Insolvency Flashcards
(15 cards)
Is there any guidance available for insolvency?
RICS Guidance Note on Termination of Contract, corporate recovery and insolvency
What is insolvency of a party in terms of a construction contract?
The inability for a company to pay its debts
What is accounting insolvency?
Accounting insolvency is when the total liabilities exceed the total assets on a firms balance sheet.
What is the difference between “Standard Insolvency” and “Accounting Insolvency”?
Standard Insolvency - The inability for a company to pay debts that are due
Account Insolvency - Does not automatically mean bankruptcy / insolvency because the individual or organisation may still be able to make payments. Just because liabilities are greater than assets, does not mean they are completely insolvent
What are the different types of insolvency for companies?
Company Voluntary Arrangements
Administration
Winding up or compulsory liquidation
Receivership
Voluntary liquidation
What are Compulsory Voluntary Arrangements?
CVA’s occur when a company is having financial difficulties but is not necessarily insolvent – the process must be overseen by an Insolvency Practitioner
Arrangements between company and unsecured creditors (e.g. HMRC), to repay only what it can afford to over a period
What is administration?
Administration involves the adoption of a procedure that allows a company unable to pay its debts to continue to trade for a further period, during which its assets are protected
The party then continues to trade while the administrator endeavors to realise the best price for a company’s assets
What is winding up or compulsory liquidation?
Winding-up occurs when the company is unable to pay its debts
Compulsory liquidation can be instigated by one of the creditors (acting on behalf of all the creditors)
If the company is issued a winding-up order, then they cease trading, and the official receiver acts in the capacity as a liquidator to sell off the company assets.
What is Receivership?
Receivership is where a party breaches the terms of borrowing from a creditor, and the creditor appoints an administrative receiver to recover the debt owed
What is voluntary liquidation?
Voluntary liquidation may be instigated when the company is still solvent
The directors of the company can cast a vote to agree that the company’s liabilities are too great to allow the company to continue in business
A liquidator is appointed to sell the assets of a company
What is bankruptcy?
Bankruptcy refers to individuals only, where a court has concluded they are unable to pay their debts and the official receiver and / or the insolvency practitioner should be appointed to deal with their affairs.
Who is employed when a company becomes insolvent?
An insolvency practitioner
Which creditors are paid first when a company goes insolvent and why?
Secured creditors are paid first (e.g. leasing companies, banks and other lenders)
Followed by preferential creditors (e.g. employees) , note HMRC are a secondary preferential creditor
Followed by unsecured creditors (e.g. suppliers, trade creditors, etc.)
Secured creditors are those who have security interest over some or all of the company assets, they are usually the first to get paid. Fixed charge holders include banks and other asset-based lenders holding title over a company asset.
What is Corporate Recovery?
“Corporate Recovery” is a term used to describe the process and actions taken to bring a failing company back to full health; this can involve the provision of financial, restructuring, accounts and legal advice by those qualified to give such advice and the possible appointment of an insolvency practitioner.
