7. Insolvency Flashcards
What are the primary sources of legislation?
Bankruptcy (S) Act 1985
Insolvency Act 1986
BANKRUPTCY (SCOTLAND) ACT 1985, as amended 1993 & 2008 & to be amended in 2015
Together with certain common law provisions, the Bankruptcy (Scotland) Act 1985, as amended by the Bankruptcy (Scotland) Act 1993 and the Bankruptcy and Diligence etc (Scotland) Act 2007 and the Bankruptcy and Debt Advice (Scotland) Act 2014, governs insolvency of all insolvents in Scotland except registered companies. The law for England and Wales is contained in the Second and Third Groups of Parts of the Insolvency Act 1986.
What is insolvency?
Insolvency is not a term of art. It is a general expression which can be used to describe a variety of individual discrete processes which can be carried out judicially or extra judicially with minimal judicial oversight.
In broad terms insolvency relates to the procedures that are put in place whereby a third party administers assets of a debtor in order to satisfy the debtors liabilities.
Various legal and practical consequences of insolvency in the financial sense require further clarification. Common element to these procedures is that an officially appointed third party has the responsibility of turning the property into liquid assets (if it is not already in such a form) and distributing such assets to creditors in a statutorily prescribed manner in an attempt to settle the debtor’s debts.
Are there distinctions between the types of debtor?
Yes -in Scots law there is a distinction between types of debtor: company debtors – corporate insolvency; and non-company debtors – sequestration (bankruptcy). However, note too there are a number of similarities.
What are the main types of insolvency process?
We will focus on sequestration, administration and liquidation.
What is sequestration?
Judicial process transferring whole assets of insolvent to trustee in sequestration. This is done for the purposes of sale of the property by the trustee and distribution to the creditors of the insolvent. Available for all insolvents except registered companies. That is, individual persons, partnerships, unregistered corporate bodies etc.
What is Trust Deed for Behoof of Creditors?
Similar to sequestration except procedure is voluntary rather than judicial. This procedure can be less expensive than sequestration so leaving more funds for distribution to creditors. Not available to registered companies.
What is bankruptcy?
This term is used indeterminately to refer to any of the above states of insolvency. Often it is used to refer to the process of sequestration or the granting of a trust deed. Bankruptcy is usually concerned with the affairs of individuals, partnerships and unincorporated bodies, rather than companies which are concerned with liquidation, receivership and administration.
What is liquidation?
Procedure for ‘winding up’ registered companies or LLPs. Liquidator appointed with similar role to trustee in sequestration (they replace the managers of the business to realise the assets and dissolve the business). At the end of liquidation, company is ‘dissolved’. Available for solvent as well as insolvent companies. If it is not an insolvent liquidation and the creditors are paid off and there is money left over, where does the money go? The money goes to the shareholders because they were the investors in the business.
What is receivership?
Used for enforcing ‘old floating charges’ (pre effect of Enterprise Act 2002). Receiver takes over the running of the company. Realises assets for benefit of chargeholder.
What is administration?
Only available for companies. This can be initiated out of court by the floating charge holder. The floating charge holder can apply to appoint an administrator - they must notify the court that this is taking place but they do not need to obtain court authority for this. Administrator takes over management of company for benefit of all concerned. Rights of creditors suspended. Sometimes the business can be sold but the old company dissolved.
What is Company Voluntary Arrangements?
Deal approved by the majority of creditors for payment at less than 100% of debts due. And the company will continue to trade after this.
How does insolvency occur?
Failure to pay one’s debts is the first step on the road to bankruptcy. However, before the provisions of the 1985 Act (as amended) can be invoked by creditors in an attempt to have outstanding debts settled, the debtor must be ‘insolvent’. There are three possible states of insolvency
What are the three possible states of insolvency?
1) Absolute insolvency
⁃ This is where your total debts are greater than your total assets. A number of businesses trade perfectly despite being ‘absolutely insolvent’ (e.g. Hamilton Accidemicals, Eurotunnel).
⁃ But if you are absolutely insolvent and practically insolvent then you have a big problem.
⁃ If a debtor is absolutely insolvent and gives away assets or sells them under value these transactions may be liable to reduction.
2) Practical insolvency
⁃ This is ‘cash flow insolvency’ - where the debtor does not have the cash to pay debts as they fall due. So while the debtor may have assets greater than liabilities, they may just not be readily liquid.
⁃ (E.g. castle owner who can’t pay for repairs).
⁃ Practical insolvency doesn’t necessarily mean you are going to enter a formal insolvency process. It does typically lead to a trigger to various enforcement processes - your creditors are more likely to do diligence against you.
⁃ Absolute and practical insolvency are two tests listed in s 1(2)(iii) of the Insolvency Act 1986 to identify when a company is unable to pay its debts. And if it is unable to pay its debts then you can initiate the administration procedure or liquidation.
3) Apparent insolvency
⁃ This is a statutory test. Under s 7 of the Bankruptcy (S) Act 1985 gives you a list[ a. sequestrated or made bankrupt in UK
b. debtor gives written notice to creditors that he has ceased to pay debts
ba. Becomes subject to insolvency in EU member state other than UK
c. i debtor grants trust deed to creditors
c. ii charge for payment served on debtor and expires without payment
c iv. decree of adjudication is granted
c vi debt payment programme under 2002 Act is revoked
d. creditor owed prescribed amount (£750) serves statutory demand for payment and denial of debt by debtor or no payment of debt within 3 weeks] of events. If one of these things happens then you are deemed to be apparently insolvent. The s 7 list applies to ALL PERSONS: COMPANIES AND NATURAL PERSONS.
⁃ The most important in the list for our purposes is s 7(1)(c)(ii) - charge for payment served on debtor and expires without payment, or s 7(1)(c)(iii) - a deed of adjudication is granted over the debtor’s assets.
In the case of (ca), (cb), and (cc) s 7 (1A) provides that there is no apparent insolvency triggered if the debtor was able and willing to pay debts as they fall due, or the debtor had a restraining order that made payment impossible).
⁃ A charge for payment is where a creditor who wishes to carry out arrestment or attachment must give notice to the debtor (by a charge for payment) of a period of time for them to pay and that if they don’t pay apparent insolvency is triggered.
When do unpaid employees get paid in cases of insolvency?
[[[[NB unpaid employees get paid before unsecured creditors (they are preferential creditors)]]]][ Just stuck this in here so i don’t forget.]
Why is it important to determine which form of insolvency applies to a particular debtor?
Because different consequences flow from the different forms of insolvency. Absolute insolvency is largely relevant to gratuitous alienations and unfair preferences. Apparent insolvency is very important for equalisation of diligence and sequestration petitions. It may also be important for termination of contracts.
It is important to note that rules on gratuitous alienations and unfair preferences apply equally to individuals and registered companies. Also companies can be absolutely or apparently insolvent.
