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Business Law and Practice > Corporate insolvency > Flashcards

Corporate insolvency Flashcards

1
Q

What is the relevant date for the Enterprise Act?

A

15 September 2003

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2
Q

What is one of the circumstances defined as insolvency?

A

Unable to pay debts

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3
Q

What are the situations where a company is deemed unable to pay its debts?

A
  • Cash flow test: unable to pay debts as they fall due
  • Balance sheet test: liabilities greater than assets
  • Doesn’t comply with statutory demand for debt over £750
  • Failed to pay creditor to satisfy enforcement of judgement
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4
Q

Who must continually review the financial performance of a company?

A

Directors

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5
Q

What are directors options when there is financial difficulty?

A
  • do nothing
  • do a deal
  • request appointment of receiver
  • put company into liquidation
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6
Q

What are the risks involved with doing nothing as a director where the company is facing financial difficulty?

A
  • personal liability
  • breach of duties
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7
Q

What are the options for informal arrangements between a company facing financial difficulty and creditors?

A

Informal arrangements
Pre-insolvency moratorium

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8
Q

What are the options for formal arrangements between a company facing financial difficulty and creditors?

A

Company voluntary arrangement
Restructuring plan

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9
Q

What may a company have to do in order to get creditor agreement for an informal arrangement?

A
  • Grent new/additional security
  • Replace directors/senior employees
  • Sell failing business/subsidiaries or profitable ones to raise cash
  • Reduce costs (eg redundancy or closure of unprofitable business)
  • Issue new shares to creditors
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10
Q

What is a standstill agreement?

A

Creditors asked not to enforce rights/remedies for specified time to negotiate a contractual arrangement

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11
Q

What does moratorium mean?

A

period where creditors unable to take action

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12
Q

What are the restricted actions when there is a moratorium?

A
  • No creditor can enforce security against assets
  • Stay of legal proceedings/bar against new
  • No winding up procedures can be commenced/Shareholder resolution to wind up
  • No administration procedure can be commenced
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13
Q

What is the procedure for pre-insolvency moratorium?

A

Filing documents at court

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14
Q

What documents should be filed at court for pre-insolvency moratorium?

A
  • Statement that company is/likely to become unable to pay debts as they fall due
  • Statement from licensed insolvency practitioner stating their view that moratorium is likely to rescue company
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15
Q

What is the period for pre-insolvency moratorium?

A

20 business days, can be extended by directors for further 20 business days

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16
Q

When will a pre-insolvency moratorium automatically terminate?

A
  • company enters liquidation/administration
  • CVA approved
  • Court sanctions restructuring plan/scheme of arrangement
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17
Q

What debts do not have to be paid during the moratorium?

A

pre-moratorium debts

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18
Q

What are the exceptions to pre-moratorium debts?

A
  • Monitor’s remuneration/expenses
  • Goods and services supplied during
  • Rent during period
  • Wages/salary/redundancy payments
  • Loans under contract involving financial services (loans from a bank)
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19
Q

What are moratorium debts and do they have to be paid?

A

Must pay debts falling due/after moratorium for obligations incurred during

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20
Q

What is the advantage of a formal insolvency corporate arrangement?

A

If requisite majority of creditors vote for, legally binding on all creditors

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21
Q

What is a company voluntary arrangement?

A

Creditors agree to part payment of debts/extended timetable for repayment

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22
Q

Does the court have to approve a CVA?

A

No

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23
Q

Who supervises and implements a CVA?

A

Supervisor (insolvency practitioner)

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24
Q

What is the procedure for setting up a CVA?

A
  1. Directors draft CVA proposal and appoint nominee
  2. Directors submit proposal and statement of affairs to nominee
  3. Nominee considers proposal and within 28 days reports to court on their opinion whether creditors and shareholders should vote on proposal
  4. Nominee allows at least 14 days for creditors to vote
  5. Meeting of shareholders must take place within 5 days of creditors decision
  6. Nominee reports to court that CVA approved
  7. Nominee usually becomes supervisor
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25
Q

How is a CVA approved?

A
  • At least 75% in value of creditors vote in favour BUT
  • Decision invalid if those voting against includes more than half of total value of creditors unconnected to company and
  • Simple majority of shareholders/members vote in favour
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26
Q

What is the effect of a CVA?

A

binding on all unsecured creditors
Not binding on secured/preferential creditors unless specifically consented

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27
Q

How long does a creditor have to challenge a CVA and on what grounds?

A

28 days from approval being reported to court
On grounds of unfair prejudice

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28
Q

What companies is a restructuring plan for?

A

companies which have or likely to encounter financial difficulty

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29
Q

Does a restructuring plan require court sanction?

A

Yes

30
Q

How is a restructuing plan voted on?

A
  • divided into classes
  • at least 75% in value of each class votes
31
Q

What is the effect of a restructuring plan?

A

Binds all creditors including secured

32
Q

How may the court exclude shareholders/members/creditors from voting on a restructuring plan

A

If they have no genuine economic interest in the company

33
Q

What is a cross class clam down?

A

One rank of credtor can force plan on another class of creditor

34
Q

When may the court allow a cross class clam down?

A

If just and equitable to do so

35
Q

What does a cross class clam down mean when placed on shareholders?

A

Creditors forcing shareholders to accept debt for equity swap

36
Q

Who can initiate a CVA?

