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WS9: Insolvency Procedures Flashcards

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1
Q

Insolvency definition

A

a company is insolvent if it is unable to pay its debts

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2
Q

what are the four tests judging insolvency?

A
  • cash flow test
  • balance sheet test
  • failure to comply with a statutory demand
  • failure to satisfy enforcement of a judgment debt
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3
Q

What procedure must an unsecured creditor use to appoint an administrator?

A

Court procedure

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4
Q

What procedure must a company or its directors use to appoint and administrator?

A

File NOI at court and on the QFCH

Wait 5 business days

File notice of appointment at court

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5
Q

What procedure must a QFCH use to appoint an administrator?

A

Steamlined out of court procedure - file notice of appointment at court

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6
Q

What are the aims of the administrator in order?

A

1) Rescuing the company as a going concern

2) Achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up

3) Realising the property in order to make a distribution to one or more secure or preferential creditors

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7
Q

Who is a qualifying floating charge holder?

A

Someone who has a charge relating to the whole, or substantially the whole of a company’s property

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8
Q

When must the court procedure must be used to appoint an administrator?

A

If a creditor petitions a company for winding up

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9
Q

What kind of procedure is administration?

A

Collective

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10
Q

Who is an administrator?

A

Qualified insolvency practitioner

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11
Q

if someone applies to court to appoint an administrator, what happens in the interim?

A

Interim moratorium comes into place until court agrees / dismisses application

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12
Q

How long do directors have to file a notice of appointment of an administrator after they file a notice of intention?

A

10 business days

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13
Q

How long does a QFC holder have to appoint their choice of administrator?

A

5 business days - after which directors can file NOI in usual way

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14
Q

If a QFC holder who ranks below another QFC holder wants to appoint an administrator, what must they do?

A

Give 2 business days notice to priority QFC holders - only proceed if a higher ranking QFC holder consents to appointment

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15
Q

What is the role of the administrator?

A

officer of the court, owes duties to creditors

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16
Q

If a debt is in dispute can it be served as a statutory demand?

A

No

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17
Q

How long after appointment does an administrator have to produce a report setting out proposals for future of business?

A

8 weeks

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18
Q

In what time frame should an administration be completed?

A

12 months

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19
Q

Once an administrator has made a plan, what happens on acceptance or rejection?

A

Rejected - liquidation

Accepted - several options, including restructuring

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20
Q

Why is the moratorium of administraiton useful for a company?

A

No order or resolution to wind up the company can be made or passed;

No administrative receiver of the company can be appointed;

No steps can be taken to enforce any security over the company’s property or to repossess goods subject to security, hire purchase and retention of title;

No legal proceedings, execution or other process can be commenced or continued against the company or its property, and

A landlord cannot forfeit a lease of the company’s premises by means of peaceable re-entry.

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21
Q

What powers does an administrator have?

A

Remove and appoint directors
Dispose of property subject to a floating charge
Dispose of fixed charge property, with court’s consent

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22
Q

What is recievership?

A

Individual enforcement procedure which benefits only the appointing creditor – who will be a secured creditor

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23
Q

what does a fixed charge receiver do?

A

Can enforce a security, manage and sell a secured asset and repay a debt owed to an appointer

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24
Q

What does a court appointed receiver do?

