Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

BL&P > 8. Corporate Insolvency > Flashcards

8. Corporate Insolvency Flashcards

1
Q

A company may be wound up by the court when:

A
  1. it can be proved to the court that the company is unable to pay its debts as they fall due (the ‘cash flow test’); or
    - a creditor has served a statutory demand for an outstanding sum of 750 or more, and the company does not pay or come to an arrangement with the creditor within 21 days of service of the statutory demand;
    - a creditor has obtained judgment against the company, and has tried to enforce that judgment, but the debt still has not been paid in full or at all;
  2. it can be proved to the court that the company’s liabilities exceed its assets (the ‘balance sheet test’).
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Definition of insolvency

A

Deemed unable to pay its debts

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Explain the importance of establishing insolvency (from the view of a creditor)

A

Establishing insolvency is a pre-condition to a successful ‘winding up’ petition

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Three potential outcomes once a business has established its insolvency

A
  1. Insolvent Liquidation
  2. Administration
  3. Company Voluntary Agreement
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Can creditors force an insolvent company into administration?

A

Yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Can creditors force a company to enter into a CVA?

A

Not force, but can strongly encourage

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Two new insolvency regimes created by CIGA 2020

A
  1. Moratorium
  2. Restructuring Plan
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Process of Liquidation (Brief)

A

the business stops trading, its assets are sold and the company ceases to exist

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Process of Liquidation (extended)

A
  1. Liquidator is appointed, directors’ powers cease and liquidator runs the company
  2. Liquidator reviews company’s past transactions to see if any can be challenged (to obtain more money to be paid to creditors)
  3. Liquidator distributes the assets of the company to the creditors in the order mandated by statute
  4. Company is dissolved at Companies House within a few months
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Three types of liquidation

A
  1. Compulsory Liquidation
  2. Creditors’ Voluntary Liquidation (CVL)
  3. Members’ voluntary liquidation (MVL)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Compulsory Liquidation

A

a third party commences insolvency proceedings against an insolvent company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Creditors’ Voluntary Liquidation

A

commenced by the company itself when it is insolvent (usually in response to pressure from creditors)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Members’ voluntary liquidation (MVL)

A

commenced by a solvent company, because it wishes to cease trading or because it is dormant and it wishes to bring its affairs to an end in an orderly manner

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Are secured creditors directly affected by the implementation of a CVA?

A

No, it primarily concerns those unsecured

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

How does ‘compulsory liquidation’ come about? Who has the power to commence this?

A
  1. Occurs when a party presents a winding up petition to the court, illustrating one or more of the grounds demonstrating insolvency (and overarching reality that the company is unable to pay its debts)
  2. Any third party
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Compulsory Liq: What if there is a genuine dispute between the creditors (wrt amount of money claimed) and company (wrt money owed)? Who resolves this?

A
  1. Petitioner may be prevented from proceeding BUT this becomes more complicated if they have already obtained judgement wrt the petition
  2. Court has ultimate discretion
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Circumstances wherein the court will NOT agree to validate the winding up petition:

A
  1. If the company can illustrate their ability to pay back debts within a reasonable period (the court will adjourn hearing for later date)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

If petition for winding up / compulsory liquidation is successful, who will act as the ‘liquidator’

A

The official receiver (OR) will become the company’s liquidator (civil servant and court official)
- a private insolvency practitioner based on creditors wishes as long as the company can pay for this

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What happens if a company begins the process of MVL (as a solvent company) and subsequently becomes insolvent

A

The company must convert the MVL to a CVL

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

MVL: How do creditors know that the company is actually solvent (and suitable for MVL)

A

The directors must swear a statutory declaration that the company is solvent

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Effect of liquidation on directors / their positions

A

1) directors lose their powers
2) In compulsory liquidation: their appointments are terminated as the liquidator takes over the running of the company

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Liquidator’s Powers

A

The liquidator’s powers include:

(a) carrying on the company’s business;

(b) commencing and defending litigation on the company’s behalf;

(c) investigating the company’s past transactions;

(d) investigating the directors’ conduct;

(e) collecting and distributing the company’s assets;

(f) doing all that is necessary to facilitate the winding up of the company.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

When the liquidator has ‘completed’ their work - how are they discharged and what happens to the company?

