Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

SQE1 - Business > 11 and 13. corporate and personal insolvency; voidable transactions > Flashcards

11 and 13. corporate and personal insolvency; voidable transactions Flashcards

1
Q

aims of the corporate insolvency reforms in the EA 2002

A
  • promote rescue culture;
  • remove the stigma associated with insolvency and therefore encourage an entrepreneurial culture; and
  • give prominence to collective insolvency procedures (which are conducted for the benefit of creditors as a whole) over enforcement procedures (which generally only benefit a creditor holding security over the company’s assets).
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

list of collective insolvency procedures

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

list of enforcement procedures

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

what is an informal insolvency procedure?

A
  • Grant new or additional security;
  • Replace directors or senior employees;
  • Sell failing businesses/subsidiaries or profitable ones to raise cash;
  • Reduce costs eg through a redundancy programme or the closure of unprofitable businesses;
    and/or
  • Issue new shares to the creditors (this is known as a ‘debt for equity swap’).
  • Standstill Agreement (preliminary step to negotiating an informal arrangement)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

what is a formal (statutory) insolvency procedure?

A
  • CVA
  • restructuring plan
  • scheme of arrangement
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

what were the two new insolvency procedures introduced by CIGA 2020?

A
  • The pre-insolvency moratorium; and
  • The restructuring plan for companies
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

what is the aim of the pre-insolvency moratorium and the restructuring plan for companies?

A
  • help a company in financial difficulty to restructure successfully
  • avoid a formal insolvency like administration or liquidation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

what is the meaning of insolvency?

A

inability to pay its debts:

  1. unable to pay debts as they fall due (cash flow test)*
  2. liabilities greater than its assets (balance sheet test)*
  3. Does not comply with a statutory demand for a debt of over £750 (evidence that the company is cash flow insolvent)
  4. failed to pay a creditor to satisfy enforcement of a judgment debt

*most important

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

what are some examples of financial difficulty?

A
  • unpaid creditors putting pressure on the company to repay them
  • fully drawn overdraft, and the bank is refusing to extend further credit
  • company’s loans and other debts that exceed the value of its assets.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

who decides what to do if a company is in financial difficulty?

A

directors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

what options do directors have when a company is facing financial difficulty?

A
  1. do nothing - but be aware of the risk of personal liability under IA 1986 and breach of duties under CA 2006
  2. do a deal - informal or formal arrangements with some or all creditors
  3. appoint an administrator - collective formal insolvency procedure; considers all creditors
  4. request the appointment of a receiver - enforcement procedure
  5. liquidation - collective insolvency procedure
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

what is a Standstill Agreement?

A
  • preliminary step to negotiating an informal arrangement
  • the creditors agree not to enforce their rights or remedies for a specified time period to give the company and the creditors some time in which to negotiate a contractual arrangement to resolve the company’s financial problems.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

what is a pre-insolvency moratorium?

A

a period during which creditors are unable to take action to exercise their usual rights and remedies (breathing space)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

when can a pre-insolvency moratorium be used?

A
  • to buy itself time to reach an informal agreement; or
  • as a preliminary step to proposing a CVA, restructuring plan or scheme of arrangement
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

which actions are restricted under a moratorium?

A
  • No creditor can enforce security against the company’s assets;
  • stay of legal proceedings against the company and a bar on bringing new proceedings against it;
  • 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
  • No administration procedure can be commenced in respect of the company (other than by the directors).
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

what is the process for obtaining the pre-insolvency moratorium?

A
  • A statement that the company is, or is likely to become, unable to pay its debts as they fall
    due.
  • statement from a licensed insolvency practitioner (usually an accountant) (‘Monitor’) stating that it is likely that a moratorium will result in the rescue of the company as a going concern.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

what type of function does the Monitor have during the pre-insolvency moratorium.

A

a supervisory function

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

how long does the pre-insolvency moratorium last?

A

20 BD

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

can the pre-insolvency moratorium be extended?

A
  • for another 20 BD by the directors
  • anything further: with the consent of a requisite majority of creditors and/or court order
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

what is the maximum length of a pre-insolvency moratorium?

A

1 year, subject to a court order to extend further

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

what happens if, during a moratorium, the following events take place?:
- company enters liquidation
- company enters administration
- CVA is approved
- a court sanctions a restructuring plan
- a court sanctions a scheme of arrangement

A

The moratorium will terminate automatically

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

what is a ‘statutory repayment holiday’?

