1.9 Business - Insolvency Flashcards
When is a company insolvent?
S. 123 IA86
- NOT comply payment terms in prescribed form for debt > £750
- NOT satisfy enforcement of judgment debt
- Co satisfied NOT able to pay debts as they fall due (cash flow test)
- Court satisfied Co’s liabilities > assets (balance sheet test)
How does voluntary arrangement work?
Co + Creditors agree settle debt w/o liquidation
1) Co nominates insolvency practitioner > Implement and supervise VA
2) Co receives VA notice > Report to court within 28 days
- VA has reasonable chance of approval
- Arrange meeting between Co and Creditors
3) Composition (Co + Creditors)
- Creditors to receive only % debt
- 75% unsecured creditors’ approval
What are the disadvantages of voluntary arrangements?
VA not affect secured/preferential creditors w/o consent
- Secured creditor can rely on security
- Preferential creditor (employees’ wages) > Unsecured creditor
Hostile creditors can demand repayment until VA approval
- UNLESS Co > Admin (but timely, costly
- UNLESS Small Co > can apply moratorium > Stop creditors vs Co for 28 days
What is required for administration orders?
1) Creditor (floating charge)/D/Co > Appoint administrator
- NO court approval needed anymore (EA 2002)
2) Administrator must give opinion > Statutory purpose is reasonably likely to be achieved
- Stop other creditors’ WU petitions (moratorium)
- Realise assets better than on liq
- Realise Co’s property for benefit of secured/preferential creditors
What is a fixed asset receiver?
Creditor has fixed charge
Creditor appoints Receiver
Receiver acts as Co’s agent
Receiver sells fixed charged asset > Pays proceeds to creditor for debt
What is required for administrative receivers?
1) Receiver > Report > Registrar, Floating charge creditor, Creditors, Creditors’ trustees (within 3 months of appt)
- Appt circumstances
- Receiver’s actions
- Statement of affairs (assets, liabilities) by employees
2) Creditor > Inform Registrar of appt within 7 days
EA 2002 prevents in most cases > Promote out of court administration
What is required for scheme of arrangement? What are its objectives?
Objectives
- Restructure debt
- Recover from financial distress
- Avoid negative publicity/goodwill loss
- NOT automatic moratorium
1) Creditors’ consent
2) Court’s sanction > Registrar
- Fair reasonable process
- Genuine attempt to reach agreement
3) App to court > Meeting to vote on scheme
- Co > Send statement of key aspects > Parties attending > Separated into classes + Vote (+75% each class)
=> Binding on creditors and Co
What is required for compulsory winding up?
1) Apply petition (Co cannot pay debts) to Court > Locus standi (right to bring action vs court)
- Creditors
- Co (SR > Registrar within 15 days)
- Contributory (members, former members)
Court’s options
- Grant WU order
- Refuse WU order
- Adjourn hearing
- Interim order
- Other order (judge thinks fit)
Grant WU order
1) Order > Co
2) Petitioners > Petition + hearing date within 14 days of order > London Gazette
3) Hearing with creditors
- Within 14 days
- Question Co
- Put forward liquidator
4) Appoint official receiver
- In office
- Investigate financial failure and misconduct
- UNLESS creditors appoint ‘private’ liquidator
5) Appoint liquidator > Control of Co’s assets
- Ds’ powers terminated
- Employees dismissed
- Property sales > Void
- Co papers and websites > Co in liquidation
What happens in a members’ voluntary WU?
1) SHs call for WU (Co can pay debts)
- Co fixed period (AA) expires + GM resolution passed
- SR
2) Ds’ statutory declaration of solvency
- Assets + liabilities
- Co can pay ALL debts within 12 months of WU
- Otherwise crime w/o reasonable grounds
3) Resolution + statutory declaration > Registrar (within 15 days)
4) Co > Advertise resolution > London Gazette (within 14 days)
5) Co NOT carry on business
- UNLESS beneficial during WU
6) Share transfers > VOID
7) Liquidator’s role
- Full progress report > Creditors’ final meeting
- Advertise meeting > London Gazette (at least 1 month before)
- Final progress report + Full progress report > Registrar (within 1 week of meeting)
- Sell Co’s assets > Distribute proceeds (after paying costs and expenses) to Creditors
What happens in a creditors’ voluntary WU?
1) Creditors call for WU (Co can NOT pay debts)
- SR
2) SR > Registrar (within 15 days)
3) Co > Advertise resolution > London Gazette + 2 newspapers where Co’s PPB (within 14 days)
4) Creditors’ meeting (within 14 days)
- Notice > Creditors (+7 days before)
- Notice > London Gazette
5) Ds’ statement re Co’s affairs > Meeting
- Appoint presiding D
When is D guilty of wrongful trading?
S. 214
1) Co > insolvent liquidation
2) Before WU > D knew/should know no reasonable prospect Co could avoid insolvent liq
- UNLESS D took every step to minimise potential loss to creditors he ought to have taken
3) D is Director
What is required for transaction at undervalue?
S. 238
Co’s transaction within 2 years before WU
- Gift of property > Person
- Sells asset for less than market value
UNLESS deal entered for genuine commercial reasons > Obtain desperately needed cash
What are preferences?
Co puts creditor in better position during insolvent liq
UNLESS liquidator/administrator applies to court > Set aside preference
- Given 6 months before WU
- Can extend to 2 years > Preference given to ‘connected person’ (D/close relative)
When may floating charges be set aside?
Creditor > FC > Max. 12 months before insolvency
Creditor connected w/ Co > FC > Max. 2 years before insolvency
BUT valid to extent
- Actual value of money paid
- Goods/Services supplied at same time/after FC
When may D be guilty of fraudulent trading?
Ds carried on business
- Defraud creditors
- Fraudulent purposes
- Should have known NO reasonable prospect Co would avoid insolvent liquidation before WU
=> Assets available to liquidator/administrator => Increases
=> Person applying to set aside deal at court
- Must prove Co entered deal to put assets beyond applicant’s reach
