Distribution of Assets Flashcards
(17 cards)
Insolvency Act 1986
Under the Insolvency Act 1986, a liquidator needs to consider two things:
1 – The size of the asset base to distribute
2 – The order of repayment.
Retention of title clause
Retention of title clauses. Suppliers of goods to companies can try to put a `Retention of Title Clause’ in the contract (Romalpa Clause from the case Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976]), which says the goods remain the property of the supplier until paid for, or sold by the ‘purchasing’ company. [Company] seems to have a valid RoT as per the Romalpa, but only if the assets are easily identifiable (packaging, etc). [Amount].
Romalpa Clause - Aluminium Industrie Vaassen BV v Romalpa Aluminum Ltd 1976
Retention of title clauses. Suppliers of goods to companies can try to put a `Retention of Title Clause’ in the contract (Romalpa Clause from the case Aluminium Industrie Vaassen BV v Romalpa Aluminium Ltd [1976]), which says the goods remain the property of the supplier until paid for, or sold by the ‘purchasing’ company. [Company] seems to have a valid RoT as per the Romalpa, but only if the assets are easily identifiable (packaging, etc). [Amount].
Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd 1984
They could also get their assets back if they can be easily returned to their original state as per Hendy Lennox (Industrial Engines) Ltd v Grahame Puttick Ltd (1984). [Amount + returned amount] If either of these can be identified, then the asset will return to [company] and the original invoice will be credited to the value of the asset returned. Any outstanding debt will be classed as an unsecured creditor. If money from the sale of [company’s] material has been kept in a separate bank account (easily identifiable), then this can also be reclaimed, but it is unlikely. [Amount]
Statutory Instrument 2003/2097 article 3
Statutory Instrument (SI)2003/2097 article 3 says this is to be 50% of the first £10,000 and 20% of the remainder up to £600,000.
Random person, Re Kiss Cards Ltd: Smith and Other v Lawson 2016
If [random person] was a member of staff and this payment was for work undertaken on behalf of the company then it could be valid. If it cannot be shown by [director] that this is true, then it may have to be repaid. Re Kiss Cards Ltd; Smith and Others v Lawson (2016). If it is repaid then it will go into the general pot for the creditors owed money.
Companies House
Charges must be registered at Companies House within 21 days to be valid. Land and buildings charges are at the Land Registry. Dated from ‘the day after creation of the charge’. Registration can be by the company, the charge holder (lender) or any person interested in it. S859F allows the court to extend if no-one is adversely affected by it. Charges of the same type are repaid in the order of registration (which should be the order in which they are taken out).
IA 1986 S238 Transactions at an Undervalue
The second thing to consider is the [Amount] paid to [random person] as this may come under the Insolvency Act 1986 S238 Transactions at an undervalue. This section allows a liquidator or administrator of a company to challenge a payment by the company as being at ‘undervalued’. The court can make any order it thinks fit including repayment of the money. There are a couple of questions to ask:
Did the company enter into a transaction at an undervalue with anyone within two years of insolvency?
Was this at a time when the company was unable to pay its debts? Possibly but even if it could at the time, the the payment was made which led to the liquidation then it falls under the Insolvency Act
Fixed debenture
A fixed debenture (also known as a fixed charge debenture), is a debt that is issued against specific assets, with a fixed rate of interest for repayment. A fixed charge debenture restricts the debtor company’s ability to deal with the charged asset without obtaining the creditor’s permission.
Floating charge
A floating charge is a security interest over a group of non-constant assets. The assets may change in quantity and value. Companies can also use floating charges as a means of securing a loan. With a floating charge, the underlying assets are usually current assets or short-term assets that can change in value.
Order of Repayment
2 – When thinking about the order of repayment, then the different types of ‘debt’ need to be considered. The general order of repayment is:
* Fixed chargeholders
* Liquidator’s Expenses
* Preferential Creditors (unpaid wages and money borrowed to pay wages)
* Floating charges
* Unsecured Creditors
* Shareholders
Crystalised debt
The other issue on floating charges, is whether the chargeholder ‘crystalised the debt’ – essentially forcing the company to cease trading. This would change the debt to a fixed one. If this is the case, then they would be second on the fixed chargeholder register as the crystallisation occurred after the Willbank charge was registered. Any assets cannot be disposed of once the charge crystallises.
It appears that there is no negative pledge, crystallisation or issue around the book debt, so Willbank will take their £5k from the asset base as long as there are £5k of book debts still outstanding. If the book debt is less than £5k, then the remaining balance goes into unsecured creditors.
s176A(4), s176A(3)
The rule may be varied by voluntary arrangement (s176A(4)) and doesn’t apply where the company’s property is less than £10,000 or the costs of distribution to unsecured creditors would be disproportionate to the benefits (s176A(3)).
If there is enough to pay Katebank the full amount after this, then the remaining money is used to pay the outstanding balance on Eurozone and Nicola (if she is an external accountant). If not, then the balance on Katebank’s debt also goes into unsecured creditors alongside any remaining debt.
s72A IA 1986
control/obligation test for employment
After the liquadtor expenses comes the preferential creditors. This is usually applied to employees. Nicola may or not be an employee, she is either a contracted accountant, or a member of staff. If it is the former, then her fee would be included in unsecured creditors, if the latter, she will get her money at this point. The control/obligation test for employment would be needed to see if this were the case. If Boris or Jeremy have any wages still to be paid as directors (essentially employees) they would fall into this section too.
S859F
S859F allows the court to extend if no-one is adversely affected by it. Charges of the same type are repaid in the order of registration (which should be the order in which they are taken out).
Fixed charge over floating charge
The fixed charge takes precedent over the floating charge, so Willbank takes priority unless one of two things have happened:
Katebank had a negative pledge clause we are not told about. This prohibits the company creating a charge ranking higher or equally (pari passu) to the first. Essentially, no charge registered after it will be paid ahead of it. There is no evidence that this took place. If they had taken a negative pledge then future debenture holders need to have been made aware of it.
The fixed charge is over the book debts. Normally a current asset is only secured by a floating charge as the company needs to trade current assets. Therefore this may not be possible and the debt would go into unsecured creditors. However, in Re Spectrum Ltd.[2005], it was held that there could be a fixed charge on book debts (a current asset) BUT only if the money repaid on the debt was kept in a separate bank account. The liquidator would have to see if this was the case.