A

The company does not have to pay pre-moratorium debts whilst the pre-insolvency moratorium subsists

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

to which pre-moratorium debts does the statutory repayment holiday NOT apply?

A
  • The Monitor’s remuneration or expenses;
  • Goods and services supplied during the moratorium;
  • Rent in respect of a period during the moratorium;
  • Wages or salary or redundancy payments; and
  • Loans under a contract involving financial services. This means that a company remains liable to pay all sums due to a bank which made a loan to it before it obtained the moratorium. This is an important carve out in practice.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

in practice, how solvent should a company be during the moratorium period?

A

cash flow solvent, so it can pay debts incurred during the moratorium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

what is a CVA?

A

creditors agree to part payment of the debts owed to them and/or to a new extended timetable for repayment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

does the CVA proposal need to be approved by court?

A

no

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

does the CVA proposal need to be reported to court?

A

yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

who supervises and implements a CVA?

A

a supervisor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

what happens to the directors during a CVA?

A
  • they remain in office and will continue to run the company’s affairs
  • subject to the terms of the CVA.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

which other procedures can a CVA be used alongside?

A
  • liquidation
  • administration
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

steps to set up a CVA

A

(a) The directors draft a CVA proposal and appoint a Nominee (who must be an insolvency practitioner). If the company is in liquidation or administration, the administrator or liquidator drafts the CVA proposal and acts as Nominee.

(b) The directors must submit the CVA proposal and a statement of the company’s affairs to the Nominee (although in practice it is the Nominee who drafts the CVA proposal).

(c) The Nominee considers the CVA proposal and, within 28 days, must report to court on whether in their opinion, the company’s creditors and shareholders should be asked to vote on the CVA proposal.

(d) The Nominee must allow at least 14 days for creditors to vote on the CVA proposal. A meeting of the shareholders must take place within 5 days of the creditors’ decision.

(e) Voting – the CVA proposal will be approved if:
- At least 75% in value (ie, value of debts owed) of those voting on the CVA proposal (excluding secured and preferential creditors) vote in favour;
- If the above majority is obtained, the decision of those creditors will be invalid if those voting against the CVA proposal include more than 50% of the total value of creditors unconnected to the company (eg not a related company, shareholder or director of the
company proposing the CVA); and
- A simple majority of shareholders/members vote in favour.

Note. In practice, it is only the approval of the CVA proposal by creditors which matters. If the creditors vote in favour of the CVA proposal but the members vote against, the creditors’ vote will always prevail.

(f) The Nominee reports to court that the CVA has been approved.

(g) The Nominee usually becomes the Supervisor and the Supervisor will implement the CVA proposal.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

who is bound by a CVA?

A

✔️all unsecured creditors
✔️including those who did not vote or voted against it.

unless they specifically consented to be bound:
❌secured creditor not bound
❌preferential creditor is not bound

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

how long does a creditor have to challenge a CVA?

A

within 28 days of the CVA’s approval

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

on what grounds can a creditor challenge a CVA?

A
  1. ‘unfair prejudice’ - the CVA treats one creditor unfairly compared to another
  2. material irregularity - the procedure followed in seeking approval of the CVA e.g., the way the creditors’ votes were
    calculated
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

Subject to what does the CVA become binding on all creditors at the end of the 28-day challenge period?

A

any unfair prejudice or material irregularity claims

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

what is a Supervisor’s role in a CVA?

A
  • agree creditors’ claims
  • collect in the unsecured funds to pay
    dividends (sums owed or a proportion thereof) to the creditors
  • generally ensure that the
    company complies with its obligations under the CVA.
  • When a CVA has been completed, the
    supervisor will send a final report on the implementation of the proposal to all
    shareholders/members and creditors.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

what are common uses for CVAs?

A

retail sector

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

why are the advantages of a CVA?

A
  • directors remain in control of the
    company
  • company can continue to trade during the CVA (subject to the terms of the CVA
    proposal)
  • company has the prospect of surviving as a going concern.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

why are the disadvantages of a CVA?

A

cannot bind secured or preferential creditors without without their consent

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

why might a landlord like and dislike a CVA?

A

like:
- difficult to re-let retail properties
dislike:
- heavily discounted rents
- a loss of income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

what is a restructuring plan?

