7. Law: Company Voluntary Arrangement | Winding Up & Liquidation of a Company

Question 1

What is insolvency?

Answer 1

when a business or person is unable to pay its debts

Question 2

What are the 2 types of insolvency?

Not about voluntary or compulsory insolvency

Answer 2

cash flow insolvency

balance sheet insolvency

Question 3

What is cashflow insolvency?

Answer 3

when a business cannot pay its bills when they become due

Question 4

What is balance-sheet insolvency?

Answer 4

it has more liabilities than assets on its balance sheet

Question 5

What are four types of insolvency?

Answer 5

Company Voluntary Arrangements (CVAs)

administration

winding up or liquidation

receivership

Question 6

What is a Company Voluntary Arrangement (CVA)?

Answer 6

it’s a legally binding agreement between a company & its creditors to freeze a companies debts & repay them over a longer period of time

Question 7

How long do Company Voluntary Agreements usually last?

Answer 7

three to five years

Question 8

Give 2 ways a CVA protects a company?

Answer 8

interest - by freezing its debt

legal pressure - from creditors ensuing wining up petitions or other aggressive legal recovery actions

Question 9

Outline the process for creating a CVA before the proposal is voted on at a creditors meeting

Answer 9

a proposal for creditors is drafted

then reviewed by an insolvency practitioner

proposal has been approved as having a good chance of being approved

Question 10

Why is it less common to restructure the debts of secured creditors & employees claims?

Answer 10

you need their express permission

Question 11

Rank the “payment hierarchy” of creditors for when a company goes into insolvency?

Answer 11

secured creditors

preferential creditors (employees)

unsecured creditors

shareholders

Question 12

What are preferential creditors?

Answer 12

are unsecured creditors with preferential treatment

but paid before other unsecured creditors

Question 13

Give examples of preferential creditors?

Answer 13

HMRC

employees

Question 14

Give examples of unsecured creditors?

Answer 14

contractors

suppliers

customers

credit card companies

Question 15

What do the unsecured creditors need to do to approve a Company Voluntary Agreement?

Answer 15

attend a creditors meeting & vote to approve or reject proposal

need 75% of votes to approve

Question 16

Is the voting power of each creditor for a CVA equal?

Answer 16

voting power is proportional to amount of debt with the creditor

Question 17

What happens if a creditor was unable to attend a CVA vote & the majority was greater than 75%?

Answer 17

The CVA is still binding on all unsecured creditors whether or not they were made aware of the meeting

Question 18

The only way a dissenting creditor can appeal the decision of a creditors meeting is?

Answer 18

the creditor can prove to the court that the CVA

unfairly prejudices the interests of a creditor

Question 19

How many days does a creditor have to appeal the decision of a creditors meeting to approve a CVA?

Answer 19

28 days

Question 20

What are 4 main advantages of a CVA?

Answer 20

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

Question 21

What is dissolving, winding up or liquidating a company?

Answer 21

its assets are liquidated

company name is removed from the register at Companies House

Question 22

The dissolving or striking off of a company is usually referenced to as?

Answer 22

winding up

liquidation

Question 23

What does it mean when a company is removed from the register at Companies House?

Answer 23

the company no longer legally exists

Question 24

What 5 situations would cause a company to dissolve?

Answer 24

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)

Question 25

What are the two major forms of winding up or liquidation?

Answer 25

voluntary

compulsory

Question 26

Who must be at the meeting for a company to be voluntarily wound up?

Answer 26

the directors & shareholders

Question 27

What are three common reasons for a business to voluntarily liquidate?

Answer 27

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

Question 28

Can both a solvent & insolvent business go into voluntary liquidation?

Answer 28

yes a solvent business can

yes an insolvent business as long as its before it would go into compulsory liquidation

Question 29

What’s the difference between “members voluntary liquidation” & “creditors voluntary liquidation”?

Answer 29

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

Question 30

What is compulsory liquidation or “winding up”?

Answer 30

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

Question 31

Who gets appointed to carry out a voluntary or compulsory liquidation?

Answer 31

a liquidator who must be a licensed insolvency practitioner

Question 32

Why does a company generally get forced into compulsory liquidation?

Answer 32

a creditor does not believe the company can pay its debts

the creditor creates a winding up petition to the court

Question 33

What is the “payment hierarchy” when a company goes into compulsory liquidation?

Answer 33

secured creditors

preferential creditors (employees/HMRC)

unsecured creditors

shareholders