Insolvency

Question 1

Signs of Companies of Financial
Distress

Answer 1

lower liquidity (current assets low, more long term assets,..)
 higher inventory = slow inventory turnover (building up of
inventory means less cash on hand as the products don’t sell
 low cash flow (simple: no cash. No possibility to pay your bills)
 disappearing profit margins
 too much debt (interest rates)
 unrealistic values for assets and liabilities
 change in accounting method

Question 1

What does Insolvency mean?

Answer 1

A lack of cash available to pay the company’s
debts as they fall due
 2 tests:
 ‘balance sheet’ test
 cash flow test

Question 2

Cash flow insolvency

Answer 2

After this test a company is insolvent when it is unable
to pay its debts when they are due.

Question 3

Balance Sheet Insolvency

Answer 3

This test holds that a company is insolvent if the total
liabilities are greater than the value of the assets

Question 4

What is the purpose of Purpose of Insolvency Law

Answer 4

provide an equal and fair procedure, ensuring that the
creditors receive an equal and equitable distribution
 to ensure that administration are conducted in an honest,
competent and independent way
 to provide the company with tools for the treatment of affairs
before the position is hopeless
 provide procedures enabling creditors and debtors to find a
joint solution, to prevent conflicts amongst them
 attempt to reduce the damaging effects of insolvency on the
interest of the public
 provide a system which is flexible, but also well respected

Question 5

What are the types of Types of winding up

Answer 5

Members’ voluntary winding up
◦ Declaration of solvency required from the directors
 Creditors’ voluntary winding up
◦ Where company in financial difficulty and members
chose to wind up the company
◦ Liquidator is appointed
 Compulsory winding up
◦ Following petition to court by unpaid creditor
◦ Grounds in s 122 IA
◦ Liquidator is appointed

Question 6

Winding up by the court -
compulsory winding up

Answer 6

S. 122 Circumstances in which a company may be
wound up by the court.
A) special res’n of company.
B) Public co. no trading certificate within one year.
D) Company not trading within one year
F.) Company unable to pay its debts.
G.) The court is of the opinion that it is just and
equitable that it should be wound up.
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Question 7

Winding up by the court -
compulsory winding up

Answer 7

Liquidator is appointed who liquidates (i.e. turns into
cash) the company’s assets and distributes the assets
to the creditors. The insolvent company is then
dissolved.
 Official Receiver becomes the first liquidator.
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Question 8

Creditors Voluntary Winding Up

Answer 8

Members take the initial action
 They may choose to wind the company up.
 Following the members’ resolution a creditors’
meeting is held and a liquidator is appointed.

Question 9

Members voluntary winding up

Answer 9

the directors swear a declaration of solvency to the effect
that they have made a full enquiry into the company’s
affairs and that they have formed the opinion that the
company will be able to pay its creditors in full, together
with any interest within a period which will not exceed 12
months from the commencement of the winding up, as
may be specified in the resolution (s 89(1))
 A members voluntary winding up commences at the time
of the passing of the special resolution by the members
declaring that the company should be so wound up.
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Question 10

Main Difference Between a Members’
Voluntary Winding up and a
Creditors’ Voluntary Winding up

Answer 10

The main technical difference between a
Members’ Voluntary Winding up and a
Creditors Voluntary Winding up is that in the
former, the directors will produce a
declaration of solvency and in the latter they
will not.
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Question 11

Administration

Answer 11

Administration process tries to rescue the company as a
going concern
* Administrator takes control of company’s affairs and acts in
the interests of all creditors (not just holder of floating
charge)
* May suggest CVA to creditors
* Administrator may be appointed by
1. an administration order of the court
2. by the holder of a floating charge
3. by the company or its directors

Question 12

Administration

Answer 12

an independent person, the administrator is placed into the company to take over
the management of the company.
 The company is protected by a moratorium, giving “breathing space” for the
administrator and company to find a restructuring solution
 Appointment either by the court or under new regime (introduced by Enterprise
Act 2002) by a floating charge holder or director of the company
 Purpose, s. para 3 (1) Schedule B 1 of the Insolvency Act 1986, the primary
objective of “rescuing the company as a going concern”.
 Paragraph 59, Schedule B1 of the Insolvency Act 1986: general powers of an
administrator.
 The administrator has to act in the interest of all creditors and is seen as an agent
of the company.
 Procedure ends automatically after twelve months (introduced by the Enterprise
Act 2002) possibility of the court to prolong this period.

Question 13

What is Company Voluntary Arrangements

Answer 13

In a CVA the directors of a company propose a composition or scheme of
arrangement, approved by its members, to all its creditors. (Part I Insolvency Act
1986)
 Formal procedure, but without the involvement of the court; binding
arrangement between the company and its creditors.
 The CVA procedure has not as high requirements as the administration
procedure. In contrast to the administration procedure, the debtor does not
need to be insolvent, it is sufficient that he is likely to become insolvent.
 Commencement: directors, the liquidator and the administrator (section 1 (1)
and (3) Insolvency Act 1986)
 Commencement with the handing in of a restructuring plan, called the proposal.
 Content: suggested course of action, suggestion of a “nominee” (section 1
Insolvency Act 1986)
 Moratorium only possible for SME’s (introduced by IA 2000)

Question 14

What are schemes of Schemes of Arrangement

Answer 14

Section 895 Companies Act 2006
 Strictly speaking not an insolvency procedure as such, but authorises a
company, whether insolvent or not, to enter into a compromise with its
creditors with the aim of restructuring companies in financial distress.
 Commencement: proposal od such an arrangement by the members or
creditors (section 895 CA 2006)
 The court will then order meetings of creditors, members and the relevant
classes and will then give or refuse the sanction to the outcome of these
meetings.
 Voting of 75 % in value of the creditors or class of creditors present
 The most important characteristic: classes of shareholders and creditors
have to be formed and in each class a simple majority has to approve the
plan.

Question 15

What are the distribution of company property

Answer 15

Preferential debts
 Fixed charges
 Floating charges
 Unsecured creditors pari passu (rateably)
 Members
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