A

restructure a company’s liabilities so that it can return to solvency

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

a restructuring plan is a hybrid of which two procedures?

A
  • CVA
  • scheme of arrangement
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

does a restructuring plan require court approval?

A

yes, a sanction

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

what is the court’s binding approval of a restructuring plan called?

A

a sanction (which will also bind secured creditors)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

who can use a scheme of arrangement?

A

solvent and insolvent companies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

who can use a restructuring plan?

A

companies that:
- have already; or
- are likely to
encounter financial difficulty

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

what is the process for approving a restructuring plan?

A
  1. creditors and shareholders are divided into classes
  2. each class must approve the plan (at least 75% in value)
  3. the Plan only becomes binding if the court sanctions it
  4. if the court sanctions the Plan, it binds everyone including secured creditors
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

who can be excluded from voting on a restructuring plan?

A

creditors and shareholders with no genuine economic interest in the company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

what is a ‘cross-class cram down’?

A

the court can sanction a Plan which allows one rank of creditor to force the Plan on another class which voted against the Plan

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

what do the ‘losing’ creditors get in return for a ‘cross-class cram down’?

A

debt for equity swap: new shares in the company in place of their debt claims

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

alongside which other procedures might a restructuring plan be used?

A
  • pre-insolvency moratorium
  • administration
  • liquidation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

a comparison of formal arrangements:

CVA versus restructuring plan

A
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

which is the most important insolvency procedure?

A

administration

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

what is a collective insolvency procedure?

A

the administrators are required to perform their duties in the interests of the creditors as a whole, rather than in the
interests of a particular creditor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

even if appointed out of court, what is an administrator’s role in relation to the court?

A

officer of the court
- owes duties to the court and to the creditors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
56
Q

what must an administrator always be?

A

a licensed Insolvency Practitioner

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
57
Q

where is the relevant law for administrations contained?

A

Schedule B1 IA 1986

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
58
Q

the 3 objectives of administration - in order

A
  1. to rescue the company as a going concern, or if that is not reasonably achievable;
  2. to achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up, or if that is not reasonably achievable,
  3. to realise the company’s property in order to make a distribution to one or more secured or preferential creditors.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
59
Q

which of the 3 objectives of administration is most likely to be achieved?

A
  1. to achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up, or if that is not reasonably achievable,
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
60
Q

what are the 2 procedures for the appointment of an administrator?

A
  1. court procedure
  2. out of court procedure
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
61
Q

who can apply for the court procedure in administration?

A
  • company
  • directors
  • creditor
  • supervisor of a CVA; or
  • liquidator
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
62
Q

when may a court appoint an administrator?

A

cash flow test:
where the company is unable to pay its debts

or

is likely to become unable to pay its debts

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
63
Q

what else must the court have regard to when appointing an administrator?

A

whether the appointment is reasonably likely to achieve the purpose of the
administration

64
Q

what happens in between the application to court and the administration order is made / the court dismisses the application?

A

interim moratorium, which temporarily freezes creditor action

65
Q

how common are administrator appointments by court?

A

uncommon

66
Q

when do administrator appointments by court normally happen (because the out-of-court procedure is unavailable)?

A

where a creditor has begun winding up proceedings against the company
and the directors wish to appoint administrators before the court has made a winding up order

67
Q

what happens to any pending winding up proceedings if the court makes an administration order?

A

the winding up proceedings are automatically dismissed

68
Q

how many out-of-court procedures are there in administration?

A

two

69
Q

what is the first out-of-court procedure in administration?

A

directors or the company (usually the directors) may appoint an administrator out of court

70
Q

what is the second out-of-court procedure in administration?

A

a holder of a qualifying floating charge holder (QFC) may appoint an administrator out of court

71
Q

what is a QFC?

A

A QFC means a floating charge which

(i) together with any other security that the holder of the floating charge holds relates to the whole or substantially the whole of the company’s property; and
(ii) the document that creates it provides that either Sch B1 para 14 IA 1986 applies to the charge or that the holder has the power to appoint an administrator or an administrative receiver.