A
  1. After they are done their work (and preparing final accounts) liquidator will apply to be released and
  2. Registrar of Companies will dissolve the company three months later
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Duty of liquidators and administrators to creditors

A

Liquidators and administrators have a duty to maximise the assets available to creditors.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Key potential claims which administrators / liquidators can make to increase assets available to creditors

A
  1. avoidance of certain floating charges
  2. preferences
  3. transactions at an undervalue
  4. transactions defrauding creditors
  5. extortionate credit transactions
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Avoidance of certain floating charges: Explanation

A

A change is automatically void where at the ‘relevant time’ before the onset of insolvency, a charge was granted without the company receiving fresh consideration in exchange for granting security

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Avoidance of certain floating charges
- Relevant time
- Onset of insolvency
- Timing of floating charge

A
    • charge was created in favour of a person connected with company, during 2 years ending with the onset of insolvency; or
      - charge was created in favour of any person during the 12 months prior to the onset of insolvency
    • Compulsory Liquidation: date of presentation of winding up petitions
      - CVL: date that the company formally enters into liquidation
      - Administration: when company files a notice of intention to appoint an administrator (or date it actually goes into administration, if that is earlier)
    • If charge given to someone unconnected, company must have been insolvent at the time the charge was given or have become insolvent as a result
      - If charge given to someone connected, it is not necessary to show company was insolvent when charge was granted / become insolvent as a result
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

‘Person connected with a company’ as defined in avoidance of floating charges

A
  • director or shadow director of insolvent company or
  • someone who is a close relative or business associate of director or shadow director; or
  • an associate of the company (company in the same group as the company or which is controlled by a director of the insolvent company)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Avoiding a floating charge: what options are there for liquidators / administrators

A
  • Liquidator or administrator will write to charge holder to say they believe it is invalid
  • charge holder may try to enforce the charge regardless, requiring the liquidator / administrator to seek an injunction
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

How does s 172 (director’s duty) change when the company becomes insolvent?

A

If the company becomes insolvent or is bordering on insolvency, this duty becomes not to the company but to the creditors (case law)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

‘Preferences’ definition

A

A preference is where the company puts the other person in a better position, in the event that the company went into insolvent liquidation or administration, than they would have been in otherwise.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Preferences: Relevant Time

A
  • if the preference was given to a person who is connected with the company, during the two years ending with the onset of insolvency; or
  • if the preference was given to any other person, during the six months ending with the onset of insolvency.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

Preferences: Onset of insolvency

A
  • Compulsory Liquidation: date of presentation of winding up petitions
  • CVL: date that the company formally enters into liquidation
  • Administration: when company files a notice of intention to appoint an administrator (or date it actually goes into administration, if that is earlier)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Preferences: necessary timing of insolvency

A

Company must have been insolvent at the time of the preference or become insolvent as a result of giving it

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

How can the liquidator / administrator demonstrate that a preference caused company to become insolvent / was insolvent at the time?

A

Liquidator / administrator will produce financial information (ie. company balance sheet) with evidence of court proceedings against company / correspondence showing this causal link

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

If a preference is given to a person CONNECTED wit the company, does this raise the presumption of insolvency?

A

No

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

Scenarios wherein a preference can be demonstrated:

A
  1. Creditor is paid before one of the other creditors
  2. Unsecured creditor is given a security
37
Q

If a preference is proven, what will the outcome be?

A

If this preference is proven, court may order:
1. release of any security given by the company,
2. return of property transferred in transaction or
3. payment of proceeds of sale of property forming part of the transaction to the company

38
Q

Definition of undervalue

A

An undervalue is where the company makes a gift to the other person, or enters into a transaction and receives consideration which is significantly lower in value than the consideration provided by the company.

39
Q

Transactions at an undervalue: Relevant Time

A

During the two years ending with the onset of insolvency

40
Q

Transactions at an undervalue: timing of insolvency and presumptions

A
  • Company must have been insolvent at the time or have become insolvent as a result
  • Insolvency presumed where transaction entered into with a person connection with company (but can be rebutted)
41
Q

Transactions at an undervalue: Any defences?

A

Defences:
1. the transaction was entered into in good faith, for the purpose of carrying on business and where there were reasonable grounds for believing it would benefit the company (when entered into)

42
Q

Extortionate Credit Transactions: Definitions and timing requirements

A

A liquidator or administrator has the power to challenge an extortionate credit transaction made in the three years ending with the day on which the company went into administration or liquidation.
- Extortionate: must require grossly exorbitant payments to be made or must otherwise grossly contravene ordinary principles of fair dealing

43
Q

When may a transaction constitute a ‘transaction defrauding creditors’

A

A transaction defrauding creditors is a transaction at an undervalue which the company entered into in order to put assets beyond the reach of someone making a claim against it, or to prejudice the interests of that person in relation to any claim they might make.

44
Q

Transactions Defrauding Creditors: is there an automatic right to challenge these?

A

Not necessarily, the court must exercise its discretion in favour of challenging

45
Q

Is there a time limit for bringing a claim that a transaction was one which ‘defrauded creditors’

A

No - therefore a compelling alternative should the time limit for transactions at an undervalue expire

46
Q

Can the creditors themselves bring a claim for ‘transactions defrauding creditors’?

