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BLP > Insolvency > Flashcards

Insolvency Flashcards

1
Q

What is insolvency?

A

When a person or business is unable to pay their debts

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2
Q

What if a business does not have distinct legal personality?

A

The individuals (partners / sole traders) are personally liable for the debt

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3
Q

What three options does an individual have when facing insolvency?

A

Negotiate with creditors

Enter into an Individual Voluntary Agreement (IVA)

Declare bankruptcy

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4
Q

What is the common downside with negotiating with creditors?

A

It is often not binding on the creditor - no consideration - could still ask for payment on the original terms

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5
Q

What is an IVA?

A

Negotiated agreement between debtor and all of their creditors

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6
Q

What is the benefit of an IVA?

A

It is binding on the creditors

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7
Q

What is the first thing an insolvency practitioner will do before getting an IVA?

A

Make an application for an interim order to give the debtor breathing space to calculate their assets

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8
Q

What percentage of creditors have to agree to an IVA?

A

Those representing 75% of the value

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9
Q

What if a debtor tries to mislead regarding the IVA?

A

The creditors can apply to make them bankrupt

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10
Q

What are the three ways a bankruptcy order can be made?

A

Debtor can apply online

Unsecured creditors owed at least £5k can petition for the debtors bankruptcy

An insolvency practitioner can petition for their bankruptcy for breaching IVA

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11
Q

How can a creditor demonstrate a debtors bankruptcy?

A

By issuing a statutory demand that gives them 21 days to pay or come up with an arrangement to pay

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12
Q

What is exempted from a bankrupts estate?

A

Assets needed for day-to-day living, such as furniture and any tools required for their job

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13
Q

What happens regarding a bankrupts salary?

A

They are allowed to keep an amount to reasonably cover their living expenses - amounts above this go to the creditors

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14
Q

What is the order over a bankrupts salary called?

A

An income payment order

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15
Q

How long does an income payment order last?

A

Up to three years

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16
Q

What is the situation regarding a bankrupts home?

A

Interest in it will pass to the trustee

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17
Q

What does the court consider when considering an order or possession and sale?

A

Other people with an interest in the property

Whether there are any minors etc

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18
Q

What happens after a year regarding a bankrupts home?

A

The interests of the creditors take priority

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19
Q

What restrictions are placed on a bankrupt?

A

Cannot:

apply for credit of more than a prescribed amount;

Act as a company director;
Be a partner; or

Trade under another name without disclosure of the bankruptcy

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20
Q

What is the order of priority for creditors?

A

1) costs of the bankruptcy;

2) preferential debts (that is, holiday pay due to employees and wages of employees due in the last four months and HMRC etc);

3) ordinary unsecured creditors; and

4) postponed creditors (spouse or civil partner)

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21
Q

What happens if there is not enough to satisfy all the creditors at one level?

A

The debts will abate equally

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22
Q

A bankruptcy is usually discharged after how many years?

A

1

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23
Q

Why may a bankruptcy not be discharged after a year?

A

If they don’t comply with the restrictions and/or

They caused the bankruptcy by their own dishonesty, negligence, or recklessness (culpable bankrupts)

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24
Q

How long can a culpable bankruptcy last?

A

Up to 15 years

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25
Q

What happens if an individual partner in a partnership at will is declared bankrupt?

A

Partnership is dissolved

Trustee will receive any money due to the partner to satisfy their creditors

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26
Q

What happens if an individual partner in a general partnership that is not a partnership at will is declared bankrupt?

A

Partnership will continue and, usually the remaining partners will purchase the insolvent partner’s interest from the trustee in accordance with the retirement provisions in the partnership agreement

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27
Q

What happens if an individual partner of an LLP is declared bankrupt?

A

They cannot participate in a partnership without the agreement of court

Usually the trustee will require the partnership to buy the share as per the retirement provisions in the partnership agreement

28
Q

What happens if all the partners are made bankrupt?

A

Trustee will wind the partnership up, ensuring:

Contracts are ended, legal dispute are settled, sell assets, collect money owed to the partnership, settle any debts - then distribute the remainder to creditors

29
Q

What happens if an LLP is made bankrupt?

A

Administered by the official receiver as if it were a limited company

30
Q

What are the 3 purposes of corporate insolvency?

A

Protect creditors (and balance their interests)

Promote corporate rescues

If necessary, control or punish the directors

31
Q

What are the three insolvency options for a company?

A

Receivership

Administration and CVAs

Liquidation

32
Q

What is receivership?

