Insolvency Flashcards
(25 cards)
What steps can creditors take if company is not repaying debt?
All creditors: - Try to resolve informally or by suggesting a CVA
- If debt is over £750 serve notice to pay and if not paid after 3 weeks can apply to court for wind-up petition
- Sue the company
- Apply to court for company to be put into liquidation
Secured creditors only: Appoint a receiver or administrator out of court (later applies to certain floating charges only).
What must the directors do if application for insolvency is triggered?
- Have duty to creditors to minimise losses and avoid personal liability
- Approach creditors to try to make an informal arrangement or CVA
- Liquidate company themselves
- Appoint an administrator themselves to either turn company around, sell it or liquidate. Driven by achieving best outcome for creditors
What happens in a liquidation?
- Company appoints liquidator and director’s powers cease.
- Liquidator collects in assets, looks at past transactions and distributes payments to creditors in order of priority.
3) Company is liquidated and ceases to exist
what happens in a compulsory liquidation?
Initiated by creditors who bring a winding up petition to court and advert is placed in the gazette
Must be able to prove insolvency by one of the tests
Court either grants or dismisses petition
OR or private liquidated appointed by court and they take the steps to liquidate the company
What are the tests for insolvency (4)?
- Creditor submits statutory demand for debt of over £750 and three weeks passes without payment
- Judgment against business is unpaid
- Company fails cash flow test - unable to pay debts as they fall due.
- Company fails balance sheet test - value of assets is less than value of liabilities
What is a CVL and how does it work?
Creditors voluntary liquidation Liquidation due to insolvency instigated by company rather than creditors so not hostile but usually in response to pressure from creditors.
1) D pass a board resolution that company is insolvent and must go into liquidation..
2) Members pass a SR to liquidate the company, D’s powers cease, ad in gazette
3) D must write to creditors within 7 days of day after SR to advise of insolvency and ask them to appoint a liquidator, details advertised in gazette and liquidation process followed. OR
This requires a special resolution and must be
advertised in the London Gazette and in two local newspapers. A meeting of creditors must be held
within 14 days, and a director must preside at the meeting.
What is an MVL?
member’s voluntary liquidation. Used when company is solvent but want to wind up due to issue eg owner/director retiring. Must make stat dec of solvency, pass an SR to confirm liquidation and OR to appoint liquidator, other steps the same as CVL
Administration, what is it and what does it do differently to liquidation?
Administrator is appointed to try to rescue best outcome for creditors, can be revive, sell or liquidate. D cannot act but still are D’s, appointment of admin also freezes creditor’s abilities to act. Gives breathing space and more flexible than liquidation.
Order of priorities for an administrator (3)?
1) Rescue as a going concern
2) Achieve a better outcome as a whole for Creditors than simple wind-up
3) Sell property to make a distribution to secured or preferential creditors
Who can appoint an administrator (3)?
1) Court following application and hearing brought by creditor.
2) The company or directors
2) Holder of a qualifying floating charge - a charge that is over all or substantially all of the companies property
Moratorium put in place to cease creditor action, admin puts plan together than creditors approve and admin starts running the company.
How does an administration end?
12 months has passed and creditor consent to extend not obtained
Object of the administration has been achieved
Company has been dissolved
Creditor or administrator applies to end it.
What is a CVA and what are it’s benefits?
- Written agreement between creditors and business to accept part payment of debt or a delay in repaying or both.
- Cheaper and quicker than administration
Useful when company solvent but experiencing cash flow issues - CVA is binding, company drafts it and shares with the nominee creditor, approved by OR and then put to vote.
- 75% of unsecured creditors must approve for it to pass as well as 50% of non-connected creditors (those with no ties to company, this is determined by chair of meeting)
- Not binding on secured creditors and they cannot vote
- Directors powers are retained by they are supervised by a nominated insolvency practitioner who reports back to creditors
what is receivership?
- Secured creditors only - may have power in credit agreement to invoke action if debt repayment is missed, regardless of if company is solvent or not. Duties only apply to the fixed asset
What is the statutory order of distribution on insolvency?
