The termination of a solvent business, corporate solvency, and personal bankruptcy

Question 1

Company voluntary arrangement:

Answer 1

*A binding agreement between the company and its creditors by which the company compromises its debts or agrees an arrangement for their discharge.
*A CVA proposal will be implemented if it is approved by at least 75% (by value) of the company’s creditors and 50% or more of unconnected creditors.
*A CVA binds every creditor of the company who had notice of it and was entitled to vote at the meeting.
*It is not binding on secured creditors and preferential creditors unless they agree to be bound.
*A smaller company can apply for a 28-day moratorium by filing the CVA documents at court, during which no creditor can take any action against the company.

Question 2

Administration:

Answer 2

*The main collective process under which a company may be organised, or its assets realised under the protection of a statutory moratorium.

Question 3

The administrator’s purpose is to (beginning with the first objective and moving down the list):

Answer 3

Rescue the company as a going concern or achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up or realising property to make a distribution to one or more secured or preferential creditors.

Question 4

Administration -
Court route:

Answer 4

by court order. Court must be satisfied that company is unable to pay its debts’ and the purpose of administration will be achieved.

Question 5

Administration -
Out of court order:

Answer 5

This route is quicker and cheaper.
Can be taken by company or directors or qualifying floating charge holder:
*By the company itself filing for administration or by the directors of the company filing for administration
or QFC holder appointing an administrator.

Question 6

QFC must be contained in?

Answer 6

the security document.

Question 7

QFC must be created on or after?

Answer 7

15th September 2003 and none of the statutory exceptions apply.

Question 8

Administration imposes a?

Answer 8

statutory moratorium that places a freeze on creditors taking action against the company for one year.

Question 9

Administrator’s duty is to all of the?

Answer 9

creditors.

Question 10

Fixed asset receivership:

Answer 10

*Not a collective process but a remedy initiated by a secured creditor.
*Security document must contain a fixed charge.
*A receiver (also known as a law of property act receiver or fixed charged asset receiver) can be appointed over specific property.
*Appointed by the holder of the fixed charge.
*Primary duty of receiver is to the fixed charge holder.
*Receiver has the powers and duties specified in and limited by law of Property Act 1925 though these can be modified by express provisions in the security document.
*Appointed with a view to selling the charged property or collecting the rental income from it for the lender.

Question 11

Liquidation (winding up):

Answer 11

*Not a rescue mechanism.
*This process will liquidate (wind up) the company.
*Involves the appointment of a liquidator who collects in and distributes the company assets.

Question 12

Two main types of liquidation:

Answer 12

Compulsory - A creditor will serve a statutory demand that remains unsatisfied for 21 days, proving that the company is unable to pay its debts.
The winding up order will made by the court.
Voluntary

Question 13

Voluntary - two types:

Answer 13

members’ voluntary liquidation creditors’ voluntary liquidation

Question 14

Members’ voluntary liquidation:

Answer 14

The directors of the companies were a statutory declaration of solvency.
*The members’ voluntary liquidation commences when the members pass a special resolution that the company should be wound up.
*Only available where a company is solvent.

Question 15

Creditors’ voluntary liquidation:

Answer 15

the directors of the company do not make a statutory declaration of solvency and the directors are more likely to be affected.
*A creditors’ voluntary liquidation commences when the members of a company pass a special resolution that the company should be wound up.
*In a creditors’ voluntary liquidation, the creditors are involved in the appointment of a liquidator and are entitled to receive reports on the progress of the liquidation.

Question 16

Individual voluntary arrangement:

Answer 16

*An alternative to personal bankruptcy.
*Debtor applies for a moratorium (interim order).
*Debtor agrees to a voluntary repayment plan.
*A debtor can enter a voluntary arrangement at any time before a bankruptcy petition by the debtor is pending.
*During the interim order (in force for 14 days):
*No bankruptcy petition can be presented or proceeded with.
*No landlord can exercise any right of forfeiture.
*No other proceedings or legal process may be commenced against the debtor or his property without the leave of the court.

Question 17

A resolution for a voluntary arrangement must?

Answer 17

be passed by at least 75% (by value) of the creditors present in person or by proxy.

Question 18

The resolution for a voluntary arrangement binds?

Answer 18

every unsecured creditor.
It is not binding on preferential and secured creditors.

Question 19

Bankruptcy -
A petition is made to a court by any of the following to start the process:

Answer 19

*Creditor (or joint creditors) owed £5000 (in aggregate) or more, the debt is a liquidated sum, payable now/certain future time/unsecured and debtor is unable to pay or has no reasonable prospect of doing so (failure to comply with the statutory demand within three weeks and no outstanding application to set aside a statutory demand)
OR
Creditor who is bound by an IVA where the debtor has not complied with
OR
debtor (the bankrupt) showing a statement of affairs that he is unable to pay his debts.

Question 20

A bankruptcy order is made at?

Answer 20

a court hearing and a trustee in bankruptcy takes control of the bankrupt ‘s assets.

Question 21

Title to the bankrupt ‘s personal property vests in?

Answer 21

the trustee to be sold to pay the creditors with the exception of tools of the trade, everyday household items, clothing, furniture.

Question 22

Title to the bankrupt ‘s home passes to?

Answer 22

the trustee.

Question 23

A court order is required to sell the property where another person has?

Answer 23

a legal or equitable interest in the property or a right of occupation.

