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Flashcards in Insolvency Deck (68):

What are the five procedures for insolvency?

1. Company Voluntary Arrangement (CVA);
2. Scheme of Arrangement;
3. Administration;
4. Administrative Receivership;
5. Liquidation
(a) Compulsory
(b) Members' Voluntary Liquidation
(b) Creditors' Voluntary Liquidation.


Which of the procedures are informal and which are formal?

Informal = CVA and Scheme of Arrangement
Formal = Administration, Administrative Receivership and Liquidation.


Which two procedures of insolvency were recommended by the Cork Committee and taken up the Insolvency Act 1986?

1. CVA
2. Administration


What was the chief recommendation made by the Cork Committee?

To shift towards a rescue culture.


What remedies are available to unsecured creditors and secured creditors in the case of insolvency?

Unsecured creditors can:
1. Obtain contractual remedies;
2. Petition for an administrator or winding-up
Secured creditors can:
1. Obtain contractual remedies
2. Appoint an administrator (if they are a qualifying floating chargeholder)
3. Petition for winding-up;
4. Appoint an administrative receiver (if the power is contained in the debenture).


What two tests have been put forward by the courts to determine when a company is insolvent?

1. Cashflow test ie the company does not have credit to pay its debts;
2. Balance-sheet test ie the company has less assets than liabilities.


How has the Insolvency Act 1986 taken up the cashflow test?

Section 123(1)(e) states if the court is satisfied that the company is unable to pay its debts as they fall due it will be deemed insolvent.


Which provision of the IA 1986 takes up the balance-sheet test?

s123(2) states a company will also be deemed insolvent if its assets fall below its liabilities taking into account future transactions.


In which case does Lord Neuberger state it would be extraordinary if every time a company's liabilities exceeded its assets it was deemed insolvent?

BNY Corporate Trustee Services Ltd v Eurosail


In which provisions do we find the procedure for Company Voluntary Arrangements (CVA)?

Sections 1-7 IA 1986.


What majorities are required by the members and creditors to obtain approval for a CVA?

50% members and 75% of the value of creditors.


Who has the option to not be bound by CVA?

Preferential or secured creditors.


Who takes charge of the CVA?

A nominee/supervisor.


How long does the nominee have to notify the court if there is a reasonable change of success for the CVA and if there is to be a meeting of creditors and members after his appointment?

28 days (s2(2) IA 1986).


Who nominates the nominee?

The directors.


What was introduced into the CVA procedure by the Insolvency Act 2000, s1A and sch1, and has been enforced since Jan 2003?

28 day moratorium


Who has the option of passing on a moratorium during CVA procedure?

Small companies


According to s382(3) CA 2006 what is the definition of a 'small company'?

1. Turnover less than or equal to £6.5m;
2. Balance sheet total of less than or equal to £3.26m
3. Less than or equal to 50 employees;
4. A small company only needs to show any two of the above.


Which companies are excluded from having moratoriums because of their nature?

Insurance companies and banks (para 2(2) sch A1).


Is it possible to have a moratorium if combining the CVA with administration?

No, if the CVA is combined with a formal insolvency procedure the moratorium is excluded (para 4 sch A1).


During a moratorium who is in control of the company?

Directors but there are limitations on what they can do given in para 7 sch A1.


What is said to be the key difference between CVAs and Schemes of Arrangements?

In Schemes of Arrangements the court is involved at each stage.


What are the advantages of CVAs?

1. No involvement of the court and therefore cheaper;
2. Option of moratorium;
3. Possible to combine with administration;
4. Possibility of ongoing trade and profits;
5. Possibility of earning more than on a winding-up.


What are the disadvantages of CVAs?

1. No automatic moratorium;
2. Preferential and secured creditors have the option to opt out;
3. In practice this procedure is only used with administration.


Where do we find the provisions relating to Schemes of Arrangements?

Sections 895-901 CA 2006.


What majority of the members is required to pass a scheme of arrangement?



