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
How are assets distributed after winding up?
Same as statutory order for debts
1) Fixed charge holders (ranked by date of creation)
- Full payment from floating charge/Balance in Co’s liquidation (only as unsecured creditor)
2) WU expenses
3) Preferential debts
4) Floating charge holders (ranked by date of registration)
5) Ordinary unsecured creditors
- Full payment/Pro rata basis
6) Interest on (greater of statutory rate at order creation (8%) vs rate Co would pay if NO liq)
- Preferential debts
- Ordinary unsecured creditors
7) Postponed creditors
- Co’s unauthorised investment/banking
8) Members
What are preferential debts?
Unpaid contributions
- Occupational pension schemees
- Employees’ wages
Loans to Cos
- Pay wages
When may bankruptcy orders be made?
Partner/Sole trader
- Liabilities > Assets
- Assets > Liabilities BUT insufficient liquid assets to pay liabilities
What may court do upon petition for bankruptcy order?
Grant bankruptcy order
Refuse bankruptcy order w explanation
- Debtor can request review (within 14 days > If rejected, appeal within 28 days)
How may debtor petition for bankruptcy?
Online app > Administrator
How may creditor petition for bankruptcy?
1) Debtor lives in E&W
2) Debt >= £5,000 (bankruptcy level)
3) Debt = liquidated sum
4) Debt is unsecured
5) Debtor appears/NO reasonable prospect of NOT paying debt
- Statutory demand served on Debtor > 3 weeks passed with NO compliance
- Debt execution NOT satisfied
6) NO outstanding app > Set aside statutory demands served re debt
How may debtor dismiss creditor’s bankruptcy petition?
Debtor can pay debt
Creditor unreasonably refused Debtor’s response to statutory demand
Appropriate to dismiss for other reason
How may voluntary scheme supervisor petition for bankruptcy?
Debtor NOT comply
- Obligations
- Supervisor’s reasonable requests under VS
Debtor gave false/misleading info re VS
How may Director of Public Prosecutions make petition for criminal bankruptcy order?
Person convicted of offence
- Loss occurred in excess of specified sum
What happens when bankruptcy petition order is made?
Debtor can NOT sell assets (VOID)
- UNLESS court consents/ratifies
Official Receiver is appointed > Trustee of Bankrupt’s estate
- Investigates conduct before and after bankruptcy (until and unless removed)
- Carry on business with view to WU
- Mortgage assets > Raise finance
- Make Bankrupt do acts re admin
- Sell Bankrupt’s estate
BUT Bankrupt keeps
- Necessary items for B’s trade
- Household items
- Property held by B in trust for others
- B’s personal earnings > Satisfy B’s reasonable domestic needs
Bankrupt > Undischarged
- Loses property
- Cannot act as D/lawyer/Co mgmt
How may Trustee challenge Bankrupt’s antecedent transactions?
Transaction at undervalue
1) Bankrupt (insolvent)
2) Gave gift (no consideration/for marriage/less than true value within 5 years of petition)
3) To Associate
- Spouse/Civil partner
- Sibling
- Family
Transaction at preference
- Bankrupt > Asset (6 months before petition) + Influenced by desire to improve position at bankruptcy > Creditor/Guarantor/Surety
- Bankrupt > Asset (2 years before petition) > Associate
=> Improves their position at bankruptcy
Transaction defrauding creditors
1) Bankrupt’s transaction at undervalue
2) Put assets beyond Creditor’s reach > Frustrate Creditor’s claims vs Bankrupt
3) Limitation period
- Cash > Must challenge within 6 years
- Assets > Must challenge within 12 years
What should Trustee do after he realises Bankrupt’s assets?
Send notice to Creditors
1) Intent to make final dividends
2) Deadline to prove claims > Otherwise non-timely claims means no dividends to Creditors
What is required for individual voluntary arrangement (IVA)?
1) Debtor/Trustee in bankrutpcy > Agreement > Creditor
- Formal proposal (assets available, period, IVA vs bankruptcy)
- Relevant insolvency practitioner (nominee)
2) Creditors accept by +75% (+ modifications)
3) Creditors report decision to Court
4) Challenges can be made (by Debtor/Creditor/Nominee) within 28 days
- Vote irregularity
- Proposal unfairly prejudices Creditors’ interests
