to as the "ring fenced" fund and applies to realisations from floating charges created on or after 15 September 2003. The prescribed part fund is calculated by reference to a certain percentage (the ‘prescribed part’) of the company’s ‘net property’. This is set aside (ring-fenced) for distribution to the company’s unsecured creditors - s. 176A. ‘Net property’ means the proceeds of selling property other than that which is subject to a fixed charge, after deduction of the liquidator’s expenses and any preferential debts.

Answer 87

The amount of the company’s net property that will be ring-fenced is 50% of the first £10,000 and 20% thereafter up to a maximum fund of £600,000 for floating charges created before 6 April 2020 and £800,000 for floating charges created on or after that date. This pot of money is reserved at this stage to be shared rateably among the unsecured creditors when they are paid (ie at step 7 below). It should be noted that for this purpose, a floating charge holder who suffers a shortfall on floating charge realisations does not share in the prescribed part fund, although the shortfall does constitute an unsecured claim against the company.

Answer 88

After payment under the previous steps, the liquidator then pays any remaining realisations from assets subject to floating charges to the floating charge holders themselves (according to the priority of their security, if there is more than one floating charge holder which is usually determined by a priority agreement between the floating charge holders).

Answer 89

For example: · ordinary trade creditors who have not been paid; · secured creditors to the extent that the security is invalid or assets subject to the security have not realised sufficient funds to pay off the secured debt. All the unsecured creditors rank and abate equally. This is known as the “pari passu” rule. For example, if a company has only two creditors (A and B) and creditor A has a claim against the company of £100 and creditor B has a claim against the company of £50 (making total claims of £150) but the assets available for distribution to the creditors are £75, creditor A will receive £50 and creditor B will receive £25. Note that a floating charge holder cannot claim for a dividend out of the prescribed part fund in respect of any shortfall that it incurs under its security.

Answer 90

Interest accruing on unsecured debts from the commencement of the winding up.

Answer 91

The shareholders of the company will rank last. However, their rights, as between themselves, will depend on the rights attributable to their particular class or classes of shares under the Articles of Association. For example, preference shareholders may have preferential rights to a return of their capital on a winding up in priority to ordinary shareholders.

Answer 92

In most insolvent liquidations, the shareholders do not receive any return from their shares, since they are the last to be paid in the statutory order of priority and there is not usually enough assets out of which to pay the amounts owed to the creditors .

Answer 93

Having looked at the order of priority of payment the benefit of fixed charges is clear and also illustrated from the example below. Fixed charge holders have the right to receive back the amounts owned to them from the sale proceeds of the fixed charged assets before any other class of creditor (see Step 2 earlier) and do not share those proceeds with preferential creditors, floating charge holders or unsecured creditors.

Answer 94

Proceeds of sale Freehold property - £200,000 Other assets - £300,000 Liquidator’s fees For sale of fixed charge assets - £7,000 For sale of other assets (general costs) - £30,000 Creditors Bank - £320,000 Trade creditors £315,000 The bank has a fixed charge on freehold property and a floating charge over other assets

Answer 95

Assets subject to fixed charge Asset subject to fixed charge (freehold property - £200,000 Liquidator’s fees (fixed charge) – (7,000) Bank receives (193,000) Apply in order of priority Assets subject to floating charge Asset subject to floating charge realise - £300,00 Liquidator’s costs and general expenses – (£30,000) Preferential creditors – (£0) Net Property Prescribed part calculation 50% x £10,000 - £5,000 20% x £260,000 - £52,000 (57,000) £213,000

Answer 96

Calculate the amount due to the floating charge holder From previous slide - £213,00 Balance due to floating charge creditor (bank) – £320,000 – 193,000 - (127,000) Balance available to unsecured creditors £86,000 Add prescribed part fund £57,000 Total available for unsecured creditors £143,000 Unsecured creditors are owed 315,000 so 143,000 over 315,000 multiply 100 = 45.39 So each unsecured creditor gets a dividend of 45.39 pence for every £

Answer 97

* 1. Liquidator’s fees and expenses of preserving and realising assets subject to fixed charges. * 2. Amount due to fixed charge creditor out of the proceeds of selling assets subject to the fixed charge. * 3. Liquidator's other remuneration, costs and expenses. * 4. Preferential creditors (the first tier and then the secondary tier). * 5. Creation of the prescribed part fund (if available) for unsecured creditors. * 6. Amount due to creditors with floating charges. * 7. Unsecured/trade creditors (including payment of the prescribed part). * 8. Interest owed to unsecured creditors. * 9. Shareholders.