72
Q

most floating charges held by creditors are QFCs, and…

A

if a bank lends to a company, it will usually request a QFC to secure the loan

73
Q

summary of the out of court procedures

A
  1. If there is an appointment under Para 22 by the directors, they must file a notice of intention to appoint (NOI) at court and, not less than 10 business days later file a notice of appointment at court. The administrators’ appointment takes effect when the second notice is filed at court.
  2. If the company has granted a QFC then the process is different. When the directors file the NOI at court, they must also send the NOI to the holder of the QFC. The QFC then has 5 business days to appoint its own choice of administrator. If the QFC does not do this, the directors can file the notice of appointment in the usual way and the directors’ choice of administrator is
    appointed.

If a QFC holder wishes to appoint an administrator out of court, it must first enforce its security in accordance with the terms of the QFC and the appointment will take effect when it has filed a notice of appointment at court.

Where there is more than one holder of a QFC, a holder of a QFC which ranks below another QFC in priority (normally determined by a priority agreement entered into by the QFC holders), it must
first give 2BD notice to the QFCH with priority and can only proceed with the appointment if the higher ranking QFCH consent to the appointment.

74
Q

in an administration, when can directors exercise their management powers?

A

they cannot, unless they obtain the consent of the administrator

75
Q

what do the administrator’s powers include?

A
  • the power to carry on the business of the company
  • take possession of and sell the company’s property (only with the consent of the fixed charge holder or the court if the property is subject to a fixed charge)
  • borrow money in the company’s name
  • execute documents in the company’s name
76
Q

what do the administrator’s powers not include?

A
  • generally, no power to pay a dividend to unsecured creditors without obtaining court permission
77
Q

what do administrators often do immediately following or soon after their appointment?

A

administrators will sell the company’s assets and business as a going concern

78
Q

once appointment, how long do administrators have to produce a report setting out their proposals for administration?

A

8 weeks

79
Q

to whom is the administrator’s report sent?

A

all creditors, for their approval

80
Q

what happens if an administrator’s proposals are rejected?

A

the company will usually be placed into liquidation

81
Q

what happens if an administrator’s proposals are accepted?

A
  • the administrators will proceed with their proposals
  • if the proposals are achieved, the company will exit from administration
82
Q

what is the time limit for completion of an administration?

A

12 months, but an extension is possible

83
Q

what is a key benefit of administration?

A

the company has the benefit of a full moratorium

84
Q

what is involved in the full moratorium?

A

except with consent of the court or the administrator:

(a) No order or resolution to wind up the company may be made or passed;
(b) No administrative receiver of the company may be appointed;
(c) No steps may be taken to enforce any security over the company’s property or to repossess goods subject to security, hire purchase or retention of title;
(d) No legal proceedings, execution or other process may be commenced or continued against the company or its property, and
(e) A landlord may not forfeit a lease of the company’s premises.

85
Q

where there is an interim moratorium, what can a creditor do provided they have the court’s consent?

A
  • order or resolution to wind up the company may be made or passed;
  • steps may be taken to enforce any security over the company’s property or to repossess goods subject to security, hire purchase or retention of title;
  • legal proceedings, execution or other process may be commenced or continued against the company or its property, and
  • a landlord may forfeit a lease of the company’s premises.
86
Q

where there is an interim moratorium, what can a QFCH do?

A

an interim moratorium does not prevent a holder of a QFC from appointing an administrator

87
Q

what does the administrator’s wide power to do all such things as may be necessary for the management of the affairs, business and property of the company’ include?

A

the administrator can:
* Remove and appoint directors;
* Dispose of property subject to a floating charge;
* Dispose of property subject to a fixed charge (with the court’s consent)
* Bring proceedings against directors for fraudulent and wrongful trading

88
Q

what is a pre-pack administration?

A
  • where the business and assets of a company
  • is prepared for sale
  • to a selected buyer
  • prior to the company’s entry into administration

this means the terms of the sale
agreement are negotiated and agreed before the administrators’ appointment.

89
Q

why are the advantages of a pre-pack sale?

A

goodwill and continuity of the business are not damaged by the administration and certainty of result is achieved for the creditors.

90
Q

who are often the pre-pack buyers?

A
  • an entity associated with the QFCH
  • one or more of the existing shareholders
  • one or more of the existing directors
91
Q

when and why are pre-pack sales controversial?