1) Liquidators costs selling fixed charge assets
2) Fixed charge holders are paid from those assets, if debt still owed they become unsecured creditors for that amount
3) Liquidators costs in selling all other assets, plus legal fees etc
4) Preferential debts (wages upto 4 months or £800 per person plus any accrued holiday up to six weeks and HMRC for VAT and PAYE only
5) Ring fenced funds for unsecured creditros
6) Floating charge holders
7 ) Unsecured creditors paid from ring fenced sums
8) Shareholders
What is the prescribed part?
A prescribed part is the part of the proceeds from realising the assets covered by a floating charge, that is set aside and kept available, so it can satisfy any unsecured debts. This is a part of section 176A of the Insolvency Act 1986 and the Insolvency Act 1986 (Prescribed Part) Order 2003.
To calculate the prescribed part, you get a percentage of the value of the company’s property that is subject to a floating charge. Typically, 50% of the first £10,000 of net floating charge realisations plus 20% of anything after, subject to a maximum prescribed part of £800,000.
Prescribed parts can be disapplied if:
The company’s net property is less than £10,000
The insolvency practitioner thinks the cost of making a distribution would be disproportionate to the benefits
The net property exceeds the minimum
Court order disapplication
What is is a preferential transaction and how are they identified?
Payment made to a creditor by a company that then becomes insolvent. Payment must be inexplicably preferable so no services or obvious benefit exchanged for settling debt, preference is assumed if creditor is connected to the business or directors and practitioner will look at last two years transactions to know associates, six months for unknown. Deciding if transaction was preferential is discretionary and will make the transaction voidable. Company must have been insolvent at time of transaction or went insolvent because of it
What is a transaction at undervalue?
Company gives another company or person eg director an asset for free or less than market rate.
Can look at last two years leading up to insolvency and company must have been insolvent at time or become as a result of the transaction. If transaction is to a connected person insolvency at the time is presumed. Presumption can be rebutted if can be shown it was done in good faith as company expected to receive a benefit from it and was done for purpose of carrying out business.
If found to be a TUV it is voidable and court can order return of item.
When would a floating charge be set aside?
An existing creditor that is given a floating charge over the debt for no new consideration can have that charge struck out. Eg a loan that is then secured by a floating charge but no change to terms of the loan. Can go back 12 months or 2 years for connected person
What is wrongful trading and the consequences?
Directors continue to trade even though company is about to go into liquidation and risk losing money that would be due to creditors. Action is brought by a creditor or the administrator.
Test is if D knew or could reasonably be expected to know re liquidation. If yes then they can be disqualified and held personally liable. Test is based on their personal skills eg qualified accountant and hat action they took to prevent loss to creditors
Fraudulent trading
D intentionally defrauded creditors by continuing to conduct business pre=-insolvency to prevent payment going to creditors.
Liquidator or administrator must show intention to defraud
Defence is that D genuinely thought they could get company out of trouble (sunshine defence).
If proven D can be personally liable, be disqualified or charged with crime.
What is a connected person?
Director or the associate of a director of the company. Associates include: Spouse, relative of D, relative of D’s spouse, spouse of a relative of the D or D’s spouse
Trustee if a D is a beneficiary
Business partner of D or D’s spouse
Employee of D or D spouse
Associate of company is another company which the same person or associates have control over
What is the threshold for personal insolvency?
Unsecured debt of 5K or more which is due and cannot be paid or will become due and person has no reasonable prospect of being able to pay it. Unsecured creditor files a bankruptcy petition.
Inability to pay is tested in same way as corp insolvency, demand and wait 3 weeks or a 5k unpaid judgment against person.
Court can appoint bailiffs if a CCJ is unpaid after 14 days and creditor requests it. Bailiffs seize property to sell and settle debt.
What is bankruptcy?
A trustee in bankruptcy collects assets to sell and pay off debt. Trustee can also investigate past conduct.
Bankrupt can keep assts needed for day to day life eg for work or household items. Bankruptcy can keep salary but high earners may have to agree to have portion ciphered off for debt. Trustee can also sell bankrupts house but needs court order if others live there.
Can also claim money lost under transactions at undervalue in last 5 years regardless if insolvency was know at the time unless transaction more than 2 years ago (or 5 years for connected person).
What are some restrictions on a person made bankrupt?
- No loans over £500 unless declare bankruptcy
- Can’t be a company director or in a partnership unless rights specified
- Can’t be involved in management or formation of a new company
- Normal bankruptcy lasts 1 year but Debt restriction orders where bankrupt was dishonest can last 2-15 years (court ordered)