A

Yes, they can bring a claim if they are a ‘victim’

47
Q

What do fixed-charge holders receive in liquidation (surplus and shortfall)

A

Surplus: Fixed charge holders will receive amount they are owed when the asset (subject to the fixed charge) is sold
Shortfall: fixed charge holder joins pool of unsecured creditors to obtain some contribution towards the outstanding debt

48
Q

Procedure for distributing the assets of the company

A
  • Liquidator sends form to unsecured creditors to fill in with debt owed to them (’proving the debt’)
  • Once forms are completed, they can approve or reject them. Smaller claims (less than 1k) are more easily accepted
  • Once liquidator has sold company’s assets and collected as much money as they can from claims and paid holders of valid fixed charges, they will make payments in this order (IA 1986):
49
Q

Order of payments in IA 1986 (after fixed charge holders are paid)

A
  1. The expenses of the winding up (fees to liquidator and professional advisors) not involved in fixed charge (those already paid above)
  2. Preferential debts, which rank and abate equally
    i. Rank and abate equally: all creditors share available money between them in the same percentage of the outstanding debt owed
    ii. Divide amount available by amount owed to get pence per pound owed
  3. Money which is subject of floating charges in order of priority
  4. unsecured creditors; rank and abate equally (often do not receive more than several pence per pound owed)
  5. Interest on preferential debts and unsecured debts
  6. Money remaining distributed to shareholders
50
Q

Examples of ‘preferential debts’

A
  • Most common example: wages / salaries of employees for work carried out in 4 months proceeding date of winding up order (maximum of 800 per employee), also includes accrued holiday pay of employees
51
Q

What type of creditor is HMRC for the purposes of liquidation?

A

A secondary preferential creditor

52
Q

Definition of Ring Fencing

A

The statutory procedure (2003) for setting aside portion of available money for floating charge holders (where security was created on or after 15 September 2003) for benefit of unsecured creditors

53
Q

Requirement of a certain intention for preferences:

A
  • Must be an intention to put someone in a better position should insolvency occur (as opposed to doing so for another reason)
  • if the person is connected to the company, this is ASSUMED to have been satisfied
54
Q

Amount which must be set aside during ring fencing procedure

A
  • 50% of first 10k of money received from the property subject to floating charges; and
  • 20% of remaining money (up to a total limit of 800 000, effective 6 April 2020), 600 000 for charges created before 6 April 2020 unless floating charge created after ranks equally or in priority to pre-April 2020 charge (800k would then apply to both charge holders)
55
Q

Alternatives to Liquidation

A

a. Administration
b. company voluntary arrangements
c. schemes of arrangement
d. restructuring plans
e. free-standing moratorium
f. informal agreement with creditors

56
Q

Explanation of Administration

A

The process whereby an administrator (an independent insolvency practitioner) is appointed to run the company and make whatever changes are necessary to improve financial performance. Alternatively, may try to get company in a position to be sold

57
Q

Moratoriums and Administration

A

While administration is occurring, there is statutory moratorium meaning it is not possible for anyone to commence or continue with legal action against company, enforce a judgement, or issue a winding up petition without the administrator’s consent

58
Q

Does the granting of a charge deplete the value of the underlying asset

A

NO

59
Q

What is a company voluntary arrangement

A

A written agreement which binds all parties to it, as long as statutory procedures are followed (statutory contract). Company’s creditors usually agree to wait longer to receive what they are owed or accept of part (or both)

60
Q

Why would a creditor pressure a company to enter a CVA rather than bringing forward a winding up petition (for CI)

A

CVA is cheaper than administration and simpler so creditors are likely to be paid more
- can be used by companies which are having only temporary cashflow difficulties

61
Q

In a CVA, who decides how much each creditor will get?

A

Proposals must be approved by:
- 75% or more in value of company’s creditors AND
- 50% or more of ‘non-connected’ creditors (Chair of CVA meeting decides if a creditor is connected or not)

62
Q

Can secured creditors vote in a CVA meeting on proposals put forward for payment to creditors?

A

Not unless they also have a debt which is unsecured

63
Q

What type of debts does the CVA relate to

A

Unsecured past debts (NOT future debts)

64
Q

Can a company use the moratorium procedure in CIGA to enter into a CVA?