Answer 98

There are 2 tiers of preferential creditors – employees for remuneration due in the 4 months before the winding up subject to a maximum of £800 plus accrued holiday pay, and HMRC.

Answer 99

This element covers two formal personal insolvency procedures: (1) Individual Voluntary Arrangements ('IVAs'); and (2) bankruptcy, including the challenge of voidable transactions by individuals

Answer 100

The principles relating to personal insolvency and corporate insolvency are similar although the terminology is different. Just as the directors of a company need to recognise when a company is in financial difficulty, individuals need to do the same. The indicators of financial difficulty and the options available to individuals are similar for individuals as for companies, namely: (1) do nothing; (2) do a deal with some or all of their creditors; or (3) seek the making of a bankruptcy order.

Answer 101

The two formal insolvency procedures for insolvent individuals that are the focus of this topic are bankruptcy and individual voluntary arrangements ('IVAs'). The key statute governing bankruptcy and IVAs is the Insolvency Act 1986 (IA86), together with the Insolvency Rules 2016. Bankruptcy is a collective insolvency procedure enabling an orderly collection, sale and distribution of an insolvent individuals' assets for the benefit of all the bankrupt's creditors. An IVA (Part VIII sections 252-263 IA 1986) is often an alternative to bankruptcy and is also a collective procedure. Both of these procedures are considered further below.

Answer 102

An IVA has many similarities to a company voluntary arrangement ('CVA'). It is an arrangement under which a debtor makes a proposal for a compromise of their liabilities with their creditors. As with CVAs, a debtor’s proposal for an IVA will usually involve the debtor paying only a part of the contractual debt owed and/or having a longer period to pay than the contractual period. It is a flexible procedure that can be tailored to a debtor’s circumstances. It usually requires the debtor to pay funds to the IVA supervisor out of their income (perhaps from the debtor’s business) or assets or a combination of both. The IVA Supervisor will then pay a dividend to creditors based on their determined claims against the debtor.

Answer 103

If approved by the requisite percentage of creditors (see below), the IVA binds the debtor and all of their creditors to the terms of the IVA. A licensed insolvency practitioner must be appointed as Supervisor of the IVA. The Supervisor supervises the debtor’s implementation and compliance with the terms of the IVA. An IVA can last any length of time, but three to five years is common in practice.

Answer 104

1.The debtor drafts a proposal for compromise of their liabilities and a statement of their affairs (e.g. full details of assets and liabilities) usually with the assistance of an insolvency practitioner who is known as a N****ominee at this stage. 2.The nominee submits a report to the court stating their opinion as to whether the debtor's proposal has a reasonable prospect of being approved and implemented and whether creditors should be asked to vote on it.

Answer 105

3. A debtor can apply to the court for an interim order. If the court grants the order, it brings about a moratorium, freezing existing or proposed bankruptcy and other proceedings and legal process (including execution, landlord’s right of peaceable re-entry and/or distress for rent) against the debtor. A court order is needed for a creditor to exercise any right or remedy otherwise restricted by the moratorium. The interim order (and the moratorium) lasts 14 days, which the court can extend. 4.In order for the proposal to become binding, it must be approved by creditors holding at least 75% (by value) of the total debt owed to the creditors voting on the proposal but if that approval is given, it will not be effective if more than half the of the total value of creditors who are not associates of the debtor vote against it.

Answer 106

* If approved, the IVA binds the debtor and all of their unsecured creditors. An IVA cannot bind a secured creditor or a preferential creditor without that creditor’s consent. * The Nominee becomes the Supervisor of the IVA and is responsible for its implementation. The Supervisor can apply to court for directions and must report to the court periodically. If the debtor fails to comply with the terms of the IVA, the supervisor usually has the right under the terms of the IVA to petition for the debtor's bankruptcy. * At the end of the IVA, if the debtor has complied with the terms of the IVA such as making the necessary payments required, the creditors will have to write off any balance of their pre-IVA debts against the debtor.

Answer 107

Some advantages of an IVA include the following: * it is an alternative to bankruptcy and avoids the stigma and restrictions associated with bankruptcy; * it can bind all unsecured creditors; and * a moratorium is available if an interim order is made. Some disadvantages of an IVA include the following: * it may last longer than a bankruptcy; * it cannot bind a secured creditor or preferential creditor without that creditor’s consent; and * it can be an expensive and time-consuming process and there is some uncertainty as to whether creditors will approve it.

Answer 108

The next formal insolvency process is bankruptcy. A bankruptcy petition is usually brought by a creditor but may also be made by the debtor.

Answer 109

A ground for the petition is that the debtor is unable/has no reasonable prospect to pay its petition debts. The debt must be for a liquidated sum exceeding £5,000, generally unsecured, and the debtor must usually be domiciled or present in England and Wales.

Answer 110

The only ground for this petition is that the debtor is unable to pay its debts. The petition must be accompanied by a statement of affairs setting out the debtors' assets and liabilities.

Answer 111

The next formal insolvency process is bankruptcy. Bankruptcy is the equivalent to liquidation for a company. The bankruptcy process begins by a bankruptcy petition being presented, usually by a creditor but sometimes by the debtor.

Answer 112

* A ground for the petition is that at the time of the presentation of the petition, the debt is one the debtor appears unable to pay or has no reasonable prospect of paying. * The debt must be for an unsecured liquidated sum exceeding £5,000, and the debtor must usually be domiciled or present in England and Wales.

Answer 113

* The only ground for this petition is that the debtor is unable to pay their debts. * The petition must be accompanied by a statement of affairs setting out the debtors' assets and liabilities.

Answer 114

* The debtor’s inability to pay their debts is evidenced by: - a statutory demand that has neither been satisfied within three weeks from service of that demand, nor set aside by the court; or - an unsatisfied execution of a judgment or of another legal process. * If a court is satisfied that the grounds for a petition and other requirements set out above have been met, the court has discretion to make a bankruptcy order.

Answer 115

* Upon the making of a bankruptcy order, the Official Receiver will become the first trustee in bankruptcy (the ‘Trustee’) unless the court orders otherwise. A majority of creditors can seek the appointment of another person as Trustee (who must be a licensed insolvency practitioner). If there are few assets in the bankruptcy estate, it may be difficult to persuade anyone else to act as Trustee as there will be insufficient funds to pay fees and expenses. On the making of a bankruptcy order, the bankrupt (whilst undischarged) is prohibited from acting as a director or being involved in the management of a company, obtaining credit of over £500 without disclosing the bankruptcy, giving gifts and practising in certain professions. They are also deprived of ownership of their property except for their reasonable domestic needs.

Answer 116

The bankrupt’s estate (comprising all assets and rights of the bankrupt) vests in the Trustee immediately and automatically by operation of law upon the making of the bankruptcy order. This means that the bankrupt will have to give up possession or give access to their assets (including those which fall into the estate after the making of the bankruptcy order) to the Trustee. The Trustee has wide statutory powers to sell or otherwise deal with the assets in the estate including the carrying on of the bankrupt’s business, selling the bankrupt's assets and granting security over them.

Answer 117

The Trustee will collect in the assets of the estate including those assets which may be available to swell the estate as a result of challenging certain prior undervalue or preferences transactions. The Trustee will sell the assets of the estate and must distribute the money in the estate in accordance with a statutory order of priority for bankruptcies. Trustees, like liquidators, have the right to disclaim 'onerous property or contracts' so as to bring the bankrupt’s liability under them to an end. The most important example of onerous property is a lease of land/property.

Answer 118

The Trustee will ask creditors to 'prove' their claims against the bankrupt. This means creditors, if they want to claim a dividend from the bankrupt’s estate, must provide evidence to the Trustee to support their claims. The Trustee will then determine the amount of the creditor’s claim and a court can decide the matter if the creditor does not agree with the Trustee’s determination.

