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Insolvency Flashcards

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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
What happens if an individual partner in a partnership at will is declared bankrupt?
Partnership is dissolved Trustee will receive any money due to the partner to satisfy their creditors
26
What happens if an individual partner in a general partnership that is not a partnership at will is declared bankrupt?
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
27
What happens if an individual partner of an LLP is declared bankrupt?
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
What happens if all the partners are made bankrupt?
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
What happens if an LLP is made bankrupt?
Administered by the official receiver as if it were a limited company
30
What are the 3 purposes of corporate insolvency?
Protect creditors (and balance their interests) Promote corporate rescues If necessary, control or punish the directors
31
What are the three insolvency options for a company?
Receivership Administration and CVAs Liquidation
32
What is receivership?
Enables creditors to recover what is solely owed to them
33
What does administration / Company Voluntary Arrangement seek to achieve?
The rescue of the company
34
What is liquidation?
Company's assets are sold off to satisfy creditors and the company then ceases to exist
35
What is fixed asset receivership?
A creditor recovering an asset over which they have a charge
36
What is considered in administration?
The interests of the creditors as a whole
37
What are the two methods by which a company can go into administration?
Formal court hearing By the company, its directors, or the holder of a qualifying floating charge filing certain documents with the court
38
When can a court make an order regarding administration?
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
What will a qualifying floating charge contain?
A provision empowering the lender to appoint an administrator if the debtor is in breach
40
What does an administrator do?
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
Who must approve an administrators proposals?
A majority in value of the creditors
42
What is one key benefit of administration?
Moratorium is imposed - protects company from third parties enforcing their rights and prevents commencement of other insolvency proceedings
43
What is a company voluntary arrangement?
Like a IVA but for companies. Usually used for short term cash flow issues
44
Who starts a CVA?
The directors
45
What percentage of creditors must agree to to the CVA?
75% of value
46
What happens if a CVA fails?
Liquidation or administration
47
What is members' voluntary liquidation?
Where a company is solvent and the members decide to wind it up
48
What is creditors' voluntary liquidation?
Started by directors and then taken over by creditors. Usually started when the company will be insolvent if it continues trading
49
What is compulsory liquidation?
Creditor who is owed money by a company that cannot pay its debts can apply to the court to have it wound up
50
What does a liquidator do?
Collects assets and distributed the funds achieved to creditors in statutory order
51
What is the order of priority for distribution to creditors?
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
What is claw back?
Where a liquidator, administrator, or trustee in bankruptcy, investigates actions prior to the insolvency to try and maximise the funds available to creditors
53
What is a preference?
Where a debtor puts a creditor in a better position than they would have been in insolvency
54
What are the requirements for a preference?
Must be intentional Must have taken place in the six months preceding bankruptcy (or within two years for a connect person)
55
What happens if a transaction is ruled to be a preference by the court?
It is voidable
56
What is the consequence of a transaction at an undervalue?
It is voidable
57
When is a transaction said to be at an undervalue for a company?
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
When is a transaction said to be at an undervalue for an individual?
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
What is the defence for a company to an alleged transaction at an undervalue?
When it was made in good faith and there are reasonable grounds for believing that it would benefit the company
60
What is never considered to be a transaction at an undervalue?
Grant of security - however, preference may be set aside
61
What is fraudulent trading?
When a director carries on the business of the company with the intention of defrauding creditors
62
Who can bring an action for fraudulent trading?
Liquidator or administrator
63
What is wrongful trading?
Failure by directors to minimise losses for creditors when they knew or ought to have known that the company was insolvent
64
Floating charges and preferences?
Can be voidable
65
When can a floating charge be set aside?
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
What is ring fencing?
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

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