A

Yes

65
Q

What is the role of the insolvency practitioner during a CVA

A

IP supervises arrangement of CVA and monitors compliance

66
Q

What is a restructuring plan

A

Court-supervised ‘arrangement’ or ‘compromise’ between company and all of its secured and unsecured creditors and shareholders

67
Q

Does a company need to be insolvent to enter into a restructuring plan

A

Need not be insolvent to apply but must have encountered or be likely to encounter financial difficulties

68
Q

Restructuring plan procedure

A
  1. Directors prepare a restructuring plan and apply to the court for approval to call meetings of the company’s creditors and shareholders (creditors and shareholders could technically do this)
  2. Implementation involves 2 court hearings: creditors can make representations at the first hearing
    a. Creditor and shareholder meetings will be held between the two hearings - each class will be deemed to have approved the plan if 75% by value of that class vote in favour
  3. Second hearing: court will decide whether to sanction the proposed plan
69
Q

What is a moratorium

A

The company is protected from actions by creditors relating to pre-moratorium debts, but must pay back debts incurred during M in full. Company directors remain in control and insolvency practitioner acts as an independent monitor (has oversight and can possibly terminate)

70
Q

Is there any limit on how often a company can obtain a moratorium?

A

Not possible if company already entered one in last 12 months

71
Q

Which companies are NOT eligible for a moratorium

A

Certain companies in the financial services industry (banks)

72
Q

Can a company get a moratorium if there is a winding up petition against them?

A

NO

73
Q

Procedure for obtaining a moratorium

A
  1. Directors file relevant documents at court + proposed monitor must confirm that moratorium will likely rescue the company
    a. Certain debts excluded from this payment holiday including employees’ wages or salary under a contract, monitor’s remuneration or expenses, and goods or services supplied during the moratorium
  2. Lasts 20 business days beginning with business day after moratorium comes into force (date of filing documents or court or court order)
    a. Can be extended for 20 more days by filing certain documents
    b. Can be extended by directors for period up to 1 year if creditors not being paid during payment holiday consent to this
74
Q

How long does a moratorium last for

A

Lasts 20 business days beginning with business day after moratorium comes into force (date of filing documents or court or court order)

75
Q

Can a moratorium be extended? What needs to occur?

A
  1. Can be extended for 20 more days by filing certain documents
  2. Can be extended by directors for period up to 1 year if creditors not being paid during payment holiday consent to this
76
Q

When can a secured creditor force a company into a receivership

A

company has breached the charge holder’s loan agreement (ie. defaulting on repayments) - charging document will specify that R can be appointed and company need not be insolvent

77
Q

Does a company need to be insolvent for a creditor to appoint a receiver?

A

No - but it must specify in the charging document that a receiver can be appointed

78
Q

What is the role of a receiver

A

Takes possession of the property subject to the charge and deals with it for the benefit of the charge holder (ie. sells it)

79
Q

Two types of receivers in insolvency:

A
  1. LPA Receivers
  2. Administrative Receivers
80
Q

How are LPA receivers appointed

A

Usually through the charge document

81
Q

If an LPA receiver sells the charged property at a surplus - who is entitled to the surplus?

A

If proceeds exceed loan, surplus kept by company available to unsecured creditors

82
Q

What is an administrative receiver and who appoints them?

A

Appointed by floating charge holders when FC is over the company’s whole undertaking. Only used for FCs created before 15 September 2003 (subject to exceptions), charges created on or after this use the administration route

83
Q

Who pays the costs of an administrative receiver

A

After selling charges assets proceeds will be used to pay their costs

84
Q

Wrongful Trading: when will a director be liable

A
  1. Company had gone into insolvent liquidation or insolvent administration
  2. Before commencement of winding up - director knew or ought to have known there was no reasonable prospect that the company would avoid insolvent liquidation
  3. Person was a director of the company at the time
85
Q

Defences to wrongful trading

A
  • If director took every step with a view to minimise the potential loss to the company’s creditors (as they ought to have taken), determined by a two-part test: the director must have acted to the standard of a reasonably diligent person having both:
    1. General knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions in relation to the company (not expected to be an expert)
    2. The general knowledge, skill and experience that the director has
86
Q

Fraudulent trading

A

General Rule: Director is liable for fraudulent trading if, in the course of the company being wound it, it appears company business has been carried out with the intention to defraud creditors of the company or creditors of any other person or for any fraudulent purpose. Persons who were knowing parties to this are liable to make contributions to company’s assets at court’s discretion.

87
Q

Can claims be brought for both wrongful and fraudulent trading?

A

Yes

88
Q

If liable for fraudulent trading, what are the consequences of the director?

A
  1. may need to make contributions to the company’s assets
  2. may face criminal conviction
89
Q

Misfeasance: definition

A

Breach of any fiduciary or other duty by directors

90
Q

Consequences of misfeasance

A
  1. May be ordered to contribute to company’s assets by way of compensation during wind up
  2. May also be ordered to repay restore or account for any money / property (or part of it) that has been misapplied in breach of duty

BL&P (14 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions