Insolvency

Question 1

Insolvency

What is an individual voluntary arrangement?

Answer 1

Agreement between individual debtor and all creditors where each agrees to accept less than is owed (often through reduced but structured payments), to give the debtor a chance to recover.

It’s purpose is to avoid bankruptcy whilst addressing the debtor’s financial difficulties.

Question 2

What is the procedure for an Individual Voluntary Arrangement (IVA) (5)?

Answer 2

1. Appointment of IP:
   * Debtor appoints an Insolvency Practitioner to draft the IVA proposal.
   * The debtor provides a statement of affairs.
2. Interim Order:
   * The debtor may apply for a 14-day moratorium to prevent creditor enforcement actions.
3. IP’s Report:
   * The Insolvency Practicioner reviews the proposal to assess its feasibility and calls a creditor decision process.
4. Approval:
   Requires:
   * Support of majority of creditors
   * 75% by value of creditors to approve.
   * At least 50% of approving creditors must NOT be connected persons.
5. Implementation:
   * The IP becomes the supervisor to oversee the IVA.
   * If the debtor defaults, creditors may petition for bankruptcy.

Question 3

Insolvency

What is the advantage of an IVA to a (1) debtor and (2) creditor?

What must a debtor do before agreeing to an IVA?

Answer 3

Advantages to the Debtor:
1. Avoids the stigma and restrictions of bankruptcy.

2. Debts are managed under a structured plan.
3. Prevents enforcement actions by creditors.

Advantages to the Creditor:
1. Greater returns than bankruptcy due to structured repayments.

2. Lower costs compared to bankruptcy proceedings.
3. Maintains debtor’s goodwill and ability to earn income.

Take professional advice

Question 4

Insolvency

What is the protection offered by the court order received by an insolvency practitioner preparing and filing a statement of affairs on behalf of the debtor?

Answer 4

No bankruptcy proceedings can be brought when the order is in force

Question 5

Insolvency

What percentage of unsecured creditors must agree to the agreement before it is binding on all ordinary unsecured creditors, whether they voted for it or not?

Who are not bound?

Answer 5

Majority in number and 75% in value

Preferential and secured creditors

Question 6

What is a Debt Relief Order (DRO), and what conditions must be satisfied to benefit from it?

Answer 6

Definition: A DRO is a simplified form of insolvency for individuals with minimal assets and low income.

Eligibility Conditions:

1. Debts of £50,000 or less
2. Gross assets of £4,000 or less
3. Disposable income below £75/month after essential expenses.
4. No prior Debt Relief Order in the last six years.
5. Not subject to any other insolvency procedure.

Question 7

In the Debt Respite Scheme (‘breathing space’), what is a standard breathing space, and how long does it last?

Answer 7

Standard Breathing Space:

• Provides legal protection from creditor actions, including pausing enforcement and freezing interest.
• Duration: 60 days.

Question 8

What is a mental health crisis breathing space, and how long does it last?

Answer 8

Mental Health Crisis Breathing Space:

• Available to individuals receiving mental health crisis treatment.
• Duration: Length of treatment + 30 days.

Question 9

Insolvency

Who are two examples of a preferential creditor?

Answer 9

1. Employees owed waged in the last four months
2. HMRC in respect of VAT, PAYE, and National Insurance

Question 10

Insolvency

What may the insolvency practitioner (now a supervisor) or a creditor do if a debtor does not adhere to the IVA, or if the debtor provided false or misleading information?

Answer 10

Petition for the debtor’s bankruptcy

Question 11

Insolvency

What is bankruptcy?

What period after a bankruptcy application is a debtor deemed discharged from the debts?

Answer 11

A judicial process in which assets of a bankrupt debtor are automatically passed to a third party, the trustee in bankruptcy, who liquidates the assets and uses the proceeds to pay off as many debts as possible, in a strict order set out by legislation

One year

Question 12

Insolvency

What are the three ways a debtor can be placed into bankruptcy?