A
  • particularly where the sale is to the company’s shareholders or directors
  • concern that often the sale does not take place at the proper price and that creditors are given insufficient information to determine whether the sale was in their best interests.
92
Q

which legal instrument restricts the ability of an administrator to enter into a pre-pack sale with the company’s shareholders or directors,

unless the sale has been:
- approved in advance by the creditors, or
- the buyer has obtained an evaluator’s qualifying report

A

The Administration (Restrictions on Disposal to Connected Persons) Regulations 2021

93
Q

where must an evaluator’s qualifying report be sent?

A
  1. Companies House
  2. all creditors
94
Q

what is receivership?

A

an enforcement procedure which is conducted in the interests of a secured creditor

95
Q

what are the 3 types of receivership?

A
  1. administrative receivership
  2. fixed charge receivership
  3. court-appointed receivers
96
Q

what is the most common type of receivership?

A

fixed charge receivership

97
Q

what type of procedure is receivership?

A

enforcement procedure

98
Q

what is administrative receivership?

A
  • a secured creditor with fixed and floating charges over all of the company’s assets
    may appoint an administrative receiver
  • the receiver will take control of the secured assets, sell them and use the proceeds to repay the debt owed to the secured creditor
99
Q

in which two cases can a QFCH apply for administrative receivership?

A
  • where the floating charge was created
    before 15 September 2003; or
  • where one of the statutory exceptions applies
100
Q

who benefits from administrative receivership?

A

only the secured creditor which appointed the receiver

nobody else (not collective)

101
Q

how common is administrative receivership?

A

it is rare - movement towards collective procedures

102
Q

what is fixed charge receivership?

A

a fixed charge receiver is appointed to:
- enforce the security
- manage and sell the secured assets (most commonly, land and buildings); and
- out of the sale proceeds, repay the debt
that is owing to their appointor (often a bank)

103
Q

who appoints a fixed charge receiver?

A

the holders of a fixed charge, pursuant to the terms of the relevant security document

104
Q

who can be appointed as an administrative receiver?

A

Only a licensed insolvency practitioner

105
Q

what is fixed charge receivership?

A

appointed to enforce the security, manage and sell the
secured assets (most commonly, land and buildings) and out of the sale proceeds, repay the debt
that is owing to their appointor, often a bank

106
Q

who can be a fixed charge receiver?

A

not necessarily a licensed insolvency practitioner

107
Q

who does a fixed charge receiver primarily owe a duty to?

A

the appointor / chargee / mortgagee

108
Q

who does a fixed charge receiver owe a limited duty to act in good faith in the course of their appointment?

A

the debtor / chargor / mortgagor

109
Q

in a sort of legal anomaly, receivers usually act as what for the chargor / mortgagor?

A

as agent

110
Q

receivers gain their powers from where?

A
  • security document: extensive powers
  • Law of Property Act 1925: limited powers including power to sell, mortgage
    and collect rents from the secured assets.
111
Q

which assets can a fixed charge receiver not deal with?

A

any assets not covered by the security document

112
Q

when can a fixed charge receiver not be appointed?

A
  • during a pre-insolvency moratorium
  • during administration.
113
Q

where do court-appointed receivers gain their powers / authority?

A

court order

114
Q

when are some examples of when court-appointed receivers appointed?

A
  • when shareholders are locked in dispute
  • under POCA 2002 and associated legislation
  • criminal sanctions etc
115
Q

typically, what is the court-appointed receiver’s duty?

A

to run the business until the dispute is determined

116
Q

what is liquidation?

A

the company’s commercial life comes to an end

117
Q

what is another name for liquidation?

A

winding up

118
Q

what is involved in liquidation?

A
  • The liquidator collects in the company’s assets and sells them (realise them for cash)
  • identifies the creditors of the company and determining the amounts owed to them and then paying creditors a ‘dividend’ out of the funds obtained from the sale of the assets - relative to the size of their determined claims
119
Q

what types of companies can be wound up?

A

solvent and insolvent

120
Q

why might a solvent company be wound up?

A
  • because it was incorporated for a specific
    purpose which has been fulfilled
  • because the company’s assets and business have been sold and it is now a cash shell which is not needed for any commercial purpose
  • because of a corporate group restructuring where the company is no longer needed as part of the group
121
Q

what is pari passu?

A

creditors of the same rank will share on an equal and proportionate basis with each other

122
Q

example of pari passu

A

A company owes £80 to A, £20 to B and £100 to C (£200 in total).

They will share in the £100 available for distribution on a proportionate basis relative to the size of their claims.