Before the scheme of arrangement is approved by the members what questions will the court ask?

1. Is it likely to succeed? (Re Savoy Hotel Ltd)
2. Are the voting classes correct?


How will the court scrutinise the scheme of arrangement once it has been passed by the members?

1. Is it reasonable?
2. Is each class fairly represented?
3. Have the statutory provisions been complied with?


What are the advantages of using a scheme of arrangement?

1. It binds dissenting members (s899(3));
2. It saves time;
3. There is no need to be insolvent to use the procedure.


What are the disadvantages of using a scheme of arrangement?

1. It is a complex and cumbersome procedure;
2. There is no moratorium;
3. It is generally used in conjunction with a formal procedure.


What are the objectives of administration/the administrator?

In priority order (para 3 sch B1 IA 1986):
(1)(a) rescue the company as a going concern;
(b) achieve a better result than if wound-up;
(c) realise property to distribute to one or more secured or preferential creditors.
(2) perform in the interests of creditors.


How is administration entered into?

By court order following application from the members, directors, qualifying floating chargeholders, liquidators, supervisor of CVA or justices' chief executive of the magistrates (s7(4)(b) and sch 1B para 12(1) and 38).

Or out-of-court by shareholders, directors or qualifying floating chargeholders.


What duties does the administrator have?

1. He must act fairly and honourably (ex p James);
2. He must act in the interests of creditors as a whole (para 3(2));
3. Upon appointment he will take custody of the company's assets (para 67).


What are the immediate effects of entering administration?

1. Any pending winding-up petition is dismissed (para 40);
2. A moratorium is imposed (para 43);
3. Administration is made public (para 45).


What are the effects of the statutory moratorium when in administration?

1. No alterations can be made to third party rights (Barclays Mercantile Business Finance Ltd v Sibec Developments Ltd);
2. Administrative receiver cannot be appointed;
3. Court winding-up is restricted and no voluntary winding-up;
4. Securities cannot be enforced without administrator approval subject to security, hire purchase or retention of title;
5. Landlords cannot forfeit by peaceable re-entry;
6. No legal action may be instigated against the company.


What must an administrator include in his proposals for the initial creditors' meeting?

According to para 49 sch B1:
1. Which statutory objections under para 3 sch B1 will be achieved;
2. How administration will end;
3. Details of asset sales/disposals;
4. Whether a pre-pack sale will take place;
5. The costs and expenses of administration.


What powers does the administrator have?

He may do all things necessary in managing the company (para 59 sch B1 IA 1986) including:
1. removing and appointing directors (para 61),
2. calling meetings (para 62),
3. dispose of property subject to floating charges (para 70),
4. apply to the court to set aside vulnerable transactions (ss238-244).


What can the administrator not do?

1. Disclaim onerous property (s178(1) IA 1986);
2. Bring proceedings in respect of misfeasance of fraudulent/wrongful trading.


What are the ways in which administration may end?

1. Automatically after 12 months unless postponed (para 76(1));
2. Court order (para 79(1));
3. Objectives have been achieved (para 80(1));
4. Moving to creditors' winding-up (para 83(1)(b));
5. Moving to dissolution (para 84(1)).


What are the advantages of administration?

1. The administrator owes duties to all creditors, where as an administrative receiver only owes duties to the creditor who appointed him;
2. Statutory moratorium almost always results in better returns for unsecured creditors;
3. Quick and flexible;
4. Avoids certain transactions;
5. Potential to rescue the company because business can be sold.


What are the disadvantages of administration?

1. Often leads to liquidation;
2. Sometimes lengthy and costly;
3. Open to abuse;
4. Qualifying floating charge holder pre 15/09/03 can still appoint an administrative receiver.


Who may appoint an administrative receiver?

The court or more usually a qualifying floating chargeholder whose charge was created pre 15/09/03 (Enterprise Act 2003) or one of the statutory exceptions in s72 IA 1986 apply.