Answer 12

1. Debtor applies online to declare themselves bankrupt
2. One or more unsecured creditors owed at least £5,000 can apply
3. Supervisor (IP) or creditor can apply if debtor has breached IVA

Question 13

Insolvency

Put simply, what are the two ways a creditor who applies to put a debtor in bankruptcy can prove that they are insolvent?

Answer 13

1. Debt immediately payable and debtor does not have the funds
2. Debt payable in future, and debtor has no reasonable prospect of being able to pay

Question 14

Insolvency

What are the three specific ways in which Bankruptcy can be demonstrated?

Answer 14

Bankrupt if debtor owes £5,000 or more and:

1. Creditor makes a statutory demand for payment; debt not paid within 3 weeks or debtor does not apply to set aside demand within 3 weeks
2. Creditor seeks to execute on the judgment; attempt to execute judgment fails
3. Debt owed in future, and creditor serves a statutory demand of proof of ability to pay; debtor does not show reasonable prospect of being able to pay

Question 15

Insolvency

What assets is a bankrupt able to retain?

Answer 15

• Assets needed for day-to-day living, including furniture
• Salary, and
• Any tools required for their job

Question 16

Insolvency

What is an income payments order, and what is the maximum length of one?

Answer 16

An income payments order requires the bankrupt to pay part of their income (e.g. salary) to the trustee in bankruptcy.

Although a bankrupt is entitled to retain any salary they make, if the salary exceeds the amount needed for the reasonable needs of them and their family, an income payments order can be made, for a maximum of three years

Question 17

Insolvency

Although the bankrupt’s interest in their home passes to the trustee, what are the four interests, which if they exist in the home, mean that it cannot be sold within the first year without a court order?

What happens after one year?

Answer 17

1. Held in joint names
2. Equitable interest of spouse
3. Right to occupy
4. Children under 18 in occupation

After 1 year the interests of creditor override those interests in the home

Question 18

Insolvency

What three things is a debtor in a bankruptcy restricted from doing, until discharged?

Answer 18

1. Apply for credit over £500 without disclosing the bankruptcy to the lender
2. Act as company director or be a partner
3. Trade under another name without disclosing the bankruptcy

Question 19

Insolvency

What is the order of priority in a bankruptcy distribution?

Answer 19

1. Secured creditors with a fixed charge
2. Costs of the bankruptcy
3. Preferential creditors
4. Secured creditors with a floating charge
5. Unsecured creditors
6. Connected unsecured creditors

Debts abate equally within a class

Question 20

Insolvency

What conduct will prevent the bankruptcy from being discharged after the usual one year?

What is the label given to the debtor, and how long does this bankruptcy last?

Answer 20

If the bankruptcy was caused by dishonesty, negligence, and recklessness

Debtor is culpable, and a culpabe bankruptcy lasts 15 years.

Question 21

Insolvency

What occurs if a partner is made bankrupt in a:
(1) partnership at will

(2) partnership for specified term/undertaking?

Answer 21

1. Partnership is dissolved and the trustee receives any money due to the insolvent partner
2. Partnership will continue if the remaining partners purchase the bankrupt partner’s interest from the trustee

Question 22

Insolvency

What occurs if a partner in an LLP is made bankrupt?

Answer 22

The partnership does not terminate, but the trustee will usually sell the interest to the remaining partners

The bankrupt partner cannot participate in the management of the LLP

Question 23

Insolvency

How does bankruptcy proceed in a partnership:

1. Of individuals
2. Of companies
3. Of a mix of both?

Answer 23

1. Bankruptcy processes apply to each partner
2. Liquidation applies to each company
3. Bankruptcy applies to individuals; liquidation to the companies

Question 24

Insolvency

Are the insolvency procedures for limited companies and LLPs broadly the same?

Answer 24

Yes, and reference to company will probably apply to LLP

Question 25

Insolvency What are the six insolvency options available to companies?

