Company Insolvency - LGS 12

Question 1

When is a company insolvent ?

Answer 1

• liabilities exceed assets
• needs to get more cash in/out or sort out its debts
• creditors want payment
• directors have to be careful they don’t incur personal liability.

Question 2

Finance options to avoid insolvency

Answer 2

• Call in debts owed to company
• Outside investment
• Selling off “debts” owed to company
• Government funding

Question 3

Aims of corporate insolvency

Answer 3

• Protects creditors
• Balance interests of different groups of creditors
• Control (sometimes punish directors) directors
• Promote rescues
• Differs from personal insolvency = company may cease to exist

Question 4

Types of corporate insolvency

Answer 4

• Company Voluntary Arrangement (CVA)
• Administration
• Receivership
• Liquidation:
  1. Members Voluntary (MVL)
  2. Creditors Voluntary (CVL)
  3. Compulsory

Question 5

Relevant Legislation

Answer 5

• Insolvency Act 1986
• Enterprise Act 2002

Question 6

Company Voluntary Arrangement (CVA) - Procedure

Answer 6

1. Directors write proposal to creditors
2. Nominee (insolvency practitioner) reports to court on proposal (mortorium for small companies)
3. Creditors vote on proposal
4. Nominee becomes “supervisor” - takes control of assets

Question 7

Reasons to consider for CVA

Answer 7

• agreement by creditors means they forgo or have to wait for their debt payment
• Requires support of anyone who could appoint receiver
• solvent and insolvent companies can use it
• company can continue to trade - better realisation of assets
• cheapest insolvency procedure

Question 8

Administration

Answer 8

1. Administrator appointed to carry on running company (appointed to manage the company - agent of company but not liable for contracts) - moratorium on creditors actions
   - has power to do anything necessary or expedient to manage the company.
   - can appoint/remove directors
   - call creditor meetings
   - pay creditors
   - apply to court for directions
2. can be appointed by court, creditors, directors or company.
3. Administrator must be insolvency practitioner
4. Administrator must act in interest of all creditors
   - aim is to rescue the company
   - ensure a better realisation of assets
   - obtain agreement to CVA
   - Administrator is officer of the court (doesn’t have to be appointed by court)

Question 9

Administration - Procedure

Answer 9

1. Administrator make proposal to creditors - get their approval.
2. Administrator will manage the company according to proposal.
3. administrator will control assets - directors lose their powers.
4. automatically ends after 1 year
   - administrator can apply to court if purpose has been achieve or cannot be achieved.
   - administrator or court can convert the administrator into CVL (liquidation)

Question 10

Liquidation

Answer 10

• winding up the company
• can be voluntary or involuntary

Question 11

Members Voluntary Liquidation

Answer 11

• only available where company is solvent
• winding up when all creditors will be paid in full
• a way of closing a company - exit strategy

Question 12

Members Voluntary Liquidation MVL

Answer 12

1. Directors make statutory declaration of solvency (pay debt in full within 12 months)
2. Shareholders pass resolutions to wind up company and appoint liquidator
3. Directors’ powers cease
4. Notice of appointment made in London Gazette and Registrar notified
5. end of MVL when:
   - all assets sold
   - creditors paid and final meetings held
   - liquidator is released
   - accounts filed at companies house
   - 3 months later company registrar dissolves company

Question 13

Creditors Voluntary Liquidation CVL

Answer 13

• initiated by directors then taken on by creditors
• directors forced into this by creditors or professional advice (to avoid wrongful trading)

Question 14

CVL procedure

Answer 14

1. Director give sworn statement of affairs
2. shareholders pass resolutions to wind up company and appoint liquidator
3. resolution advertised in London Gazette
4. Creditors meeting - creditors choose their own liquidator
5. notice of appointment made in London Gazette and Registrar notified.
6. CVL ends when:
   - all assets are sold
   - creditors paid and final meeting held
   - liquidator is released
   - accounts filed at companies house
   - 3 months later company registrar dissolves company

Question 15

Compulsory Liquidation

Answer 15

Hostile process done against company’s wishes
- court more involved (official receiver is appointed)
- slower and more expensive compared to voluntary
- first have to invoke statutory ground.

Question 16

Compulsory Liquidation procedure

Answer 16

Grounds:
Company unable to pay debts because
- cannot comply with statutory demands
- judgement debt is unsatisfied
- liabilities exceed assets BS
- cannot pay debts as they fall due
Procedure:
1. petition by creditor, director or company
2. petition advertised in London Gazette
3. court makes its order - if petition granted the official receiver is appointed as liquidator
4. appointment advertised in London Gazette and Registrar notified
5. Meeting of creditors who can choose own liquidator
6. Compulsory liquidation ends when:
- all assets sold
- creditors paid and final meeting held
- liquidator is released
- accounts filed at companies house and court
- 3 months later company registrar dissolves company

Question 17

Powers of Liquidator

Answer 17

• gathering assets and distribute according to statutory order
• sell assets
• use company bank account
• litigate
• do all things needed to wind up company
• CVL will take more time
• will have to investigate past transactions to ensure pool of assets is as big as possible
• Official receiver needs courts consent to litigate and carry on business
• directors powers pass to official receiver - directors appointments are terminated
• official receiver can examine company officers in open court

Question 18

Statutory order of payments

Answer 18

1. Fixed charges
2. expense of winding up
3. Preferential debts
4. Monies secured by floating charges
5. Unsecured creditors

Question 19

Receivership

Answer 19

• lender appoints someone to take charge under loan agreement.
• receiver take possession of charged property for benefit of charge holder to sell
• receivership normally leads liquidation only few assets after charged property is taken.

Question 20

Past transactions

Answer 20

• Liquidator/administrator can see if more assets can be increased
• if transaction was not in “good faith” and occurred within “relevant time” property can be reclaimed. = have to show company was insolvent or become insolvent as result.

Preferences:
- one creditor must have been in better position than if liquidation and there was desire to prefer this creditor.
- 2 years for connected person
-6 months for unconnected person.

Question 21

Director Liability

Answer 21

wrongful trading - directors must have or ought to have known the company was going insolvent.

fraudulent trading - must find intention of director to defraud