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Business and Employment Law > 11: Corporate Insolvency > Flashcards

11: Corporate Insolvency Flashcards

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1
Q

What happens if a company is going to be dissolved?

A

It will be necessary to gather its assets and distribute them to whoever is entitled to them.

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2
Q

What is the process of gathering and distributing a company’s assets called?

A

This process is called liquidation.

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3
Q

Who carries out the process of liquidation?

A

A liquidator.

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4
Q

By what act is liquidation governed?

A

Insolvency Act 1986 (IA 1986).

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5
Q

By what rules is the detailed procedure of liquidation governed?

A

Insolvency Rules 2016.

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6
Q

When is a company considered insolvent?

A

When it cannot pay its debts.

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7
Q

What is the most usual procedure for liquidation when a company is insolvent?

A

Compulsory liquidation.

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8
Q

What are the two types of voluntary liquidation?

A

Creditors’ voluntary liquidation and members’ voluntary liquidation.

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9
Q

What are the 4 grounds for a company to be deemed unable to pay its debts under s123(1)?

A
  1. A creditor owed more than £750 has served a statutory demand and the company fails to pay within 3 weeks;
  2. a creditor has tried to enforce a judgment;
  3. the company cannot pay its debts as they fall due;
  4. or the company’s assets are less than its liabilities.
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10
Q

What is the cash flow test?

A

A test for insolvency to see if the company cannot pay its debts as they fall due because it cannot raise enough cash.

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11
Q

What happens if a company has lots of other assets but cannot turn them into cash to pay its creditors?

A

It cannot pay its debts and is considered insolvent.

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12
Q

What is the balance sheet test?

A

A test to see if a company’s assets are less than its liabilities, taking into account contingent and prospective liabilities.

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13
Q

What is a statutory demand?

A

A written demand for payment served by a creditor owed more than £750, that must be paid within 21 days, or else the creditor can commence compulsory liquidation proceedings.

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14
Q

What is the effect of serving a statutory demand?

A

It can compel a company to pay or negotiate with the creditor within 21 days, or else the creditor can commence compulsory liquidation proceedings.

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15
Q

What might the court issue if a company disputes a statutory demand?

A

An injunction to prevent the creditor from proceeding with compulsory liquidation.

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16
Q

When does it work best for a creditor to serve a statutory demand?

A

If the company is actually solvent, as it won’t want to be wound up and will pay the bill.

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17
Q

What can the creditor do if they already have a judgment against a company?

A

They can commence liquidation proceedings if they have been unsuccessful enforcing the judgment.

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18
Q

If a company states that they are having cash flow problems, what would that be an admission of?

A

That they could not pay its debts as they fell due. This could be used as evidence in an compulsory liquidation situation.

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19
Q

What is the winding-up petition in the liquidation process?

A

The process of liquidation/winding up starts with the creditor presenting a winding-up petition to the court, advertised in the London Gazette.

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20
Q

What is the purpose of advertising the winding-up petition?

A

To give other interested parties an opportunity to attend the hearing and put other creditors on notice that the company is in financial difficulties.

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21
Q

What can the mere presentation or advertising of a petition cause?

A

It can be enough to stop a company trading.

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22
Q

What happens if the court is satisfied that the company is unable to pay its debts?

A

It will make a winding-up order.

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23
Q

Who is appointed when a winding-up order is made?

A

The Official Receiver (OR) as provisional liquidator.

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24
Q

When is the winding-up deemed to have commenced?

A

On the day when the petition was presented.

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25
Q

What are some effects of a winding-up order?

A

The liquidator takes over the company, directors’ powers cease, employees are redundant, and proceedings against the company are stayed.

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26
Q

What is the role of the Official Receiver (OR)?

A

To act as provisional liquidator and investigate and report on the company’s failure and affairs.

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27
Q

What happens during the hearing of the winding-up order?

A

The court considers if the company is unable to pay its debts (with two tests) and may issue a winding-up order if satisfied.

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28
Q

Who can require the company’s present or former officers to submit a statement of affairs?

A

The Official Receiver (OR).

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29
Q

What can the liquidator do with onerous property?

A

Disclaim it, including contracts or rental agreements.

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30
Q

What will a liquidator put in the London Gazette?

A

A notice asking creditors to submit a claim called a proof.

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31
Q

What are creditors’ voting rights based on?

A

The amount they are owed. The more a creditor is owed, the more votes they’ll have.

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32
Q

What is setting aside preferences?

A

Where a liquidator can apply to the court to reverse a transaction. In a setting aside preferences order, a company has done something to put a creditor in a better position than the company’s other preferences and the liquidator seeks to undo that transaction.

33
Q

What is setting aside transactions at an undervalue?

A

Where a liquidator can apply to the court to reverse a transaction. In a setting aside transactions at an undervalue order, a transaction results in the company receiving less than it gave and the liquidator seeks to undo that transaction.

34
Q

What is a transaction defrauding creditors order?

A

When a company has deliberately placed assets beyond the reach of its creditors to make it harder for them to recover their claims against the company and the liquidator seeks to reverse this.

35
Q

What must the OR investigate in a compulsory liquidation?

A

The reasons why the company failed and how its affairs were conducted, incl any director within 3 years of the liquidation.

36
Q

Can a liquidator demand money from a director (misfeasance)?

A

Yes, they can get a court order for a director to repay, restore, or account for money or property misapplied or wrongfully retained. This is called a misfeasance action.

