Debt Flashcards
What are the implications of continuing trading with a known deficiency? (4)
If directors don’t take steps to minimise loss to creditors they may become guilty of wrongful trading.
In which case the courts could lift the veil of incorporation and make directors personally liable.
This could lead to bankruptcy for the directors.
They could be disqualified as directors.
What do directors have to do to implement a member’s voluntary liquidation?
Give a statutory declaration within 5 weeks of winding up resolution that the company is solvent and able to pay all debts within a period not exceeding 12 months.
How can the process of administration avoid compulsory liquidation? (6)
Moratorium will apply staying creditor actions and preventing new actions
Enables the business to keep trading
Administrator must attempt to rescue the company
May sell assets or make redundancies to reduce costs
May sell property to pay off a creditor if interest of other creditors not harmed
Could facilitate orderly wind down if business can’t be saved to achieve better outcomes for creditors
What are the implications for a business owner who has remortgaged to put money into a business and the business fails? (5)
Owner is still liable for the loan
Lender could foreclose
If tenants in common then other share is safe
Could face personal bankruptcy
Unlikely to get anything back from company
How is a bankrupt’s pension treated? (3)
The value of pension benefits are excluded and not available to creditors
Trustee in bankruptcy cannot force undrawn pension into payment
TIB could as court for an excessive contribution order if trustee believes they made contributions on purpose to put them out of reach from creditors
What are the steps directors need to take to enter voluntary liquidation whilst the company is solvent?
Directors pass resolution winding up company voluntarily
As company is solvent a special resolution is required in a general meeting
Meeting must be advertised 21 days in advance
At least 75% of the voting shares are necessary for special resolution
All directors must be willing to make a statutory declaration within 5 weeks of resolution passed saying the company is solvent and can pay all debts within 12 months
Resolution must be advertised in London Gazette within 14 days of resolution
Shareholders must appoint an insolvency practitioner as liquidator
Describe the process of implementing an administration order
Directors apply to the court for AO
Court must be satisfied company cannot pay its debts and administration is likely to achieve purposes set out in Insolvency Act 1986
Court appoints administrator to run the company
Administrator contract runs for 1 year (court can extend this)
A moratorium takes effect
There can be no enforcement of individual claims against the company
Existing actions against the company are stayed and no new actions can be started
Administrator has 8 weeks to make proposals that may save the company
Creditors deemed to agree unless 10% by value object
If they’re deemed agreed the administrator implements plans
If they object then the administrator arranges for creditors to make a decision through electronic voting
A director whose company is in liquidation wants to set up a new similar limited company. What are the implications?
No detrimental implications as long as they act legally, fairly and in a timely manner about discharging duties as the director of the old company
New business is a new legal entity/her liability was limited to the company
If she was found guilty of not acting property/wrongful trading there could be implications
Three methods of raising finance for an MBO (other than borrowing from family and friends) and an advantage and disadvantage of each.
Venture capital - expertise provided by the investor but they take an equity stake
Crowdfunding - risk spread across more people but they may not raise funding or interest cost may be more than expected
Bank/lending - no equity stake required but high interest/may not lend if failing company
Explain why capital may not be realised from a poorly performing company during an MBO
Assets held for some time may not have been recently revalued
Value of plant and machinery depreciates and the market value may be less than the written down value in the accounts
Bad debts may reduce value of the company
How can a loss be used on the wind up of a business?
Where a trade ceases losses in the last 12 months can be carried back against total profits for up to 3 years leading to a tax refund.
What are the criteria for a Members Voluntary Wind Up?
The company is solvent
The directors are able to make a statutory declaration which must be with 5 weeks before the revolution is passed stating that the company is solvent and will be able to pay all of its debts within 12 months
What are the directors responsibilities to their employees if they wind up their business?
Consult with employees to prevent unfair dismissal
Explain the impact on their pension arrangements
Provide redundancy pay for employees over the age of 18 with more than 2 years service
Must pay holiday pay in lieu
What is the statutory redundancy pay?
1 week’s pay for each year of continuous service. Based on actual income but capped at £489
