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FLK 1: Business Law And Practice > Topic 12: Corporate Insolvency > Flashcards

Topic 12: Corporate Insolvency Flashcards

(78 cards)

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1
Q

What is the main statute dealing with corporate insolvency?

A

Insolvency Act 1986 (IA 1986)

The IA 1986 has been significantly amended by various legislation including the Enterprise Act 2002 and Corporate Insolvency and Governance Act 2020.

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2
Q

What are the aims of the corporate insolvency reforms in the EA 2002?

A
  • To promote the rescue culture removing the stigma associated with insolvency
  • To increase entrepreneurship by giving prominence to collective insolvency procedures over enforcement procedures

The EA 2002 came into force on 15 September 2003, known as the ‘Relevant Date’.

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3
Q

What are the two new insolvency procedures introduced by CIGA 2020?

A
  • Pre-insolvency moratorium
  • Restructuring plan for companies

These procedures aim to increase the likelihood of a company successfully restructuring its debts.

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4
Q

Define insolvency according to IA 1986.

A

A company is unable to pay its debts as they fall due

This includes various tests outlined in the IA 1986.

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5
Q

What are the four tests for when a company is deemed unable to pay its debts?

A
  • Unable to pay debts as they fall due (cash flow test)
  • Liabilities greater than assets (balance sheet test)
  • Non-compliance with a statutory demand for a debt over £750
  • Failure to pay a creditor for enforcement of a judgment debt

The cash flow and balance sheet tests are the most important.

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6
Q

What responsibilities do directors have towards companies in financial difficulties?

A

Directors must continually review financial performance and recognize financial difficulties

Examples include unpaid creditors and exceeding liability limits.

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7
Q

What are the options available to directors when a company is in financial difficulty?

A
  • Do nothing
  • Reach a deal with creditors
  • Appoint an administrator
  • Request the appointment of a receiver
  • Place the company into liquidation

Directors must consider personal liability risks when deciding to do nothing.

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8
Q

What is a pre-insolvency moratorium?

A

A period during which creditors cannot take action against the company

It allows companies time to negotiate agreements with creditors.

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9
Q

What documents must a company file to obtain a pre-insolvency moratorium?

A
  • A statement of inability to pay debts
  • A statement from a licensed insolvency practitioner (Monitor)

The Monitor has a supervisory function during the moratorium.

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10
Q

What are moratorium debts?

A

Debts that fall due during or after the moratorium by reason of an obligation incurred during the moratorium

These debts must be paid.

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11
Q

What are the two types of formal arrangements available in insolvency?

A
  • Company Voluntary Arrangement (CVA)
  • Restructuring Plan

Both procedures require approval from requisite majorities of creditors.

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12
Q

What is a Company Voluntary Arrangement (CVA)?

A

A compromise between a company and its creditors for part payment of debts or a new timetable for repayment

The CVA must be reported to court but does not require court approval.

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13
Q

What is the role of the Nominee in setting up a CVA?

A

The Nominee drafts the CVA proposal and reports to court on whether creditors and shareholders should vote on it

The Nominee must be an insolvency practitioner.

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14
Q

What happens if a CVA proposal is approved?

A

It becomes binding on all unsecured creditors, including those who did not vote

Secured or preferential creditors are not bound unless they unanimously consent.

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15
Q

How long does a company have to challenge a CVA after approval?

A

28 days

Challenges can be based on unfair prejudice or material irregularity.

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16
Q

What is a significant disadvantage of the CVA procedure?

A

Secured or preferential creditors are not bound unless they unanimously consent

This can limit the effectiveness of the CVA.

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17
Q

What is a Standstill Agreement?

A

An agreement where creditors agree not to enforce their rights for a specified period

It gives the company time to negotiate an arrangement.

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18
Q

What is the maximum duration of a pre-insolvency moratorium?

A

One year, subject to court order

The initial moratorium lasts for 20 business days but can be extended.

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19
Q

What is the role of the Supervisor in a CVA?

A

To agree creditors’ claims, collect unsecured funds for dividends, and ensure company compliance with CVA obligations.

The Supervisor sends a final report to shareholders and creditors after the CVA is completed.

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20
Q

How are CVAs commonly used?

A

To reach a compromise with creditors, particularly landlords, to agree on rent reductions to allow continued trading.

CVAs can be used alone or as part of an administration.

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21
Q

What is the major disadvantage of a CVA?

A

It cannot bind secured or preferential creditors without their consent.

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22
Q

Why do trade creditors tend to support CVAs?