What are the effects of administrative receivership?

1. No moratorium (Re Atlantic Computer Systems);
2. Crystallisation of floating charge (Tauton v Sheriff of Warwickshire (1895));
3. Termination of certain employment contracts incompatible with management of powers of AR eg directors (Griffiths v Secretary of State).


What is the remedy under administrative receivership?

Contractual remedy to realise property for the secured creditor.


What are the duties of the administrative receiver?

To realise property for the qualifying floating chargeholder who appointed him only and to take advice on whether the business may be carried on, sold as a going concern, sold in parts, or wound-up.


What are the advantages of administrative receivership?

1. No need to go to court so it's quick and easy;
2. Advantageous to the one secured creditor;
3. Company can be sold.


What are the disadvantages of administrative receivership?

1. Limited availability;
2. No moratorium;
3. Disadvantageous to other creditors.


Who does the liquidator act for primarily?

All unsecured creditors (s130)


What is the most common ground for compulsory winding-up?

The company is unable to pay its debts (s122(1)(f) IA 1986).


In what three situations is the company presumed to be insolvent?

1. The company fails to pay a creditor who has made a statutory demand for a sum owed exceeding £750 three weeks from the demand (s123(1)(a));
2. The company is unable to pay an order or judgment debt;
3. The court is satisfied the company is unable to pay its debts.


In which case was the balance-sheet test for insolvency applied ie where the assets fall below the liabilities the company can be declared insolvent?

Re Cheyne Finance


Who may bring a petition for compulsory winding-up?

Board, creditors, company or contributories (s79).


Where a debt is disputed on bona fide grounds will the court entertain a petition?

No (Re Ringinfo c/f Lachonta Foundation v GBI Investments).


Does it matter what motive the creditor has in bringing a petition for winding-up?

Not if the sum owed is more than £750 (Bryanston Finance v De Vries (No 2)).


Can the majority of creditors block a winding-up order?

Yes (s195 IA 1986), Lord Hoffman said to take into account the number of opposing creditors, the value of debts owed, their quality, motives and any principles of commercial morality or fairness (Re Lowestoft Traffic Services Ltd).


Which provision lays down the powers of the court in making an order for liquidation?

Section 125.


For what reason may a creditor not issue a statutory demand or else it is deemed an abuse of process?

As a means of debt collection.


What transactions will be void following commencement of winding-up?

Dispositions of property, transfer of shares, altering of members' rights (s127 IA 1986).


What is the date of commencement of winding-up taken as?

The date at which the winding-up order was made to the court or the resolution was passed (s129 IA 1986).


Which case shows the width of the powers the court has in making a compulsory liquidation order?

In Re Hewitt Brannan the court overruled the majority of creditors who were prejudiced.


What are the automatic consequences of liquidation?

1. Official receiver become liquidator;
2. Stay on commencing or continuing proceedings against the company (s130 IA 1986);
3. Publication of liquidation on company papers and marketing material (s188(1A) IA 1986);
4. All employees are dismissed.


Where are the liquidator's powers contained in the Insolvency Act 1986?

Part III schedule 4


In which three situations may a company voluntarily wind-up?

1. Where the company's purpose has been fulfilled;
2. Members' voluntary winding-up
3. Creditors' voluntary winding-up


If the directors are able to swear to a statutory declaration of solvency (s89 IA 1986) ie the guarantee the company will be able to pay debts in a set period normally 12 months, which voluntary insolvency procedure may be used?

Members' voluntary winding-up


What must the liquidator do if the liquidation takes more than 1 year in a members' voluntary winding-up?

Show a progress report (s92).


What must the liquidator do at completion of liquidation?

1. Lay accounts to members/creditors;
2. Call meeting;
3. Inform Companies House


If undertaking a CVL when must the creditors' meeting happen?

Within 14 days of the members' meeting (s98 IA 1986).


If the members and creditors disagree over who should be the liquidator who gets preference?