A

Runs a business until a dispute is determined

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25
What is the function of a liquidator?
realise a company's assets for cash determine identity of creditors pari passu close company, dismiss employees and sell assets on a piecemeal basis
26
When does dissolution occur on a voluntary liquidation?
3 months after the filing by the liquidator of the final accounts and return
27
When does dissolution happen for a compulsory liquidation?
3 months after notice by liquidator has been filed with Registrar of Companies that winding up is completed
28
Is compulsory liquidation a court process?
yes
29
When does compulsory liquidation happen?
someone presents a winding up petition to the court
30
Who can apply for a winding up order?
* A creditor; * The company (acting by the shareholders; this would happen where there are insufficient assets in the company to fund a voluntary liquidation); * The directors (by board resolution); again, this would happen where there are insufficient assets to fund a voluntary liquidation; * An administrator; * An administrative receiver; * The supervisor of a CVA; and * The Secretary of State for Business, Energy & Industrial Strategy (on public policy grounds).
31
On what grounds can someone apply for a winding up order?
Inability to pay debts J and E winding up petition
32
What must directors do for a members' voluntary liquidation?
Swear a declaration of solvency
33
What does a declaration of solvency illustrate?
That a company will be able to pay creditors in full, with interest, 12 months from commencement of winding up
34
What resolutions must members pass to put a company in MVL?
Special resolution to put a company in MVL Ordinary resolution to appoint a liquidator
35
What must a company do if on a MVL they realise that a company will be unable to pay its debts?
Change to a CVL
36
Who starts a creditors' voluntary liquidation?
Shareholders
37
What resolutions must be passed to enter into CVL?
Special resolution to place company in CVL Ordinary resolution to appoint a nominated liquidator
38
How long does a company have after a special resolution to a put a company in CVL to appoint a liquidator?
14 days
39
What is the statutory order of priority?
* Liquidator’s fees and expenses of preserving and realising assets subject to fixed charges. * Amount due to fixed charge creditor out of the proceeds of selling assets subject to the fixed charge. * Other costs and expenses of the liquidation. * Preferential creditors (the first tier and then the secondary tier). * Creation of the prescribed part fund (if available) for unsecured creditors. * Amount due to creditors with floating charges. * Unsecured/trade creditors (including payment of the prescribed part). * Interest owed to unsecured creditors. * Shareholders.
40
What is included in 'other costs and expenses of liquidation'?
liquidator's fees costs of selling assets
41
what are the two tiers of preferential debts?
Tier 1: employees for 4 months before relevant date, up to £800 each, plus holiday and pension Tier 2: HMRC debts
42
How much will be ringfenced in the prescribed part fund?
50% of the first £10,000 20% thereafter up to a maximum fund of £600,000 for floating charges created before 6 April 2020 £800,000 for charges created on or after that date
43
What is an informal agreement?
Company negotiating with creditors
44
What is a standstill agreement?
Company agreeing with creditors that they will not take action for a certain period
45
What is a pre-insolvency moratorium?
Period during which creditors can’t enforce debts, court proceedings are stayed + company may not be wound up - gives a company breathing space
46
What cannot happen during a moratorium?
* No creditor can enforce a security * Stay of any legal proceedings, bar on any new proceedings * No winding up procedures can be commenced * No administration procedure can be commenced in respect of the company
47
How long does a moratorium last?
20 business days which can be extended by directors for another 20 business days Can be extended further, if there is a majority of creditors Maximum period of 1 year
48
What is the procedure for obtaining a moratorium?
file documents at court including statement that company is likely to become unable to pay debts as they fall due Monitor statement from a LIP saying that a moratorium will help rescue
49
What is the statutory repayment holiday?
No need to pay pre-moratorium debts
50
What debts are excluded from a statutory repayment holiday?
* Monitor’s pay / expenses * Goods and services supplied during moratorium * Rent in respect of a period during the moratorium * Wages, salary, redundancy * Loans under a contract involving financial services - crucially this includes sums due to a bank re a loan taken out before moratorium
51
What are the two types of a formal agreement?
Company Voluntary Arrangement Restructuring Plan
52
Is a CVA a court procedure?
No - but it must be reported to the court, but there is no requirement for court to approve the arrangement
53
Who supervises a CVA?
insolvency practitioner
54
How is a CVA set up?