Answer 25

1. Receivership 2. Restructuring plan 3. Moratorium 4. Administration 5. Company voluntary arrangement 6. Liquidation

Question 26

Insolvency What is fixed asset receivership? Is proof of insolvency needed? What are the most common breaches giving rise to fixed asset receivership?

Answer 26

Where a secured creditor exercises their right to appoint an administrative receiver because a company has breached a term, through which the receiver takes possession of the charged asset and usually disposes of it to use the proceeds to pay back the creditor Receiver owes the duty to the particular creditor No need to show insolvency. Common breaches are failure to pay interest or capital of a loan

Question 27

Insolvency Why does fixed asset receivership usually place a company into insolvency anyway?

Answer 27

Because charges are usually granted against assets which are crucial to the functioning of the business, e.g. buildings and machinery

Question 28

Insolvency What percentage of creditors must agree to a restructuring plan, and does it bind those who do not vote for it?

Answer 28

75% in value of the unsecured debt, and binds all if this threshold is reached

Question 29

What is a moratorium, how long does it last, and how long can it be extended?

Answer 29

Definition: A temporary pause on creditor actions to allow the company to restructure or rescue its business. Duration: * Initial period: 20 business days Extendable: * By 20 days through court filing * Up to 1 year with creditor consent

Question 30

What debts are not included in the moratorium?

Answer 30

1. Employee wages and accrued holiday pay. 2. Goods and services supplied during the moratorium. 3. IP’s fees and expenses. 4. Debts secured against company assets (e.g., mortgages).

Question 31

Insolvency What three things are prohibited when a company seeks a moratorium? How long does a moratorium last for?

Answer 31

1. Creditors cannot take action to enforce their rights or launch proceedings 2. Landlord may not forfeit lease of company premises 3. Floating charge holder may not crystallise charge A moratorium initially lasts for; * 20 business days * It can be extended for a further 20 business days without creditor consent. * It can be extended for a longer period (up to 1 year) with creditor consent or court approval.

Question 32

Insolvency What is the exception to the payment holiday a company enjoys during a moratorium? What companies cannot avail of a moratorium?

Answer 32

Wages and other payments to employees, including holiday pay Companies subject to insolvency proceedings currently or within the last 12 months

Question 33

Insolvency What is administration? What powers does an administrator have? What is the difference between an administrator and a receiver?

Answer 33

What is administration? * Administration is a formal process where a company in financial distress is managed by an appointed administrator, aiming to either rescue the business or maximize returns for creditors. Role of an administrator? * An administrator (independent insolvency practitioner) can run, reorganise, or sell the company as a going concern * An administrator acts in the interests of creditors as a whole

Question 34

Insolvency What are the three aims of an administrator, in order of importance?

Answer 34

1. Rescue the company 2. Achieve a better result for creditors than if it was wound up 3. Realise property to distribute to creditors

Question 35

Insolvency What are the two ways an administrator can be appointed to a company?

Answer 35

1. Court appointment 2. Company, directors, or holder of a qualifying floating charge file certain documents in court

Question 36

Insolvency If the court appointment is used for appointment of an administrator, what two things must the court be satisfied of?

Answer 36

1. Company unable to pay debts 2. Administrator likely to achieve better result for the creditors than liquidation

Question 37

Insolvency If the company or directors appoint the administrator, who must they notify and what can they do?

Answer 37

They must notify any qualifying charge holders, who can agree or appoint an alternative administrator

Question 38

Insolvency What is a qualifying floating charge?

Answer 38

Charge over the whole or substantially whole of the company’s assets, containing a provision enabling the holder to appoint an administrator if a breach allowing the creditor to terminate their agreement occurs

Question 39

Insolvency What are four powers of an administrator? Generally, what proportion of the value of the creditors must agree to an administrator’s proposals?

Answer 39

1. Take control of company assets and sell company assets 2. Bring and defend legal proceedings on behalf of the company 3. Carry out the company’s business 4. Remove directors Majority

Question 40

Insolvency What are the effects of the moratorium which gets imposed during administration?

