7.13: Corporate Insolvency and Liquidation Flashcards
What is ring fencing?
In order to preserve funds for unsecured creditors, who are always paid last, the insolvency
practitioner must set aside the prescribed part or ring-fenced portion of the realisation from
the sale of assets that were subject to a floating charge (net of/after the liquidator’s costs
and expenses).
What are the three main types of transactions which can be challenged
- transactions at an undervalue * preferences, and * floating charges.
When is a transaction at an undervalue voidable / relevant period? (ie. no consideration given)
it took place in the 2 years prior to the onset of insolvency i.e. insolvent administration or liquidation, and
the company was insolvent at the time of the transaction or became insolvent as a result.
Insolvency will be presumed when it is with a connected person
What is a connected person
person connected to a director ie. family member, partner, civil partner etc
What is the limitation period for issuing proceedings
Action must be brought within 6 years from the onset of insolvency.
When can a transaction be challenged in insolvency?
Company must be insolvent or in administration
Time limits:
Transactions at an undervalue – 2 years before insolvency
Preferences – 6 months (unconnected), 2 years (connected)
Floating charges – 12 months (unconnected), 2 years (connected)
If challenged successfully, restore company to pre-transaction position.
What is a transaction at an undervalue and the time limit for challenging?
Gift or sale below market value (IA 1986, s238(4))
Time limit: 2 years before insolvency
Who can challenge: Liquidator or administrator
Defence: Good faith, carrying on business
What is a preference and the time limits for challenging?
Preference: Giving one creditor an unfair advantage. Relates to creditors?
Time limits:
6 months (unconnected person)
2 years (connected person)
Who can challenge: Liquidator or administrator
Defence: Commercial pressure or business reason
When can a floating charge be challenged and the time limits?
No fresh consideration or better position for creditor
Time limit:
12 months (unconnected person)
2 years (connected person)
Who can challenge: Liquidator or administrator
No defences allowed
What are the key time limits for challenging transactions?
Transaction at an undervalue – 2 years before insolvency
Preference –
- 6 months (unconnected)
- 2 years (connected)
Floating charge –
- 12 months (unconnected)
- 2 years (connected)
Action must be brought within 6 years from onset of insolvency.
What is ring-fencing and how is the prescribed part calculated?
Ring-fencing is setting aside part of floating charge proceeds for unsecured creditors.
Amount:
- 50% of first £10,000
- 20% of remainder
Capped at:
- £600,000 (charge before 6 April 2020)
- £800,000 (charge on/after 6 April 2020)
Applies if charge created on/after 15 Sept 2003.
What are the valid defences to a floating charge
new money is brought into the company, new goods or services are supplied to the company or existing debts are extinguished as a result of the giving of the charge
What is the time limit for the statutory offence of wrongful trading by a director?
AT SOME TIME BEFORE THE WINDING UP OF THE COMPANY.
Explained: the statutory offence of wrongful trading looks for it to be shown that at some time before the commencement of the winding up of the company, the director knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation and did not take every step with a view to minimising the potential loss to the company’s creditors.
What is the order of priorities of repaying debts during insolvency proceedings?
The order of priorities is liquidator’s general costs and expenses, preferential creditors, floating charge holders, unsecured creditors and shareholders.
How is a director judged by the court when judging their actions prior to their insolvency? Apply the test.
The director should be judged on how they carried out their role with the general knowledge, skill and experience that should be expected of someone with the role of director and the knowledge and skill that they actually have as a director.