37
Q

What are the two main types of voluntary liquidation?

A

Members’ voluntary liquidation (MVL) and creditors’ voluntary liquidation (CVL).

38
Q

What happens in a members’ voluntary liquidation (MVL)?

A

The company is solvent, and assets are distributed to members/shareholders.

39
Q

What happens in a creditors’ voluntary liquidation (CVL)?

A

The company is insolvent, and the process is controlled by the creditors.

40
Q

What must shareholders pass to commence voluntary liquidation?

A

A special resolution (SR).

41
Q

What is the effect of passing a special resolution (SR) in voluntary liquidation?

A

The company ceases its business, the resolution is advertised, and directors’ powers cease.

42
Q

How quickly must the special resolution (SR) be advertised in the London Gazette?

A

Within 14 days.

43
Q

What is the effect of a company being put into liquidation regarding its contracts with suppliers and service providers?

A

Suppliers and service providers cannot terminate contracts with the company just because it is in liquidation.

44
Q

What is a proof in the context of liquidation?

A

A claim submitted by creditors to the liquidator for debts owed to them by the company.

45
Q

How can a liquidator apply to reverse certain transactions by the company?

A

By applying to the court for orders under s238 (preferences), s239 (undervalue transactions), or s423 (defrauding creditors).

46
Q

What is the simplest form of corporate liquidation?

A

Members’ voluntary liquidation (MVL).

47
Q

When is a company placed in MVL?

A

When shareholders pass a special resolution (SR) to wind up the company, and all directors make a declaration of solvency under s89.

48
Q

What would happen if a declaration of solvency was not made, or was made more than 5 weeks before the SR was passed?

A

It would turn into CVL, not MVL.

49
Q

What must directors declare for MVL?

A

That the company will be able to pay its debts for up to 12 months following the commencement of winding up.

50
Q

What happens if a company in MVL is not solvent?

A

The liquidation can be converted to a creditors’ voluntary liquidation (CVL).

51
Q

How is a CVL commenced?

A

By shareholders passing a special resolution (SR) when directors have not made a declaration of solvency.

52
Q

Why is CVL often preferred over compulsory liquidation?

A

It is cheaper, quicker, and the process is controlled by the creditors.

53
Q

What must directors submit after passing the resolution to wind up the company in CVL?

A

A statement of the company’s affairs to its creditors within seven days.

54
Q

Who prevails in the choice of liquidator in CVL?

A

The creditors if there is disagreement.

55
Q

What does the liquidator do at regular intervals in CVL?

A

Reports to the creditors.

56
Q

What happens once the liquidator has realized all the assets?

A

The assets are distributed to the creditors and any surplus to the shareholders.

57
Q

What is a secured creditor?

A

One with a security interest over some or all of the company’s property.

58
Q

What are the two types of charges?

A

Fixed charges and floating charges.

59
Q

What is a fixed charge?

A

A charge granted over a particular asset or assets, giving the creditor the right to put the asset towards satisfying the amount due.

60
Q

What is a floating charge?

A

A charge over an entire class of assets or possibly all assets, allowing the company to buy and sell assets covered by the charge in the ordinary course of business.

61
Q

What is the prescribed part?

A

A percentage of the company’s property set aside for unsecured creditors when assets are subject to floating charges, up to a maximum of £600,000.

62
Q

What are preferential debts?

A

Debts such as employees’ wages and holiday pay due in the four months before winding up commenced, up to £800 per person.

63
Q

What happens to shareholders in the order of distribution?

A

They rank last and normally receive a distribution only if all other debts have been paid.

64
Q

What happens to a company once its assets have been distributed?

A

The company is dissolved.

65
Q

What is the main route for a creditor to place a company in liquidation?

A

Compulsory liquidation, on the ground that the company is unable to pay its debts.

66
Q

What are the two tests to determine if a company cannot pay its debts?

A

The cash flow test and the balance sheet test.

67
Q

What is an example of evidence a creditor might use to prove a company is insolvent?

A

A statutory demand or an unsuccessful attempt to enforce a judgment.

68
Q

What happens if a winding-up order is made?

A

The Official Receiver (OR) is appointed as provisional liquidator.

69
Q

What is the liquidator’s main job?

A

To realize the company’s assets and distribute them.

70
Q

What are the alternatives to compulsory liquidation?

A

Members’ voluntary liquidation (MVL) and creditors’ voluntary liquidation (CVL).

71
Q

What are the order of distribution steps for a company’s assets?

A

Expenses of the liquidation, preferential debts, money secured by floating charges, unsecured creditors, and shareholders.

72
Q

What are the fees and expenses of the liquidation?

A

The expenses of the liquidator and their professional advisers.

73
Q

How are preferential debts paid if there is not enough money?

A

They are paid in proportion to the amount owed to each creditor, known as rateably.

74
Q

What happens after preferential debts are paid?

A

Money secured by floating charges is paid, subject to ring-fencing.

75
Q

What is the order of priority for holders of floating charges?

A

They rank in the order in which their charges were created.

76
Q

How are unsecured creditors paid?

A

They share any remaining money rateably.

77
Q

What is often the recovery rate for unsecured creditors?

A

A few pence in the pound.

78
Q

What is the usual dividend to unsecured creditors called?

A

A dividend, often expressed as “so many pence in the pound.”

79
Q

What happens if there is a surplus after all creditors are paid?

A

The surplus is distributed to shareholders.

Business and Employment Law (16 decks)

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