Answer 40

1. Restricts ability of third parties to enforce their rights 2. Prevents commencement of insolvency proceedings

Question 41

Insolvency What is a Company Voluntary Arrangement? Only who is bound by a CVA?

Answer 41

Agreement between the company and all creditors where each agrees to accept less than is owed (often through reduced but structured payments), to give the company a chance to recover and operate as a going concern. subject to the same 75% approval threshold and binding on dissenters if passed Unsecured creditors

Question 42

Insolvency What two groups can start a voluntary liquidation, and what are the two types?

Answer 42

Voluntary liquidation can be started by the members or directors, and the two types are: Members’ voluntary liquidation Creditors’ voluntary liquidation

Question 43

Insolvency In a Members’ Voluntary Liquidation, who controls the process from start to finish, and what are the two requirements for it to be available?

Answer 43

The members and directors control it and to be available: 1. The company must be solvent, and 2. The individuals involved in running the company must wish to wind it up

Question 44

Insolvency What are the steps in a MVL? Within what time period after the final step of a MVL is the company dissolved? (6)

Answer 44

1. Directors make statutory declaration of solvency 2. Shareholders pass a special resolution to start the liquidation and an ordinary resolution to appoint the liquidator 3. Appointment of liquidator is advertised in London Gazette and Companies House is notified 4. Liquidator investigates, and asks creditors for full details of debts 5. Liquidator collects company assets, liquidates them, and distributes funds to creditors in the statutory order 6. Final accounts are sent to creditors and members, and final return is filed at Companies House Three months

Question 45

Insolvency In a Creditors’ Voluntary Liquidation, who starts the process and who takes it over?

Answer 45

Started by the directors and then taken over by the creditors

Question 46

Insolvency What is the main reason the directors would commence a CVL?

Answer 46

The directors are advised the company is insolvent, and do not wish to be personally liable for the debts of the company through fraudulent or wrongful trading if they continue to trade

Question 47

Insolvency What are the steps required within the company to begin a CVL? (8) Within what time period after the final step of a CVL is the company dissolved?

Answer 47

1. Directors resolve that the company is insolvent and should be placed into liquidation 2. Shareholder pass special resolution to start the liquidation 3. Resolution is advertised in the London Gazette within 14 days of being passed 4. Directors prepare a Statement of Affairs (SOA) and deliver it to the proposed liquidator before the creditors' meeting, which must be held within 14 days of the shareholders’ resolution. The liquidator then makes the SOA available to creditors — usually by circulating it at or before the meeting. 5. Appointment of liquidator is advertised in London Gazette and Companies House is notified 6. Liquidator investigates, and asks creditors for full details of debts 7. Liquidator collects company assets, liquidates them, and distributes funds to creditors in the statutory order 8. Final accounts are sent to creditors and members, and final return is filed at Companies House Three months

Question 48

Insolvency What must any creditor be able to show to petition the court to wind up a company? What will cause the court to dismiss the petition if shown by the company?

Answer 48

Creditor must show company is unable to pay debts Court will dismiss if company can show it may recover financially or that the debt upon which the petition is based is disputed

Question 49

Insolvency What is the order of priority in a liquidation of a company?

Answer 49

1. Secured creditors with a fixed charge 2. Costs of the liquidation 3. Preferential creditors 4. Secured creditors with a floating charge 5. Unsecured creditors 6. Connected unsecured creditors 7. Shareholders Debts abate equally within a class

Question 50

Insolvency What is a preference?

Answer 50

When a debtor intentionally does something that puts a creditor or other similar party in a better position on liquidation/administration than they otherwise would be

Question 51

Insolvency When is intent to prefer presumed?

Answer 51

If the preference is to a connected person, e.g. director, their spouse, other close family member or associate

Question 52

Insolvency To constitute a preference which can be clawed back, within what time limit of the onset of insolvency must it have occured for: 1. Non-insiders, and 2. Insiders? Is it required that the preference cause the insolvency?

