7.13: Corporate insolvency and liquidation Flashcards
What are the two main legal tests for determining corporate insolvency in the UK?
- Cash-flow test: Company cannot pay debts as they fall due (Insolvency Act s 123(1)(e))
- Balance sheet test: Company’s liabilities exceed its assets (Insolvency Act s 123(2))
What are the two types of voluntary liquidation?
- Members’ Voluntary Liquidation (MVL): For solvent companies. Decided by Directors. Debts are paid within 12 months of its winding up commencing.
- Creditors’ Voluntary Liquidation (CVL): For insolvent companies. Decided by creditors.
What is compulsory liquidation?
Liquidation initiated by a creditor or another qualifying party through a court order due to the company’s insolvency.
What is the primary role of the liquidator in liquidation?
To collect the company’s assets, potentially use clawback provisions, distribute the proceeds to creditors according to a statutory order, and ultimately dissolve the company.
Name two main alternatives to liquidation for an insolvent company.
- Administration - 75% of value of debts by creditors
- Company Voluntary Arrangement (CVA)
What is the main objective of administration when a company enters this procedure?
The administrator’s primary initial objective is to rescue the company as a going concern.
What is a Company Voluntary Arrangement (CVA)?
A legally binding arrangement between a company and its creditors to manage and repay its debts over a set period.
What is fixed asset receivership?
An option for secured creditors holding a charge over specific assets to appoint a receiver to realize those assets to recover their debt. They are focused on purely covering their asset/debt and do not care about the health of the company.
What is a moratorium in the context of insolvency?
A temporary suspension of legal actions by creditors against a company, providing it with a period of protection from creditors. Introduced during lockdowns to help companies going through insolvency.
How can a creditor demonstrate a company’s cash-flow insolvency to the court?
Serving a formal statutory demand for a debt exceeding £750 that remains unpaid for 21 days. Threshold for a statutory demand.
Who can typically apply to the court for an administration order?
The company itself, its directors, or its creditors.
What is the threshold for a Company Voluntary Arrangement (CVA)?
Unsecured creditors who hold 75% or more in value must agree to the proposals
What is a liquidator’s primary goal?
Doing all things necessary to facilitate the winding up of the company.
What is the order of priority for paying debts?
Liquidator’s expenses, fixed charge holder, employees’ wages, and then the unsecured suppliers of goods
How long does a moratorium last and how can it be extended?
The moratorium will last 20 business days and may be extended for a further 20 business days without the consent of the creditors. Can be extended by a maximum duration of a year with the consent of the creditors.