Answer 119

When proposing to pay a dividend to creditors, the Trustee must give notice to the creditors who have proved their debts, stating the amount of the sale proceeds received from a sale of the assets in the estate, any deductions that have been made from these proceeds and the amount of any dividend that they can expect to receive. The Trustee must pay dividends to creditors in accordance with a statutory order of priority which we will look at next.

Answer 120

The bankruptcy order of priority differs from the order of priority in corporate insolvencies and is as follows: 1.secured creditors (but limited to the value of the security itself and ranking with ordinary unsecured creditors for any amount not recovered under the security); 2.expenses of the bankruptcy including the Trustee’s remuneration; 3.two tiers of preferential creditors (identical to the ones on a corporate winding up); 4.ordinary unsecured creditors; 5.statutory interest; 6.debts of a spouse (must be provable but they are postponed to other creditors); and 7.finally, any surplus is payable to the bankrupt.

Answer 121

A bankrupt has a number of duties to the Trustee including a duty to provide information and assistance to the Trustee to enable the Trustee to carry out their functions. Section 333(1) IA86 states as follows: “The bankrupt shall- (a) give to a trustee such information as to his affairs; (b) attend on the trustee at such times, and (c) do all such other things, as the trustee may for the purposes of carrying out his functions reasonably require.”

Answer 122

It is a criminal offence for the bankrupt to fail to comply with their obligations under s 333 IA 1986 and they could face imprisonment for up to two years and unlimited fines. Also, the bankrupt runs the risk of having their automatic discharge suspended (see below).

Answer 123

Generally, a bankrupt is automatically discharged from bankruptcy after a maximum period of one year. Discharge means that the bankrupt is released from most of the bankruptcy debts and the personal restrictions eg acting as a director, obtaining credit etc mentioned above.

Answer 124

The Official Receiver or Trustee may apply for an order suspending the automatic discharge if the bankrupt fails to comply with their obligations under IA 1986. The bankrupt may be discharged in less than a year if the Official Receiver or Trustee files a notice stating that the bankruptcy does not require investigation or stating that they have concluded any such investigation within the one year period.

Answer 125

* The Secretary of State, or the Official Receiver acting on the Secretary of State’s direction, may apply to the court for a Bankruptcy Restriction Order (“BRO”) if the court considers it appropriate having regard to the conduct of the bankrupt (before or after the bankruptcy order). * Behaviour to be taken into account is listed in Schedule 4A IA86 and includes failure to keep records, entering into preferences or transactions at an undervalue, fraud and incurring a debt without reasonable expectation of being able to pay it. Generally, the application must be made within a year of the start of the bankruptcy.

Answer 126

* A BRO will operate for a period of between two and 15 years. For the duration of the order, the bankrupt is unable to act as a director or obtain credit of more than £500 without disclosing that they are subject to a BRO. * Breach of a BRO is a criminal offence punishable by fine and/or imprisonment. * Instead of being subject to court process, a bankrupt can offer the Secretary of State a bankruptcy restriction undertaking (BRU) which, if accepted, will have the same effect as a BRO.

Answer 127

If a bankruptcy order is in place, a Trustee has the power to challenge voidable transactions and will do this with the aim of increasing the assets available to creditors. In doing so, the Trustee will have to balance the costs and risks of litigation with the chances of success in making recoveries for the bankruptcy estate. The principles for voidable transactions for individuals are similar to corporate insolvencies but sometimes involve different time periods and different sections of IA86.

Answer 128

The voidable transactions that are the focus of this topic are: Transactions at an undervalue (s 339 IA86) Preferences (s 340 IA86) Transactions defrauding creditors (s 423 IA86) If the requirements for each of these voidable transactions are met, the court has the power to make such order as it thinks to restore the position to what it would have been but for the transaction or preference. A reference in this section to an “associate” means an associate as defined in s 435 IA 1986. Insolvency in the context of s339 and s340 IA 1986 voidable transaction claims means either cash flow or balance sheet insolvency.

Answer 129

A Trustee can bring a claim for TUV if the transaction is either: * a gift; or * in consideration of marriage or the formation of a civil partnership; or for a consideration the value of which in money or money’s worth is significantly less than the consideration provided by the bankrupt

Answer 130

Relevant time The transaction must take place within 5 years preceding the day of the presentation of the bankruptcy petition Is insolvency required It must be proved that the individual was insolvent but only if the transaction took place between 2-5 years from the day of the presentation of the petition. Presumption available Insolvency of the bankrupt is presumed (subject to rebuttal by the associate) where a transaction at an undervalue is entered into with an ‘associate’ of the bankrupt (see s 435 IA86 for the definition of associate).

Answer 131

A Trustee can bring a claim for a preference if: * that person is a creditor (or a surety or guarantor of their debts or liabilities); and the individual does anything or suffers anything to be done which has the effect of putting that person in a better position than they otherwise would have been in the event of the individual being made bankrupt. Relevant time Within 6 months preceding the day of the presentation of the petition if to an unconnected person; or within 2 years preceding the day of the presentation of the petition if to an associate. Is insolvency required It must be proved that the individual was insolvent at the time of the preference or became insolvent as a result of it.

Answer 132

It must be shown that the individual was influenced by the desire to prefer the creditor. There is a rebuttable presumption (for the associate to rebut) that the bankrupt individual was influenced by the desire to prefer the creditor where the preference is to an 'associate'

Answer 133

* The same provisions apply to TDCs for individuals as they do for companies. The detail is in the Voidable Transactions element in corporate insolvency. The key points are summarised below. * In addition to the list of persons that can bring a claim for TDC mentioned in the corporate insolvency element, the Trustee or Official Receiver can also bring a claim. * To bring a claim for TDC it must be shown that the transaction was a transaction at an undervalue with an intent to defraud creditors or to put assets beyond their reach and there is, therefore, a high evidential burden.

Answer 134

* There is no relevant time for bringing a TDC claim and therefore a Trustee is most likely to bring a TDC claim when they are outside the time limits for a transaction at an undervalue claim under s339 IA 1986. * There is also no need to prove that the debtor is or was insolvent.

Answer 135

Transactions at an undervalue s 339 : * Transaction for an undervalue * Within 5 years preceding the day of presentation of bankruptcy petition * Individual insolvent at time / as a result (this is presumed with associates) Transactions defrauding creditors s 423: * Must be transaction for an undervalue * Need intention to defraud creditors or to put assets beyond their reach * No need for individual to be insolvent and no relevant time to consider Preferences s 340: * Individual puts creditor in better position and influenced by desire to prefer * Within 6 months preceding the day of presentation of bankruptcy petition * Within 2 years preceding the presentation of bankruptcy petition if an associate and presumption of preference if with an associate * Individual insolvent at time / as a result

Answer 136

* An IVA is often an alternative to bankruptcy and allows an individual to make proposals for repayment and reach a binding agreement with their creditors under the supervision of an insolvency practitioner acting as the Supervisor. * A creditor, or the debtor themselves, can file a bankruptcy petition on certain specified grounds, most likely that the debtor is unable to pay its debts. The court has discretion to make a bankruptcy order and either the Official Receiver or an insolvency practitioner is appointed as Trustee. The Trustee is appointed to gather in and distribute the bankruptcy estate in accordance with the statutory order of priority. The Trustee has a wide range of powers in carrying out its duties.

Answer 137

* The Bankrupt has a duty to cooperate with the Trustee. The Bankrupt is automatically discharged and released from their bankruptcy debts after one year from the date of the bankruptcy order, provided they have complied with their duties to the Trustee. * The Trustee can bring claims for TUV’s, TDCs and preferences and the court can make a restoration order on such terms as it thinks fit.

Answer 138

An IVA must be approved by more than 75% in value of all creditors.

Answer 139

The debtor is unable to pay its debts as evidenced by an unsatisfied statutory demand that has been outstanding for three weeks from the date of service of the statutory demand.

Answer 140

The ‘relevant time’ for a trustee in bankruptcy to bring a claim for a transaction at an undervalue is within 5 years preceding the day of presentation of the bankruptcy petition.

Chapter 9: Insolvency Proceedures Flashcards

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