Directors draft written proposals and appoint a nominee insolvency practitioner Nominee considers proposals and reports to court within 28 days nominee gives creditors 14 days to consider and vote
55
Once creditors have voted on a CVA, when must a meeting of shareholders take place?
within 5 days of the creditors' decision
56
What are the thresholds for a CVA to be approved?
75% of creditors in value (excluding secured creditors – unsecured only) vote in favour AND A simple majority of members votes in favour
57
What is the effect of a CVA?
Once approved binds all unsecured creditors Does not bind secured or preferential creditors
58
How long do creditors have to challenge a CVA
28 days
59
When does a CVA become binding?
28 days after approval if no creditors have challenged
60
What are key advantages and disadvantages of CVAs?
Advantages: directors remain in control + company can continue to trade Disadvantages: fails to bind all creditors
61
Why are restructuring plans often considered more advantageous than CVAs?
bind secured creditors
62
What is the procedure for a Restructuring Plan?
* Apply to court for approval, called a Sanction * Divide creditors and members up * Plan approved by at least 75% of each class voting * Court then must approve the plan and it will bind all creditors
63
Who is excluded from a restructuring plan?
Any creditors or shareholders who have no genuine economic interest in the company
64
What advantages are there of a restructuring plan?
Court can sanction a cross class cram down
65
What conditions are there regarding a cross-class cram down?
Dissenting class would not be any worse off than they would be in the event of a cross-class cram down not being approved AND Restructuring plan has been approved by at least one class of creditors or members who would receive payment or have a genuine economic interest in the company in the event of the cross-class cram down not being approved
66
What are the two formal insolvency procedures for individuals?
Bankruptcy Individual voluntary arrangement
67
What is an IVA? How does it work?
Similar to a CVA - proposal for compromise of liabilities with creditors
68
How is an IVA set up?
* Debtor drafts proposal * Nominee submits report to court * IVA proposal needs to be approved by creditors holding at least 75% by value of total debt owed to creditors voting
69
What is the effect of an IVA?
* IVA binds debtor and all unsecured creditors * IVA cannot bind secured or preferential creditor without their consent * Nominee becomes the Supervisor of the IVA  responsible for its implementation o Supervisor can report to court for directors and report periodically * Debtor fails to comply with terms of IVA - supervisor has right under terms of the IVA to petition for debtor’s bankruptcy * End of IVA – creditors have to write off any balance of pre-IVA debts
70
What are the pros and cons of an IVA?
Pros: * Avoid bankruptcy * Binds all unsecured creditors * Moratorium available if interim order made Cons: * Can last longer than bankruptcy * Does not bind a secured creditor or preferential creditor without consent * Long + £££
71
When can a bankruptcy petition be brought against an individual?
* The debt is one the debtor appears unable to pay or has no reasonable prospect of paying * Must be for an unsecured liquidated sum over £5,000 * Debtor domiciled or present in England and Wales
72
who is appointed once a bankruptcy order has been made?
Trustee in bankruptcy
73
What does a trustee in bankruptcy do?
* Bankrupt’s estate vests in trustee on operation of law when bankruptcy order is made * B has to give up possession of assets * T collects in the assets including those which may have been previously charged at an undervalue / preferences * T sells assets of the estate + distributes money in accordance with statutory order of priority * Can disclaim onerous property or contracts * T can make creditors prove their claims against the bankrupt – T will determine amount of creditors claim with court deciding if they do not agree * If going to pay a dividend to creditors – T must give notice to creditors who have proved debts saying what they have sold assets for, any deductions, and how much they can hope to receive.
74
What are the duties of the bankrupt?
* Give Trustee information about affairs * Attend on T * Do anything else T needs to reasonably carry out functions Criminal offence to fail to comply
75
What is the maximum period of a bankruptcy order?
1 year
76
When will a court order a bankruptcy restriction order?
If it considers it appropriate
77
What behaviour is monitored under a BRO? How long does it last for?
Keeping records Entering into preferences / TUVs Fraud Incurring a debt knowing you can’t pay it Operates between 2 and 15 years
78
What order do charges rank in - registration or creation?
Creation - as long as they are registered within 21 days
79
Once an administrator is appointed, what happens any winding up petition?
Winding up petition is stayed and would require the consent of the court or the administrator to continue
80
Can a CVA bind a secured creditor?
yes but only if they consent

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