A

They are likely to recover more than if the company goes into administration or liquidation.

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23
Q

What is the purpose of the Restructuring Plan introduced by CIGA 2020?

A

To compromise a company’s creditors and shareholders and restructure its liabilities for solvency.

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24
Q

What is a unique feature of the Restructuring Plan compared to a CVA?

A

It can bind all creditors including secured creditors.

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25
What is required for a Restructuring Plan to become binding?
Court sanction is required.
26
What is a cross-class cram down in the context of a Restructuring Plan?
One rank of creditor can force the Plan on another class of creditor who has voted against it.
27
Who can initiate a CVA?
Directors, liquidator, or administrator.
28
What is the approval requirement for a CVA?
* At least 75% in value of unsecured creditors * Over 50% of shareholders.
29
What are the limitations of a CVA?
Preferential and secured creditors are not bound without express consent.
30
Who can initiate a Restructuring Plan?
Company, creditor, member, liquidator, or administrator.
31
What is the approval requirement for a Restructuring Plan?
* Sanctioned by the court * At least 75% in value of each affected class of creditors/shareholders.
32
What are the limitations of a Restructuring Plan?
The court process can be costly and time-consuming.
33
What is the primary objective of an administration?
To rescue the company as a going concern.
34
What must administrators consider when appointing an administrator?
The appointment must be reasonably likely to achieve the purpose of administration.
35
What is an interim moratorium in administration?
A temporary freeze on creditor action that lasts until the administration order is made.
36
What happens if the court makes an administration order?
Pending winding up proceedings are automatically dismissed.
37
What is required for the out-of-court procedure for appointing an administrator?
The directors must file a notice of intention to appoint (NOI) at court.
38
What is a qualifying floating charge (QFC)?
A floating charge related to the whole or substantially the whole of the company's property.
39
What powers does an administrator have?
* Carry on the business of the company * Take possession and sell property * Borrow money.
40
What is a key benefit of administration?
The company benefits from a full moratorium during administration.
41
List some actions that cannot be taken during the administrative moratorium.
* No winding up orders * No appointment of an administrative receiver * No legal proceedings against the company.
42
What is a pre-packaged sale in administration?
The business and assets are prepared for sale to a selected buyer before the company enters administration.
43
What are the advantages of a pre-packaged sale?
* Maintains goodwill and continuity of the business * Certainty of result for creditors.
44
What restrictions were introduced by the Administration (Restrictions on Disposal to Connected Persons) Regulations 2021?
Restricts pre-packaged sales to connected persons unless approved by creditors or accompanied by an evaluator's report.
45
What strategies were pursued by Debenhams' administrators in May 2020?
* Sale of the business * Restructure of the business * Wind-down of the business.
46
What is a pre-packaged sale in the context of company insolvency?
A sale into a pre-packaged arrangement with directors or shareholders must be approved by creditors or include an evaluator's qualifying report. ## Footnote This report must be sent to Companies House and all creditors.
47
What is the main difference between administration and receivership?
Administration is a collective procedure, while receivership is an enforcement procedure in the interests of a secured creditor.
48
What are the three types of receivers discussed?
* Administrative receivers * Fixed charge receivers * Court-appointed receivers
49
What is the role of an administrative receiver?
To take control of secured assets, sell them, and use the proceeds to repay the debt owed to the secured creditor.
50
What distinguishes fixed charge receivers from other types of receivers?
Fixed charge receivers are the most common type and do not have to be licensed insolvency practitioners.
51
What powers do fixed charge receivers typically have?
* Sell secured assets * Manage secured assets * Collect rents from secured assets
52
What is a court-appointed receiver?
A receiver appointed by the court with powers and duties set out in the court order.
53
What is liquidation?
The process of winding up a company's business and transferring its assets to creditors and members.
54
What percentage of company insolvencies were liquidations in 2019?
More than 87% of all company insolvencies were liquidations.
55
What are the two main types of liquidation?
* Compulsory liquidation * Voluntary liquidation
56
What is compulsory liquidation?
A court-based process for placing a company into liquidation.
57
Who can apply for a winding up order?
* A creditor * The company (by shareholders) * The directors * An administrator * An administrative receiver * The supervisor of a CVA * The Secretary of State
58
What is the most common ground for a winding up petition?
The company's inability to pay its debts.
59
What are the grounds under which a court can order a company to be wound up?