Answer 52

1. Six months 2. Two years No

Question 53

Insolvency What is a **transaction at an undervalue?** What is the insolvency requirement for a transaction at an undervalue by a **company**?

Answer 53

When property that would otherwise have formed part of the bankruptcy estate is gifted or sold for significantly less than market value within **two years** of a **company’s insolvency** or **five years** of an **individual’s bankruptcy** A company must have been insolvent at the time of the transaction, or became insolvent as a result

Question 54

Insolvency In the context of a transaction at an undervalue by a company, when is insolvency presumed?

Answer 54

When the transaction is made to a connected person

Question 55

Insolvency Regarding a transaction at an undervalue made by an insolvent individual, there is no requirement to prove insolvency if a transaction is made within what time limit before insolvency? In the context of a transaction at an undervalue by an individual when is insolvency always presumed?

Answer 55

Two years If a transaction is made to a close relative or business associate at any time

Question 56

Insolvency What are the three defences available to a company for a transaction at an undervalue claim?

Answer 56

Transaction at an undervalue entered into: 1. In good faith 2. For the purpose of carrying on the business 3. With reasonable grounds to believe it would benefit the company

Question 57

Insolvency What is one thing which will not amount to a transaction at an undervalue, and why?

Answer 57

Granting a security interest in a company asset, because this does not change the value of the company’s assets

Question 58

Insolvency When does the criminal offence of **fraudulent** trading arise?

Answer 58

When a director (or other person who knowingly participates) carries on business of the company, knowing it is insolvent, with the **intent to defraud creditors**

Question 59

Insolvency When does **wrongful **trading arise?

Answer 59

When, at some time before a company became insolvent, the directors **knew or ought reasonably to have known that was no prospect the company would avoid insolvency**, and **failed to take adequate steps to minimise losses for creditors**

Question 60

In a wrongful trading situation, when does a director’s duty shift and to whom does it shift? What can a director show in defence to a wrongful trading claim?

Answer 60

The duty shifts from what is best for the shareholders to what is best for the **creditors**, once the director knows or ought reasonably to know insolvency is unavoidable That they took every step with a view to minimising potential loss to creditors

Question 61

In what situation is a floating charge **void **if given to (1) an unconnected person and (2) a connected person?

Answer 61

**Unconnected:** 1. If it was created for **no consideration** within **12 months** ending with insolvency and 2. At the time it was created, the company was insolvent or became insolvent as a result **Connected:** If it was created for **no consideration** within **two years** ending with insolvency (no insolvency step 2)

Question 62

Companies: raising finance What is a: (1) fixed charge and (2) floating charge granted over?

Answer 62

1. Assets the company will own for a substantial period of time 2. A group of assets that change regularly, and does not crystallise until default

Question 63

Companies: raising finance Within what time limit of the creation of a charge by a company must it be registered at Companies House? What is the impact of failing to register a charge at Companies House?

Answer 63

21 days * The charge becomes void against a liquidator, administrator, and creditors. * The lender loses priority to any other secured creditors whose charges are registered. The charge is treated as if it doesn’t exist, meaning: * The lender becomes an unsecured creditor. * The asset becomes part of the company’s general pool of assets. * It is then available to all unsecured creditors, who share in it rateably (i.e. proportionately). * The debt remains valid, but the lender cannot enforce the charge as security. * The charge is not enforceable against third parties. Late registration may be allowed by the court under s.859F CA 2006 if: ▸ There is a valid reason for the delay; and ▸ No unfair prejudice to other creditors would result.

Question 64

Companies: raising finance How is the priority of: (1) fixed charges over the same asset (2) floating charges over the same asset determined?

Answer 64

Both based on the date of their creation, as long as they were validly registered at Companies House

Question 65

Companies: raising finance What is the priority of a fixed charge and a floating charge in the same asset?

Answer 65

As long as it is properly registered, a fixed charge will take priority over a floating in the same asset, even if the floating charge was created and registered first