Question 24

After one year a court order will be likely granted as?

Answer 24

the creditors’ interests outweigh anyone else living in the home.

Question 25

A trustee in bankruptcy will gather and increase the bankrupt ‘s assets by:

Answer 25

*Disclaiming onerous contracts or property.
*Setting aside transactions at an undervalue.
*Setting aside preferences.
*Setting aside transaction at an undervalue that defraud creditors.

Question 26

The assets of the bankrupt will be discharged in the following order:

Answer 26

*The costs of bankruptcy.
*Payment of preferential debts.
*Payment of unsecured creditors.
*Payment of postponed creditors (bankrupt’s spouse or civil partner).

Question 27

Restrictions on bankrupt until discharged from bankruptcy include:

Answer 27

*Cannot obtain credit of more than £500 without disclosing bankruptcy.
*Cannot act as director.
*Must disclose their bankruptcy if trading under a different name under which the bankruptcy order was made.
*Without leave of the court, cannot be involved in company management, promotion, or formation of a company.
*Cannot continue as a partner in a partnership.

Question 28

A bankrupt is discharged from bankruptcy one year from?

Answer 28

the date on which the bankruptcy commences.

Question 29

Preferences (s.239 IA 1986) -
A company prefers a person if:

Answer 29

• It is a creditor or a surety or guarantor of any of the company’s debts or liabilities
  AND
  *The company does anything to put that person into a better position in the event of the company going into insolvent liquidation than he otherwise would have been
  AND
  *The preference was given during the six months (or two years where the person that has been preferred is connected with the company) before the onset of insolvency
  AND
  *The company was unable to pay its debts at the time of the transaction or became unable to pay its debts as a result of it.

Question 30

An administrator or liquidator can apply to the court to ask?

Answer 30

it to set aside or make other appropriate order in relation to a preference.

Question 31

A person connected with the company is:

Answer 31

a director or shadow director, or someone who is a close relative or business associate of a director or shadow director, or an associate of the company.

Question 32

Transactions at an undervalue (s.238 IA 1986):

Answer 32

*A company enters into a transaction at an undervalue at the relevant time where it:
Makes a gift
OR
enters into a transaction for consideration, the value of which in money or money’s worth is significantly less than the value provided by the company.

Question 33

Transactions at an undervalue (s.238 IA 1986) -
Relevant time means:

Answer 33

during the two years ending with the onset of insolvency.

Question 34

Transactions at an undervalue (s.238 IA 1986) -
The company must have been insolvent at the time of?

Answer 34

the transaction or became insolvent as a result of entering into the transaction.

Question 35

Fraudulent Trading (s.213 IA 1986):

Answer 35

*Fraudulent trading is where a liquidator or administrator determines that the business of the company has been carried on with intent to defraud the company’s creditors or some other person’s creditors.
*The liquidator or administrator can seek a court declaration that anyone who was knowingly party to the fraudulent business make a contribution to the company’s assets.
*The court can make a disqualification order against a person if that person has been found liable for fraudulent trading.

Question 36

Wrongful trading (s.214 IA 1986) - Wrongful trading imposes personal liability were:

Answer 36

*The company goes into insolvent liquidation
AND
*The director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation
AND
*That person was a director at the time.

Question 37

The directors are offered a defence if?

Answer 37

that director took every step with a view to minimising the potential loss to the company’s creditors as he ought to have taken.

Question 38

In determining if a director knew, or ought to have known certain facts, the conclusions which he ought to reach and the steps he ought to have taken, both subjective and objective test are applied:

Answer 38

*What would a reasonable director, (taking into account general knowledge, skill, and experience) have known in the circumstances
AND
*What did this particular director know (taking into account his general knowledge, skill, and experience)?

Question 39

If a director is held liable for wrongful trading, the director may?

Answer 39

have to make a personal contribution to the company’s assets.

Question 40

The court can make a disqualification order against a person if?

Answer 40

that person has been found liable for wrongful trading.

Question 41

Setting aside a floating charge (s.245 IA 1986):

Answer 41

*A floating charge is invalid if at the relevant time when the charge was created, the company got nothing in return, whether in the form of new money, the provision of goods or services or the extinguishing of existing debts.
*In contractual terms, the charge is invalid to the extent that the consideration for its creation was past consideration.
Relevant time means:
If the charge was created in favour of a person who is connected to the company during the two years ending with the onset of insolvency
OR
If the charge was created in favour of any other person during the 12 months before the onset of insolvency.

Question 42

A person connected with the company is a director or shadow director, or someone who is?

Answer 42

a close relative or business associate of a director, or a shadow director or an associate of the company.

Question 43

Assets loaned or leased to the company, assets held on trust for third parties and assets held on retention of title clauses are not available to?

Answer 43

the general pool of creditors and will be repossessed by their true owners.

Question 44

The order of priority between creditors is as follows:

Answer 44

*Fixed charge holder.
*If there is a surplus, then that becomes the property of the company and available for the creditors generally.
*General costs and expenses of the liquidation or administration are second.
*The preferential creditors are third.
*The floating charge holders are fourth.
*The insolvency practitioner must work out how much money is left to pay the floating charge holders as s.176A of the IA states he must first carve out a sum and set it aside for the unsecured creditors (a ring-fenced fund). The balance is paid to the floating charge holders.
*The ordinary unsecured creditors are fifth.