* The company is unable to pay its debts * It is just and equitable for the company to be wound up
60
What happens to a company's employees upon a compulsory winding up order?
All employees are automatically dismissed.
61
What is a members' voluntary liquidation (MVL)?
A method of voluntary winding up for solvent companies.
62
What declaration must directors make for an MVL?
A declaration of solvency stating the company can pay its creditors in full within 12 months.
63
What is a creditors' voluntary liquidation (CVL)?
An insolvent liquidation commenced by resolution of shareholders but under the control of creditors.
64
What powers does a liquidator have during liquidation?
* Secure and realise the company's assets * Distribute assets to creditors * Manage the company's affairs
65
What is the role of the liquidator?
To realise assets for cash and pay dividends to creditors based on their claims.
66
What must a liquidator do if they believe the company cannot pay its debts during an MVL?
Change the members' winding up into a creditors' voluntary liquidation.
67
What are the powers of a liquidator as set out in Part I to III Sch 4 IA 1986?
The powers include: * Sell any of the company's property * Execute deeds and documents in the company's name * Raise money on the security of the company’s assets * Make or draw a bill of exchange or promissory note in the company's name * Appoint an agent for business the liquidator cannot do * Wind up the company's affairs and distribute its assets * Carry on the business only as necessary for winding up * Commence or defend court proceedings in the company's name * Pay debts and compromise claims ## Footnote These powers are essential for effective liquidation and asset distribution.
68
What is the liquidator's duty regarding the company's property?
The liquidator has a duty to preserve the company's property and maximise the value of the company's assets available for distribution. ## Footnote This duty ensures that creditors receive the maximum possible recovery from the liquidation process.
69
What transactions can liquidators avoid to maximize asset value?
Liquidators can avoid the following transactions: * Disclaim onerous property (s178 IA 1986) * Set aside a transaction at an undervalue (s238 IA 1986) * Set aside a preference (s 239 IA 1986) * Set aside or vary extortionate credit transactions (s 244 IA 1986) * Claim invalid floating charges (s 245 IA 1986) * Set aside transactions that defraud creditors (s 423 IA 1986) ## Footnote These powers also apply to administrators.
70
What is the statutory order of priority in insolvency?
The statutory order of priority includes: 1. Liquidator’s fees and expenses 2. Amount due to fixed charge creditors 3. Liquidator's other remuneration, costs, and expenses 4. Preferential creditors 5. Prescribed part fund for unsecured creditors 6. Amount due to creditors with floating charges 7. Unsecured/trade creditors 8. Interest owed to unsecured creditors 9. Shareholders ## Footnote This order dictates how assets are distributed to creditors during liquidation.
71
What are the two tiers of preferential creditors introduced after December 2020?
The two tiers of preferential creditors are: * First tier: Employee claims for unpaid remuneration and certain pension contributions * Second tier: Crown debts (PAYE, national insurance, VAT) ## Footnote The first tier must be paid in full before the second tier is addressed.
72
What is the 'prescribed part' fund in insolvency?
The 'prescribed part' fund is: * A fund reserved for unsecured creditors * Calculated as 50% of the first £10,000 and 20% thereafter, up to a maximum of £600,000 for floating charges created before 6 April 2020 and £800,000 for those created after ## Footnote This fund aims to increase payments to unsecured creditors in a liquidation.
73
How are assets subject to fixed charges handled in liquidation?
Proceeds from assets subject to fixed charges are applied as follows: 1. Liquidator’s costs of preserving and realising assets 2. Fixed charge creditors receive payment from the sale proceeds ## Footnote Fixed charge holders are prioritized over other classes of creditors.
74
What happens to proceeds from assets subject to floating charges?
After fixed charge liabilities are settled, proceeds from floating charge assets are applied to: 1. Costs and expenses of liquidation 2. Preferential debts 3. Floating charge creditors ## Footnote This order ensures that floating charge holders are compensated after other obligations are met.
75
What is meant by 'pari passu' rule for unsecured creditors?
'Pari passu' means: * All unsecured creditors rank equally * They receive distributions proportionate to their claims ## Footnote This principle ensures fairness among unsecured creditors during asset distribution.
76
Who ranks last in the statutory order of priority during liquidation?
The shareholders rank last in the statutory order of priority. ## Footnote Typically, shareholders do not receive any return in most insolvent liquidations.
77
Fill in the blank: The statutory order of priority must be followed for _______ to creditors.
[dividend] ## Footnote A dividend refers to the distribution of available assets to creditors.
78
True or False: The liquidator can claim costs of litigation without any approval from creditors.
False ## Footnote Approval is required from preferential creditors and floating charge holders to claim litigation costs.

FLK 1: Business Law And Practice (14 decks)

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