A

Enables creditors to recover what is solely owed to them

33
Q

What does administration / Company Voluntary Arrangement seek to achieve?

A

The rescue of the company

34
Q

What is liquidation?

A

Company’s assets are sold off to satisfy creditors and the company then ceases to exist

35
Q

What is fixed asset receivership?

A

A creditor recovering an asset over which they have a charge

36
Q

What is considered in administration?

A

The interests of the creditors as a whole

37
Q

What are the two methods by which a company can go into administration?

A

Formal court hearing

By the company, its directors, or the holder of a qualifying floating charge filing certain documents with the court

38
Q

When can a court make an order regarding administration?

A

When it is satisfied that the company cannot pay its debts, and administration is likely to achieve a better outcome for creditors than liquidation

39
Q

What will a qualifying floating charge contain?

A

A provision empowering the lender to appoint an administrator if the debtor is in breach

40
Q

What does an administrator do?

A

Takes control of the company’s property and sells it, brings or defends legal proceedings on behalf of the company, carries out the company’s business, removes or replaces directors

41
Q

Who must approve an administrators proposals?

A

A majority in value of the creditors

42
Q

What is one key benefit of administration?

A

Moratorium is imposed - protects company from third parties enforcing their rights and prevents commencement of other insolvency proceedings

43
Q

What is a company voluntary arrangement?

A

Like a IVA but for companies. Usually used for short term cash flow issues

44
Q

Who starts a CVA?

A

The directors

45
Q

What percentage of creditors must agree to to the CVA?

A

75% of value

46
Q

What happens if a CVA fails?

A

Liquidation or administration

47
Q

What is members’ voluntary liquidation?

A

Where a company is solvent and the members decide to wind it up

48
Q

What is creditors’ voluntary liquidation?

A

Started by directors and then taken over by creditors. Usually started when the company will be insolvent if it continues trading

49
Q

What is compulsory liquidation?

A

Creditor who is owed money by a company that cannot pay its debts can apply to the court to have it wound up

50
Q

What does a liquidator do?

A

Collects assets and distributed the funds achieved to creditors in statutory order

51
Q

What is the order of priority for distribution to creditors?

A

1) Secured creditors
2) expenses of wining up (liquidator/professional adviser fees);
3) preferential debts;
4) debts secured by floating charges in order of priority (subject to ring fencing);
5) unsecured debts;
6) shareholders

52
Q

What is claw back?

A

Where a liquidator, administrator, or trustee in bankruptcy, investigates actions prior to the insolvency to try and maximise the funds available to creditors

53
Q

What is a preference?

A

Where a debtor puts a creditor in a better position than they would have been in insolvency

54
Q

What are the requirements for a preference?

A

Must be intentional

Must have taken place in the six months preceding bankruptcy (or within two years for a connect person)

55
Q

What happens if a transaction is ruled to be a preference by the court?

A

It is voidable

56
Q

What is the consequence of a transaction at an undervalue?

A

It is voidable

57
Q

When is a transaction said to be at an undervalue for a company?

A

If the transaction is to a connected person, and the transaction took place when the company was insolvent or the transaction causes the insolvency, then it is presumed to have been made at an undervalue

58
Q

When is a transaction said to be at an undervalue for an individual?

A

There is no requirement to prove insolvency.

Only needs to be made two years before a petition if made to a close friend or relative

59
Q

What is the defence for a company to an alleged transaction at an undervalue?

A

When it was made in good faith and there are reasonable grounds for believing that it would benefit the company

60
Q

What is never considered to be a transaction at an undervalue?

A

Grant of security - however, preference may be set aside

61
Q

What is fraudulent trading?

A

When a director carries on the business of the company with the intention of defrauding creditors

62
Q

Who can bring an action for fraudulent trading?

A

Liquidator or administrator

63
Q

What is wrongful trading?

A

Failure by directors to minimise losses for creditors when they knew or ought to have known that the company was insolvent

64
Q

Floating charges and preferences?

A

Can be voidable

65
Q

When can a floating charge be set aside?

A

When it is made 12 months before insolvency

Or

Charge granted at time the company was or ought to have known it was insolvent

66
Q

What is ring fencing?

A

liquidator is required to set aside part of the assets subject to a floating lien for the benefit of unsecured creditors

The amount is 50% of the first £100,000 in value of the property subject to floating charges and 20% on amounts above, up to a maximum ring-fenced fund of £600,000

BLP (9 decks)

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