6. The termination of a solvent business, corporate insolvency and personal bankruptcy

Question 1

When may an individual be insolvent?

Answer 1

An individual may be insolvent when:

• A debt is payable immediately or at some certain time in the future;

AND

• The debtor appears either unable to pau it, or has no reasonable prospect of being able to pay it

(s267 IA)

Question 2

What are the three ways that show an inability to pay under s 267/268 IA? Personal Insolvency

Answer 2

1. A statutory demand has been served for a liquidated and unsecured sum of at least 5k or more, PAYABLE IMMEDIATELY and after 3 WEEKS it remains unpaid/there is no application to set it aside.
2. A statutory demand has been served for a liquidated and unsecured FUTURE sum of at least 5k or more and after 3 WEEKS there is no reasonable prospect of it being paid/there is no application to set it aside.
3. Attempt has been made to enforce a JUDGMENT DEBT of at least 5k, byt it remains unsatisfied.

Question 3

What is a statutory demand?

Answer 3

A formal written demand for payment.

Question 4

What is a liquidated and unsecured sum?

Answer 4

An exact sum, rather than one that needs to be calculated or assessed, that is not secured.

Question 5

What is bankruptcy?

Answer 5

A judicial process whereby most of the bankrupts assets pass to a trustee in bankruptcy and the bankrupt becomes subject to restrictions.

Majority are usually discharged and free of restrictions after ONE year.

Question 6

What is a trustee in bankruptcy?

Answer 6

A qualified insolvency practicioner takes control of most of the bankrupt’s property.

Under a dity to maximise the funds that will be available to creditors and to distribute the bankrupt’s property.

Question 7

What is a creditor’s petition?

Answer 7

Usually starts the bankruptcy process.

Creditor owed a liquidated and unsecured sum of more than 5k may present a bankruptcy petition if a debtor is unable to pay their debts.

Must show one one of the three inabilitys to pay.

Question 8

What can a creditor do if they are owed less than 5k?

Answer 8

They can submit a joint petition.

The court fee and a deposit to cover the costs of the trustee in bankruptcy must be paid.

Usually filed at the debotrs local county court with a bankruptcy jurisdiction, and then served on the debtor.

Question 9

What is a debtor’s application?

Answer 9

Another way to start the bankruptcy process.

Debtor submits an online application to be made, which is decided on by an adjudicator. Usually done as a self-help measure.

Application fee needed and a deposit to cover costs of adjudicator.

Bankruptcy order must be made witin 28 days.

Question 10

What happens when a bankruptcy order has been made?

Answer 10

The official receiver (officer of the court) takes control of most of the bankrupts assets and acts as trustee in bankruptcy.

The bankrupt must produe a statement of affairs and set out their financial position to assist the trustee.

Trustee has wide powers to realise the assets and may investigate and unwind transactions to maximise the available funds for creditors.

Question 11

What happens to the bankrupt’s property?

Answer 11

The title vests in the trustee, with the exceptions:
- tools of the trade (tools and vehicles)
- everyday items (clothes and furniture)

If these items are of particular high value, they may be sold and substituted for something cheaper.

Question 12

What happens to the bankrupt’s salary?

Answer 12

If it is above what is needed for reasonable needs, then income payments made be agreed, or an income payments order made.

Under such order the bankrupt must make contributions to funds available for creditors for up to three years.

Question 13

What happens to the bankrupt’s home?

Answer 13

The interest in the home will pass to the trustee.

If the bankrupt is the sole legal, and equitable owner and nobody else has a right of occupation or an interest, no court order is needed to sell it.

If there is another party incolved, then a court order is required.

3 years after the bankruptcy order, ownership will revert back to the bankrupt, unless the property has been sold for example.

Question 14

What past transactions can a trustee in bankruptcy investigate?

Answer 14

• Disclaiming onerous property.
• Transactions at an undervalue.
• Preferences.
• Transactions defrauding creditors.
• Extornionate credit transactions.

Question 15

What is onerous property?

Answer 15

Any property of the bankrupt that is a drain on resources, rather than an asset.

Most common example is a lease with no premium, with liability to pay rent building up. Also, contracts making a loss and heavily polluted land.

Question 16

What happens when onerus property is disclaimed?

Answer 16

The liabilties will cease.

However those that suffer (landlord eg..) may be able to claim as an unsecured credtior for what is owed to them.

May also push for the trustee to disclaim (eg a landlord so they can re rent the property).

Procedure is to ask the trustee to diclaims within 28 days (s316) after which it is no longer possible.

Question 17

What is a Transaction at Undervalue?

Answer 17

A gift of sale of property where the consideration received is significantly less than the value of the property.

Trustee can set aside TUV going back up to 5 years from the date of presentation of petition (the relevant date).

• If took place in the first 2 years from the relevant date - no more pre-conditions.
• If took place after the first 2 years from relevant date, must be proven that the bankrupt was ‘insolvent at the time’ or ‘became so because of the transaction’.

Question 18

What is an associate? (s435 IA)

Answer 18

• Relatives (siblings, aunts, uncles, nephews, lineals (kids, parents (grand)).
• Spouse/CP and their relatives.
• Spouses/CPs relatives
• Business partners and employees/employers
• A company controlled by a person either along or together with their associates.

Question 19

What is the effect of a TUV being made to an associate?

Answer 19

There is a rebuttable presumption that the bankrupt was insolvent at the time of the transaction.

Question 20

What is the insolvency timeline for TUV?

Answer 20

Dates of insolvency, 1 year, 2 years:
- No additional Preconditions.

3 Years, 4 Years, 5 Years:
- Insolvency needs to be proven.
- Insolvency presumed if in favour of an associate.

Question 21

What is a preference transaction?

Answer 21

An arrangment that places a creditor or guarantor in a better position than they would have otherwise been in the event of an individual’s bankruptcy.

Often involves a creditor or guarantor, whereas TUV doesn’t.

Question 22

What must be proven for a preference?

Answer 22

A desire to prefer the creditor.

This is presumed if made in favour of an associate.

Question 23

What is the insolvency timeline for preference?

Answer 23

6 Months from Date of Insolvency:
- Can investigate and set aside ANY preferences.

6 Months - 2 Years:
- If the preference was made to an associate.
- Insolvency must be proven
- Desire to prefer assumed if it favour of an associate.

Question 24

What are Transactions Defrauding Creditors?

Answer 24

An undervalue transaction where there is an intention to put assetes beyond the reach of someone of rejudice their interests in relation to a potential claim.

There is no time limit.

Question 25

What are Extortionate Credit Transactions?

Answer 25

A credit transaction entered into within THREE YEARS of the relevant date, that involves grossly exorbiant payments or grossly contravenes the ordinary principles of fair dealing.

Question 26

What is the order of distribution for the Bankrupts assets?

Answer 26

• Secured Creditors
• Costs of bankruptcy
• Preferential Debts
• Unsecured Creditors
• Postponed Creditors (spouse/cp of bankrupt)

If there are unsufficient funds to settle preferential debts or unsecured creditors, they receive a proportionate sum of what is left.

Question 27

What are preferential creditors?

Answer 27

Primary preferential debts:
- Wages for work carried out in the four months proceeding the bankruptcy order (up to £800)
- Accrued holiday pay/

Secondary preferential debts:
- Sums owed to HMRC for PAYE and VAT.

Question 28

What are the restrictions placed on the bankrupts?

Answer 28

May face criminal liability in event of breach:

• most disclose their bankruptcy if obtaining credit of more than £500
• they cannot act as a director
• they must disclose their bankruptcy if trading under a different name
• they cannot be a partner
• cannot be involved in company formation or managment without leave of the court
• they require leave of the SRA to practice as a solicitor.

Question 29

How are bankruptcys discharged?

Answer 29

Most are automatically discharged after one year, however BROs and BRUs may continue to apply.

Liability to pay student loans will remain.

Question 30

What is a BRU and BRO?

Answer 30

Bankruptcy restriction order (court) and Bankruptcy restriction undertaking (agreement).

Provide additional restrictions for particularly culpable bankrupts for 2-15 years. Aim is to protect the public from the financially reckless.

Question 31

What are the alternatives to bankruptcy?

Answer 31

• IVA (Individual Voluntary Arrangment)
• DRO (Debt Relief Order)
• DRS (Debt Respite Scheme)

Question 32

What is a IVA?

Answer 32

The main alternative to bankruptcy for an individual.

It is a binding agreement to settle between debtor and unsecured crediots.

Avoids stigma of bankruptcy and gives the creditors a better result.

Question 33

How does an IVA work?

Answer 33

Debtor appoints a nominee to become the supervisor of the IVA. They produdce a statement of affairs and applies to the court for a moratorium (usually 14 days).

Requires approcal from 75% or more of the creditors in value, of which at least 50% are NOT associates.

If approved, it is binding on every unsecured creditor.

If debtor defaults, petition made be made for their bankruptcy.

Question 34

What is a DRO?

Answer 34

Debt Relief Order
Online application to write-off debts.

Only applies where the assets and liabilites are low:
- unsecured liabilites cannot exceed 30k
- gross assets cannot exceed 2k
- cannot have a car worth more than 2k (unless adopted for disability)
- cannot have a diposable income of more than £75 pcm
- cannot have a DRO in the preceding six yers.
- cannot be used subject to other insolvency proceedings

Question 35

What is a DRS?

Answer 35

Debt Respite Scheme.

Provides breathing space for up to 60 days or 30 days plus any treatment period.

Does not allow any further action to be taken against debtor.

Question 36

What are the four ways that show an inability to pay in corporate insolvency?

Answer 36

1. A statutory demand has been served for a liqudiadted sum for £750 or more and has been unsatisfied after 28 days.
2. Attempt has been made to enforce judgment debt yet it remains unsatisfied.
3. Company unable to pay its debts as they fall due.
4. The companies liabilties are more than its assets

Question 37

What may happen to an insolvent company?

Answer 37

May go into liquidation.

Alternative would be administration or CVA (company voluntary arrangment).

Question 38

What is liquidation?

Answer 38

Involves the company ceasing to trade and a liquidator taking control to review past transactions, sell assets and distribute profits to the creditors.

Company is then dissolved.

Question 39

What are the three types of liquidation?

Answer 39

1. Compulsory
2. Creditors voluntary (CVL)
3. Members voluntary (MVL)

Question 40

What is compulsory liquidation?

Answer 40

Commenced by a creditor presenting a winding up petition when a company is insolvent.

It is the corporate equivalent of a bankruptcy petition.W

Question 41

What happens in a compulsory liquidation?

Answer 41

Creditor usually prove inabilty to pay by showing a statutory demand has been unsatisfied for 21 days.

If debt is disputed the petition will not be able to proceed and the court will adjourn the hearing if the company claims it will be able to pay the sum in a reasonable period.

When a winding-up order is made by the court the official reciver becomes the liquidator.

Question 42

What is a Creditor’s Voluntary Liquidation (CVL)?

Answer 42

Corporate equivalent of a debtor’s application for bankruptcy.

Commenced by an insolvent company, usually as a response to creditor pressure and/or concern of the directiors as to personal liability.

Special resolution is required.

Question 43

What is a Member’s Voluntary Liquidation (MVL)?

Answer 43

Commenced by a SOLVENT (!!!) company.

Often used for corporate restructuring or for closing down a company that is no longer needed.

Special resolution is required.

Question 44

What is the effect of liquidation?

Answer 44

The liquidator takes over the comapny and the director’s ppowers cease.

Liquidator has wide powers to managae and wind-up the company.

These powers include the ability to investigate and unwind past transactions.

After the submission of accounts, the liquidator may be released and the company will be dissolved three months later.

Question 45

What happens to a floating charge granted during insolvency?

Answer 45

Automatically be void if it granted at the relevant time before insolvency, without the company receiving fresh consideration.

Relevant time:
- 2 years if the charge is in favour of connected person.
- 1 Year if in favour of an unconnected person. (Insolvency must also be proven)

Question 46

What is a connected person?

Answer 46

A director and his associates, or an associate of the company.

Question 47

What happens to a preference during insolvency?

Answer 47

6 Months from Date of Insolvency:
- Can investigate and set aside ANY preferences.

6 Months - 2 Years:
- If the preference was made to an associate.
- Insolvency must be proven
- Desire to prefer assumed if it favour of an associate.

Question 48

What happens to a TUV insolvency?

Answer 48

For companies, can have the possible defence that the transaction was entered into in good faith for the purpose of carrying on the company, and there was a reasonable belief it would benefit the company.

Dates of insolvency, 1 year, 2 years:
- No additional Preconditions.

3 Years, 4 Years, 5 Years:
- Insolvency needs to be proven.
- Insolvency presumed if in favour of an associate.

Question 49

What is the order of distribution of the insolvent companiy’s assets?

Answer 49

• Liquidator’s fees
• Fixed charge holders.
• Winding up exepenses
• Preferential debts.
• Set aside PPF.
• Floating charge
• Unsecured creditors

Question 50

What is ring fencing?

Answer 50

50% of the first 10k and 20% of the balance owed to floating charge holders is set aside for unsecure creditors.

Subject to the stautory limit of 800k

or 600k if made before 06 april 2020

Question 51

What are the alternatives to liquidation?

Answer 51

1. Administration
2. Company Voluntary Arrangements (CVAs)

Question 52

What is administration?

Answer 52

Involves an administrator running the company to rescue it and/or enable it to be sold as a growing concern.

Must act in the best interersts of the creditors and achieve a better result than on winding up

Question 53

What does administration do?

Answer 53

Creates a moratorium, breathing space for the administrator to do their work.

Question 54

How is an administrator appointed?

Answer 54

Can be throuhg court, our out of court.

Through court:
- Used if the court is likely to be unable to pay its debts adn the adminsitration is likely to achieve its purpose.

QFCH as well as those entitled to appoint an administrator must be notified.

Out of Court:
Made by Directors
- Staturoy declaration filed that the company is unable to pay debts and is not in liqudiation.
- Notify court, QFCH.

Made by QFCH
- Notify other QFCHs.
- Must file the notice of appointment at court with a statutory declaration confirming the lender is a QFCH.

Question 55

What is a qualifying floating charge?

Answer 55

A floating charge which states
(a) the statutory powers to appoint applies;
(b) relates to whole/substantially the whole of the companies property
(c) purports to empower the QFCH to appoint an administrator

Question 56

What duties does the administrator have?

Answer 56

Has a duty to all creditors, and the moratorium will continue whilst they act.

A majority of present and voting members must vote in favour of the proposals.

Administrator manages the company, director’s powers cease.

Ends after one year unless extended or ended earlier.

Question 57

What is a CVA?

Answer 57

A binding agreement between the company and the creditors and is essentially a compromise where creditors accept part payment and/or delay.

Outcome is usually better for the credtiors and it is usually cheapher than administration.

Question 58

How are CVA proposals approved?

Answer 58

Must be approved by:
75% or more in a value of the company’s creditors.
50% or more of unconnected creditors.

If approved, it is binding on all unsecured creditors in respect of past debts.