8. Insolvency Flashcards
Claims can be brought against insolvent company/LLP?
- Misfeasance
- Wrongful trading
- Fraudulent Trading
When is a company insolvent?
Cannot pay their debts
Tests for corporate insolvency ?
- Statutory demand for £750+ no payment/agreement decided within 21 days
- Sought judgement for £750+ but not paid
- Cash flow test: cannot pay debts
- Balance sheet test: liabilities > assets
Options for insolvent company?
- Liquidation
- Administration
- Corporate Voluntary Agreement
Liquidation?
Business stops trading
Liquidator is appointed
Review past transactions + claw back assets
Use proceeds to pay creditors debts
Liquidator applies to be released
Company ceases to exist
3 types of Liquidation?
- Members Voluntary Liquidation: solvent company wants to retire/cease trading
- Creditors Voluntary Liquidation: pressure from creditors to go into liquidation
- Compulsory Liquidation: 3rd party starts insolvency proceedings
Process for Compulsory Liquidation?
- Creditor shows company is insolvent + prove insolvent
- Issue winding up petition
- Court issues winding up order
- Appoint Official Reciever
- OR reviews past transactions + claw back assets
- Sells asset + distribute proceeds to creditors
- Dissolve company
5 ways to claw back assets for creditors?
- Set aside invalid floating charges
- Preferences
- Undervalue transactions
- Transactions at defrauding creditors
- Extortionate credit transactions
Requirements for invalid floating charge?
Security was granted
a. “at the relevant time”
connected person: 2 years before insolvency unconnected person: 1 year before insolvency
b. with “no new consideration”
Order of distribution for liquidation creditors?
- fixed charge holder
- Liquidation costs
- preferential debts - employee wages under PAYE/NI
- floating charge holder
- unsecured creditor
- shareholders abate rest equally
A preference transaction?
Puts the creditor in a better position than they would have been in with a desire to prefer
connected person - 2 years
unconnected person - 6 months
Acronym for order of distribution for liquidator asset distribution?
Fancy - F - ixed charge holder
Lawyers - L - liquidator
Prefer - P- referential debts (PAYE and NI)
Useful - U - nsecured creditor
Insolvency - I - nterest on debt
Steps - S- hareholders
Administration purpose?
Rescue company or put it in a better position for creditors or sell as a going concern
Administration process
- Appoint Administrator (QCFH has 5 days from notice to appoint to appoint one)
- Moratorium starts
- Review company + prepare rescue plans
- Set out proposals to creditors within 8 weeks (sell or rescue company)
- Implement rescue plan
- Administrator retires after 1 year
(AMR PIE)
What is a Qualified Fixed Charge Holder?
Secured creditor e.g. banks
Administration by QCFH steps?
- Check security is enforceable
- 2 business days notice to company + other credits of intention to appoint administrator
- Appoint administrator
- Moratorium starts
- Adminstrator reviews finances + rescue plan
- Propose to creditors
- Implement + exit
Transaction at an undervalue definition?
company recieves significantly less consideration for the gift/transaction than it gave
Transaction at an undervalue test?
relevant time - 2 years before insolvency
presumption for connected perso
must be insolent at the time or as a result of transaction
Defence for transactions at undervalue for company?
- acted in good faith
- to carry on business
- reasonable grounds to believe the transaction would benefit company
Ring fencing?
set aside certain amount of money for unsecured creditors = 50% of the first £10k and 10% of the rest up to £800k
What is company voluntary agreement?
Agreement with creditors to delay repayment or repay part
for business that is structurally sound but temporary financial issues (continue trading while paying off debt)
CVA approval requirements?
75% creditors must agree + 50% unconnected
How long does moratorium last for?
20 business days + 20 days exertion + 1 year extension
Receiver vs adminstrator?
receiver: for specific creditor + sell assets to them specifically
administrator: to rescue company