This means they will each receive a dividend of 50p for each pound owed to them. Therefore, the liquidator will pay £40 to A, £10 to B and £50 to C.

123
Q

why do liquidators have very limited powers to carry on the business of a company?

A

because liquidation represents the end of the commercial life of the company

124
Q

what happens soon after the appointment of a liquidator?

A
  • usually close a company’s business
  • and dismiss employees
125
Q

what are the 2 types of liquidation?

A
  • Compulsory liquidation
  • Voluntary liquidation - subdivided into:
    (i) Members’ voluntary liquidation
    (ii) Creditors’ voluntary liquidation.
126
Q

following a liquidation, when the company cease to exist as a legal person?

A

On dissolution

127
Q

when does dissolution occur following a compulsory liquidation?

A
  • 3 months after
  • the liquidator
  • has filed a notice
  • with the Companies Registry
  • stating that the winding up has been completed
128
Q

when does dissolution occur following a voluntary liquidation?

A
  • 3 months after
  • the liquidator
  • has filed the final accounts
  • with the Registrar of Companies at Companies House
  • stating that the winding up has been completed
129
Q

what is compulsory liquidation?

A

a court-based process

130
Q

what are the principal functions of a liquidator in compulsory liquidation?

A
  • To secure and realise the assets of the company then distribute to the company’s creditors; AND
  • To take into their custody or under their control all the property of the company.
131
Q

how to begin the compulsory liquidation process?

A

applicant requests the court to make a winding up order

132
Q

what happens if a court does make a winding up order?

A

usually the Official Receiver (a government employee) will become the first liquidator and continues in office until another person is appointed.

The Official Receiver will notify the Registrar of Companies and all known creditors of the liquidation.

The Official Receiver has the power to summon separate meetings of the company’s creditors and contributories for the purpose of choosing a person to become the liquidator of the company in their place.

Creditors can request the Official Receiver to convene a creditors’ meeting for the appointment of a replacement liquidator.

133
Q

Who can apply for a winding up order?

A
  • A creditor;
  • The company ((acting by the shareholders; this would happen where there are insufficient assets in the company to fund a creditors’ voluntary liquidation*);
  • The directors (by Board resolution); again, this would happen where there are insufficient assets to fund a creditors’ voluntary liquidation;
  • An administrator;
  • An administrative receiver;
  • The supervisor of a CVA; and
  • The Secretary of State for BEIS (on public policy grounds).
134
Q

what are the grounds on which the court can order winding up?

A

includes:
(1) the company is unable to pay its debts; and
(2) it is just and equitable for the company to be wound up.

135
Q

The most common ground for a winding up petition is the company’s inability to pay its debts. How can it be shown that a company is unable to pay its debts?

A

(a) Failure by the company to comply with a creditor’s statutory demand. A statutory demand is a written demand in a prescribed form requiring the company to pay a specific debt. The statutory demand can only be used if the debt exceeds £750 and is not disputed on substantial grounds. The company has 21 days from receipt of the statutory demand in which to pay the debt, failing which the creditor has the right to petition the court to wind up the company.

(b) The creditor sues the company, obtains judgment and fails in an attempt to execute the judgment debt.

(c) Proof to the satisfaction of the court that the company is unable to pay its debts as they fall due (the ‘cash-flow test’). The cash flow test is usually satisfied by going through the statutory demand process in (a) above but that is not essential.

(d) Proof to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account contingent and prospective liabilities (the ‘balance sheet test’).

136
Q

how are companies prevented from losing value between the presentation of the petition and the making of the winding up order?

A

a disposition of a company’s property (and a transfer of its shares) will be void if made after the presentation of petition

137
Q

between the presentation of the petition and the making of the winding up order, a company is likely to need to pay for goods or services. how will a company obtain approval for such transactions?

A

it must seek the making of a validation order from the court

138
Q

what is the typical timeframe between the presentation of the petition and the making of the winding up order?

A

2-3 months

139
Q

what happens on the making of the winding up order?

A
  • There is a limited statutory moratorium under which no legal proceedings can be commenced against the company and any proceedings which have already commenced are stayed;
  • All employees are automatically dismissed; and
  • The directors lose their powers.
140
Q

what are the 3 situations in which a company can be wound up without a court order (voluntary winding up)?

