Insolvency A&Q

Question 1

What is the definition insolvency in IA 86?

Answer 1

IA 86:

Context of the circumstances when a court may make a winding up order in respect of a company.

One such circumstance is when a company is unable to pay its debt

Question 2

What are the 4 situations or tests for when a company is deemed to be unable to pay its debts in IA 86?

Answer 2

1) is unable to pay its debts as they fall due (The cash flow test)

2) Has liabilities that are greater than its assets (The balance sheet test)

3)Does not comply with a statutory demand for a debt of over 750 pounds = Cash flow insolvent

4) Has failed to pay a creditor to satisfy enforcement of a judgment debts.

Question 3

What is the cash flow test?

Answer 3

Is when a company is unable to pay its debts when they fall due

Question 4

What is the balance sheet test?

Answer 4

When a company has liabilities that are greater than its assets.

Question 5

What is the directors’ obligations towards companies in financial difficulties?

Answer 5

The directors must:

1) review financial performance of a company

2) recognise when it is facing financial difficulties

3) Facing difficulties = decide what action to take on behalf of the company

4) take advice on their duties responsibilities and liabilities to resolve their companies financial difficulties and minimising the exposure of creditors losses.

Question 6

What are examples of financial difficulties?

Answer 6

1. Pressure from unpaid creditors
2. overdraft facility is fully drawn + bank is refusing to provide further credit by increasing the facilities.
3. loans and liabilities that exceed the value of its asset

Question 7

What are the options for the directors for a company facing financial difficulties?

Answer 7

5 options:

1. Do nothing
2. Do a deal (through informal or formal arrangements)
3. Appoint an administrator (formal insolvency procedure)
4. Request the appointment of a receiver (enforcement procedures )
5. Place the company into liquidation (formal collective insolvency)

Question 8

What considerations must a directors take into account when doing nothing?

Answer 8

Take into consideration:

1) Potential risk of personal liability under IA 86

and

2) potential breach of their directors duties under the Companies Act

Question 9

Can a director incur personal liabilities where the company is insolvent?

Answer 9

Yes, under IA 86

Question 10

What is an informal agreement ?

Answer 10

A company negotiating informally with its creditor,

Question 11

Is an informal agreement regulated by any insolvency related statute?

Answer 11

No

Question 12

Is an informal agreement contractually binding.

Answer 12

Potentially.

it MAY be contractually binding agreement

Question 13

How does a company obtain a creditor agreement?

Answer 13

The company may have to done or more of the following:

1) Grant new or additional security

2) Replaced directors or senior employees and/or

3) Sell failing businesses/subsidiaries or profitable ones to raise cash

4) Reduce costs (e.g through redundancy programme or the closure of unprofitable businesses) and/ore

5) Issue new shares to creditors (debt for equity swap)

Question 14

What is debt for equity swap?

Answer 14

Issue new shares to the creditor to obtain a creditor agreement

Question 15

What is a standstill agreement?

Answer 15

• A preliminary step to negotiating an informal arrangement with relevant creditors.
• whereby the creditors agree not to enforce their rights or remedies for a specified period to give the company time to negotiate an arrangement with them to resolve the company’s financial issues.

Question 16

when is a pre-insolvency moratorium used?

Answer 16

can be used by a company to buy itself some time to reach an informal agreement with all or some of its creditors or as a preliminary step to proposing a CVA, a restricting plan or a scheme of arrangements.

Question 17

What is a pre-insolvency moratorium?

Answer 17

a period during which creditors are unable to take action to exercise their usual rights and remedies, thereby creating a breathing space for a company to resolve the situation.

Question 18

What are the actions restricted by the pre-insolvency moratorium?

Answer 18

1) no creditors can enforce its security against company’s assets

2) there is a stay of legal proceedings against the company and a bar on brining new proceedings against it

3) no winding up procedures can be commenced in respect of the company (unless commenced by the directors) and no shareholder resolution can be passed to wind up the company (unless approved by the directors) and

4) no administration procedure can be commenced in respect of the company (other than the directors)

Question 19

What is the procedure for obtaining the pre-insolvency moratorium?

Answer 19

By filing documents at court including:

1) a statement that the company is, or is likely to become, unable to pay its debts as they fall due.

2) a statement from a licensed insolvency practitioner (usually an accountant), known as a Monitor for these purposes:

• stating that in their view, it is likely that a moratorium will result in the rescue of the company as a going concern.

*the Monitor has a supervisory function during pre-insolvency moratorium.

Question 20

What is a Monitor?

Answer 20

The Monitor has a supervisory function during pre-insolvency moratorium, which states that a moratorium will result in the rescue of the company as as a going concern from a licensed insolvency practitioner.

Question 21

How long does an pre-insolvency moratorium last?

Answer 21

20 business days

Question 22

Can a pre-insolvency moratorium be extended after 20 business days? and by who?

Answer 22

Yes by a further 20 business days by the directors.

Question 23

Can a pre-insolvency moratorium be extended after 40 business days? and who can authorise it?

Answer 23

By the consent of requisite majority of creditors and/or court order = further extension are possible

Question 24

What is the maximum period for a pre-insolvency mortarium last?

Answer 24

One year

*subject to a court order to extend further

Question 25

How can a pre-insolvency moratorium terminate automatically?

Answer 25

1) if the company enters liquidation or administration

or

2) at the point that a CVA is approved

or

3) a court sanctions a restructuring plan or a scheme of arrangements

Question 26

What are pre-moratorium debts?

Answer 26

These are debts which have fallen due before or during the moratorium by reason of an obligation incurred before the moratorium.

*a company does not have to pay pre-mortarium debts, whilst the pre-insolvency moratorium subsists (statutory repayment holiday)

Question 27

What are debts that do not apply to the statutory repayment holiday to pre-moratorium debts?

Answer 27

These debts must still be paid for:

1) The Monitor’s remuneration or expenses

2) Goods and services supplied during the moratorium

3) Rent in respect of a period during moratorium

4) Wages or salary or redundancy payments and

5) Loans under a contract involving financial services. (Still liable to pay all sums due to a bank )

Question 28

Does a company have to pay their pre-mortarium debts, whilst the pre-insolvency moratorium subsists (statutory repayment holiday)?

Answer 28

No

Question 29

What is a mortarium debts?