A

Directors
Liquidator
Administrator

37
Q

Who can initiate a restructuring plan?

A

Company
Creditor
Member
Liquidator
Administrator

38
Q

Administration is a collective insolvency procedure, what does this mean?

A

Adminsitrators owe duties to creditors as a whole

39
Q

What are the statutory objectives of an administrator?

A

1 - rescue company as a going concern
2 - achieve better result for creditors than winding up
3 - realise property and distribute to secured/preferential creditors

40
Q

What is the court procedure for appointing an administrator?

A
  • court may appoint where is/likely to become unable to pay debts
  • application by company, directors, creditors, cva supervisor or liquidator
  • court considers whether reasonably likely to achieve purpose
  • interim moratorium
41
Q

Why would the court procedure be used for administration?

A

If a creditor has started winding up proceedings, it is the only option

42
Q

Who may appoint an administrator out of court?

A
  • directors or company
  • qualifying floating charge holder
43
Q

What is a qualifying floating charge?

A

o Together with any other security relates to wholly/substantially whole of company’s property and
o Documents that creates it provides Sch B1 applies to charge or holder has power to appoint administrator/administrative receiver

44
Q

What is the out of court procedure for directors appointing an administrator?

A
  1. File notice of intention at court
  2. No less than 10 business days later, file notice of appointment
45
Q

What is the out of court procedure for companies who have granted a QFC appointing an administrator?

A
  1. File notice or intention at court and sent to holder of QFC
  2. QFC has 5 business days to appoint
  3. If QFC doesn’t, directors can file notice of appointment
46
Q

What is the out of court procedure for QFCs appointing an administrator?

A
  1. Enforce security
  2. File notice of appointment
47
Q

What is the out of court procedure for QFCs appointing an administrator where there is another QFC with priority?

A

must give two business days notice to QFC which have priority and can only proceed if they consent

48
Q

What is a key benefit of administration?

A

Full moratorium

49
Q

What are the exit options after administration?

A
  • restructure rights of creditors through CVA/scheme of arrangement
  • If company returned to solvent, hand back to directors
  • enter liquidation
50
Q

Is receivership a collective insolvency procedure?

A

No

51
Q

What are the types of receivership?

A

Administrative receivership
Fixed charge receivership
Court-appointed receivership

52
Q

Does a fixed charge receiver have to be an insolvency practitioner?

A

No

53
Q

When can a fixed charge receiver not be appointed?

A

during pre-insolvency moratorium or if company in administration

54
Q

what happens during liquidation?

A
  1. Collects/sells assets and pays credits dividend
  2. If surplus, paid to shareholders in accordance with rights under Articles
55
Q

Can only insolvent companies be liquidated?

A

No

56
Q

How do creditors of the same rank rank against each other?

A

Pari passu

57
Q

What are the types of liquidation?

A
  • compulsory
  • voluntary (members or creditors)
58
Q

When does disolution occur for liquidation?

A
  • Compulsory – 3 months after notice filed at CH stating winding up completed
  • Voluntary – 3 months after liquidator filed final accounts and return with registrar or companies at CH.
59
Q

What is the process for compulsory liquidation?

A
  1. winding up petition
  2. Court makes winding up order
  3. official receiver appointed liquidator
  4. OR notifies registrar of companies and creditors
60
Q

What are the grounds for compulsory liquidation?

A
  • unable to pay debts
  • just and equitable
61
Q

What is the consequence when making a winding up petition?

A

disposition of property is void if made after presentation of winding up order

62
Q

What is the consequence on the making of a winding up order?

A
  • Limited statutory moratorium where no legal proceedings/any commenced are stayed
  • All employees automatically dismissed
  • Directors lose powers
63
Q

Which companies can use members voluntary winding up?

A

Solvent

64
Q

What is the procedure for an MVL?

A
  1. Directors swear a declaration of solvency
  2. Containing assets and liabilities statement
  3. Members pass special resolution to place company into MVL
  4. Members pass ordinary resolution to appoint nominated liquidator
65
Q

What must happen where a lqiuidator of an MVL considers the company cannot pay its debts?

A

Convert into CVL

66
Q

What is the procedure for a CVL?

A
  1. Shareholders pass special resolution to place into CVL
  2. Shareholders pass ordinary resolution to appoint liquidator
  3. Within 14 days of special resolution, directors must ask creditors to approve liquidator/put forward their own.
  4. Statement of assets and liabilities sent to creditors
67
Q

What happens to directors when a liquidator is appointed?

A

Management powers end, directors dismissed and powers transferred to liquidator

68
Q

What is the exit procedure for liquidation?

A

Notice to companies house that winding up has concluded
Company dissolved 3 months later

69
Q

What is the statutory order of priority?

A
  1. Liquidators fees for fixed charge assets
  2. fixed charge creditors
  3. Liquidators other remuneration
  4. preferential creditors
  5. prescriped part fund for unsecured creditors
  6. creditors with floating charge
  7. unsecured creditors
  8. unsecured creditors interest
  9. shareholders
70
Q

What happens if an asset subject to a fxed charge and the proceeds of sale are not enough to discharge the creditor?

A

Unpaid part ranks as unsecured creditor

71
Q

What are the two tiers of preferential creditors?

A

first = employees unpaid remuneration four months before winding up + accrued holiday
second = PAYE and NI deductions and VAT

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