A
  1. where the company’s purpose according to the articles has expired and resolution of the shareholders - rare
  2. where the shareholders of a company resolve by special resolution to wind up the company after the directors have made a declaration of solvency. the company must be solvent - MVL
  3. where the shareholders of a company resolve by special resolution to wind up the company because it is unable to pay its debts. this is an insolvent type of liquidation - CVL
141
Q

what are the requirements for a company entering into an MVL?

A
  • the directors must swear a declaration of solvency
  • stating that they have made a full enquiry into the company’s affairs
  • and they have formed the opinion that the company will be able to pay its creditors in full
  • together with interest at the official rate
  • including a statement of the company’s assets and liabilities as at the latest practicable date before making the declaration
  • within a period not exceeding 12 months from the commencement of the winding up
142
Q

what may a director who does not have reasonable grounds for their opinion be liable to if they make a declaration of solvency?

A

a fine or imprisonment

143
Q

what is presumption against directors if the debts are not actually paid in full within the specified period?

A

it will be presumed that the director did not have *reasonable grounds to give a declaration of solvency

144
Q

what are the procedure for placing a company into an MVL?

A
  • special resolution to place the company into MVL
  • ordinary resolution to appoint a nominated liquidator
145
Q

when does the winding up actually commence?

A

when the special resolution is passed

146
Q

when might an MVL be converted into a CVL?

A

if the liquidator thinks that the company will be unable to pay its debts

147
Q

what are the procedure for placing a company into an CVL?

A
  • special resolution to place the company into a CVL
  • ordinary resolution to appoint a nominated liquidator
  • directors must also draw up a statement of the company’s affairs (setting out the company’s assets and liabilities) and send it to the company’s creditors
148
Q

for a CVL, what must be done within 14 days of the special resolution being passed?

A

the directors must ask the company’s creditors to either:
- approve the nominated liquidator
- or put forward their own choice of liquidator

149
Q

Where the creditors’ choice of liquidator differs from that of the company’s
shareholders, whose nomination will take precedence?

A

the creditors’ nomination

150
Q

Role of the liquidator for all types of liquidation

A

The appointment of a liquidator terminates the management powers of the company’s directors and these powers are transferred to the liquidator. All liquidators must be qualified insolvency practitioners, other than the Official Receiver (appointed by the court).

Liquidators will preserve, collect and sell the company’s assets, determine who the company’s creditors are and determine their claims against the company and then
distribute the company’s assets by way of a liquidation dividend on a pari passu basis in accordance with the statutory order of priority.

151
Q

Liquidator’s powers to manage the company

A

The most important powers include those to:
* Sell any of the company’s property;
* Execute deeds and other documents in the name of the company;
* Raise money on the security of the company’s assets;
* Do all other things that may be necessary to wind up the company’s affairs and to distribute its assets;
* Carry on the business of the company, but only to the extent that is necessary for the beneficial winding up of the company;
* Commence or defend court proceedings in the name of the company, for example to recover debts owed to it or dispute debts alleged to be owed by the company;
* Pay debts and compromise claims.

152
Q

liquidators have a duty to preserve what?

A
  • preserve the company’s property
  • to maximise the value of the company’s assets available for distribution to creditors
153
Q

how do liquidators:
- preserve the company’s property
- to maximise the value of the company’s assets available for distribution to creditors

A

Liquidators (and administrators) can challenge certain antecedent
transactions and apply to the court for an order to set aside the following:
* A transaction at an undervalue (s238 IA 1986);
* A preference (s 239 IA 1986);
* An extortionate credit transaction (s 244 IA 1986); and
* A transaction defrauding creditors (s 423 IA 1986).
(a floating charge granted in a certain time frame period before the liquidation begins
will be void except to the extent the company granted fresh consideration for the floating charge)

154
Q

what power does a liquidator have in respect of onerous property?

A

Liquidators have the power to disclaim ‘onerous’ property in order to bring the company’s liabilities to an end, usually under long-term contracts

most commonly leases of land/property

155
Q

summary of the statutory order of priority

A
  • simplified
  • assumes that there is a QFC granted on or after the Relevant Date (15 September 2003).
156
Q

when is the Relevant Date?

A

15 Sep 2003

157
Q

what is the significance of the Relevant Date?

A

the statutory order of priority assumes that there is a QFC granted on or after 15 September 2003

SQE1 - Business (20 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions