7. Law: Company Voluntary Arrangement | Winding Up & Liquidation of a Company Flashcards
What is insolvency?
when a business or person is unable to pay its debts
What are the 2 types of insolvency?
Not about voluntary or compulsory insolvency
cash flow insolvency
balance sheet insolvency
What is cashflow insolvency?
when a business cannot pay its bills when they become due
What is balance-sheet insolvency?
it has more liabilities than assets on its balance sheet
What are four types of insolvency?
Company Voluntary Arrangements (CVAs)
administration
winding up or liquidation
receivership
What is a Company Voluntary Arrangement (CVA)?
it’s a legally binding agreement between a company & its creditors to freeze a companies debts & repay them over a longer period of time
How long do Company Voluntary Agreements usually last?
three to five years
Give 2 ways a CVA protects a company?
interest - by freezing its debt
legal pressure - from creditors ensuing wining up petitions or other aggressive legal recovery actions
Outline the process for creating a CVA before the proposal is voted on at a creditors meeting
a proposal for creditors is drafted
then reviewed by an insolvency practitioner
proposal has been approved as having a good chance of being approved
Why is it less common to restructure the debts of secured creditors & employees claims?
you need their express permission
Rank the “payment hierarchy” of creditors for when a company goes into insolvency?
secured creditors
preferential creditors (employees)
unsecured creditors
shareholders
What are preferential creditors?
are unsecured creditors with preferential treatment
but paid before other unsecured creditors
Give examples of preferential creditors?
HMRC
employees
Give examples of unsecured creditors?
contractors
suppliers
customers
credit card companies
What do the unsecured creditors need to do to approve a Company Voluntary Agreement?
attend a creditors meeting & vote to approve or reject proposal
need 75% of votes to approve
Is the voting power of each creditor for a CVA equal?
voting power is proportional to amount of debt with the creditor
What happens if a creditor was unable to attend a CVA vote & the majority was greater than 75%?
The CVA is still binding on all unsecured creditors whether or not they were made aware of the meeting
The only way a dissenting creditor can appeal the decision of a creditors meeting is?
the creditor can prove to the court that the CVA
unfairly prejudices the interests of a creditor
How many days does a creditor have to appeal the decision of a creditors meeting to approve a CVA?
28 days
What are 4 main advantages of a CVA?
business can continue to trade in the long term
maintain control of the business
it takes the pressure off the company from creditors by freezing interests & charges
possibility of debt reduction
What is dissolving, winding up or liquidating a company?
its assets are liquidated
company name is removed from the register at Companies House
The dissolving or striking off of a company is usually referenced to as?
winding up
liquidation
What does it mean when a company is removed from the register at Companies House?
the company no longer legally exists
What 5 situations would cause a company to dissolve?
by mutual agreement
the business achieves the purpose for which it was originally formed
if there is a death or bankruptcy
if it becomes unlawful to continue
by a court judgement (often one of directors becomes mentally incapable)
What are the two major forms of winding up or liquidation?
voluntary
compulsory
Who must be at the meeting for a company to be voluntarily wound up?
the directors & shareholders
What are three common reasons for a business to voluntarily liquidate?
the business no longer needs to exist
the business owner is retiring or changing to something different & there is no one to replace him
the company is insolvent & it’s easier & faster to voluntarily liquidate than to go into compulsory liquidation
Can both a solvent & insolvent business go into voluntary liquidation?
yes a solvent business can
yes an insolvent business as long as its before it would go into compulsory liquidation
What’s the difference between “members voluntary liquidation” & “creditors voluntary liquidation”?
MVL - company is solvent & can pay its creditors in full
CVL - company is insolvent & cannot pay its creditors in full - without being ordered by the Court
What is compulsory liquidation or “winding up”?
it’s by order of the Court
where the company is made to stop operating
liquidate its assets to pay of its creditors
company name is removed from the register at Companies House
Who gets appointed to carry out a voluntary or compulsory liquidation?
a liquidator who must be a licensed insolvency practitioner
Why does a company generally get forced into compulsory liquidation?
a creditor does not believe the company can pay its debts
the creditor creates a winding up petition to the court
What is the “payment hierarchy” when a company goes into compulsory liquidation?
secured creditors
preferential creditors (employees/HMRC)
unsecured creditors
shareholders
