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(APD) Business Law and Practice > 9. Corporate Insolvency > Flashcards

9. Corporate Insolvency Flashcards

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1
Q

What does ‘corporate insolvency’ mean?

A

Inability of a company to pay its debts

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2
Q

What are the 4 ways to demonstrate a company is ‘insolvent’ (i.e. unable to pay its debts as they fall due’?

A

(1) Cash-flow test - unable to pay its debts as they fall due
(2) Balance sheet test - liabilities > assets
(3) Statutory demand for sum of £750 or more and NOT satisfied after 21 days
(4) Judgment debt not satisfied after attempt to enforce

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3
Q

If a company becomes ‘insolvent’ what is the worst outcome?

A

Company enters ‘liquidation’ (‘winding up’)

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4
Q

On entering ‘liquidation’:
(1) What happens the company?
(2) Who is appointed?

A

(1) Company ceases to trade
(2) Liquidator appointed

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5
Q

What are the 3 key duties of a ‘liquidator’?

A

(1) Sells assets
(2) Distributes proceeds to creditors
(3) Review past transactions

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6
Q

What are 3 types of liquidation?

A

(1) Compulsory liquidation
(2) Creditors’ voluntary liquidation (CVL)
(3) Members’ voluntary liquidation (MVL)

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7
Q

(1) To begin the ‘Compulsory liquidation’ process, what must be presented to the court?
(2) What 2 people can present this?
(3) When will the court not grant the document in (1)?

A

(1) ‘Winding-up petition’
(2) Creditor (or Administrator)
(3) Company is able to pay its debts within a ‘reasonable period’

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8
Q

For the court to accept the ‘winding-up petition’ in ‘Compulsory liquidation’, what 2 conditions must be met?

A

(1) Company unable to pay its debts (4 tests) AND
(2) ‘Just and equitable’ to wind-up the company

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9
Q

What are the 2 types of voluntary liquidation?

A

(1) Creditors’ Voluntary Liquidation (CVL)
(2) Members’ Voluntary Liquidation (MVL)

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10
Q

Who initiates a Creditors’ Voluntary Liquidation (CVL)?

A

Shareholders
(NOT Creditors - creditors then take over process)

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11
Q

Re A Creditors’ Voluntary Liquidation (CVL)
(a) The company must be solvent or insolvent?
(b) What 2 resolutions must be passed?

A

(1) Insolvent
(2)
(a) SR - begin CVL
(b) OR - appoint liquidator

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12
Q

Re a Members’ Voluntary Liquidation (MVL)
(a) The company must be solvent or insolvent?
(b) What 2 resolutions must be passed?

A

(a) Solvent
2
(a) SR - begin MVL
(b) OR - appoint liquidator

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13
Q

What are 2 ways a Members’ Voluntary Liquidation (MVL) is used for?

A

(1) Corporate Restructuring
(2) Closing down a company no longer needed

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14
Q

In liquidation, what is the statutory order of priority that assets will be distributed to? There are 6 categories.

A

(1) Fixed charge creditors (up to extent of their fixed charge)
(2) Liquidator’s fees / expenses
(3) Preferential debts
‘RING FENCED’ FUND taken
(4) Floating charge creditors
(5) Unsecured creditors
(6) Shareholders

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15
Q

On winding up a company, If the amount recovered from the sale of assets subject to a ‘fixed charge’ fails to satisfy the debt owed, how should the Creditors claim the remaining amount?

A

Unsecured creditors

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16
Q

On winding up a company, there are 2 tiers of ‘preferential creditors’. What is the main debt for (1) Tier 1 and (2) Tier 2?

A

Tier 1 - Unpaid wages for the 4 months before ‘winding up’ up to MAX £800

Tier 2 - Tax owed to HMRC

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17
Q

On winding up a company a ‘ring-fenced’ fund must be made (if funds allow). Who will this be paid to?

A

Unsecured creditors

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18
Q

On winding up a company, a ‘ring-fenced’ fund is kept for unsecured creditors.

(1) What are the 2 components used to calculate this?
(2) What is the maximum amount of the fund?

A

(1) 50% first £10k (owed to floating charge holders)
(2) 20% of balance (owed to floating charge holders)
(3) Up to MAX £800,000

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19
Q

On winding up, a liquidator has the power to investigate and set aside past transactions. What are the 4 main examples of these transactions?

A

(1) Floating charges
(2) Transactions at an undervalue
(3) Preference transactions
(4) Transactions defrauding creditors

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20
Q

On winding up, a floating charge will be AUTOMATICALLY VOID if it meets what 2 conditions?

A

(1) NO fresh consideration provided AND
(2) FC granted:
(a) 2y before presentation of ‘winding-up petition’ - CONNECTED person
(b) 1y before presentation of ‘winding up’ petition - NON CONNECTED person

21
Q

A floating charge where (1) NO fresh consideration is provided and (2) granted 2 years connected person OR 1 year non-connected person before the presentation of a ‘winding up petition’ will be….?

A

Automatically void

22
Q

What 3 conditions must be satisfied for a ‘floating charge’ belonging to a CONNECTED person to be made automatically void?

A

(1) NO fresh consideration provided
(2) FC granted max 2y before presentation of ‘winding-up petition
(3) IF FC granted 1y or less before, prove company insolvent at time / due to transaction

23
Q

(a) In ‘transaction at an undervalue’ on WINDING-UP, from how long can transactions be set aside for?
(b) How does this differ from the time period in BANKRUPTCY?

A

(a) 2 years before the DATE OF PRESENTATION OF WINDING-UP PETITION

(b) Bankruptcy = 5 years

24
Q

In ‘transaction at an undervalue’ on WINDING-UP, will insolvency be presumed or need to be proven for:
(a) Connected person
(b) Non Connected person

A

(a) Presumed
(b) Proven

25
Q

In ‘transaction at an undervalue’ on WINDING-UP, what ‘defence’ may a company argue. There are 2 components:

A

(1) Transaction entered into in ‘good faith’ AND
(2) Reasonable grounds for believing it would benefit the company

26
Q

What are the 3 main alternatives to liquidation?

A

(1) Administation
(2) Company Voluntary Arrangement (CVA)
(3) Receivership

27
Q

What are the 2 key aims of Administration?

A

(1) Rescue the company as a ‘going concern’
(2) IF NOT achieve better results for the creditor than ‘winding-up’

28
Q

Who carries out an administration?

A

Administrator

29
Q

What are the 3 methods an administrator is appointed?

A

(1) Court procedure
(2) Out of court procedure by holder of a qualifying floating charge holder (QFCH)
(3) Out of court procedure by Directors

30
Q

For the Directors of a company to appoint an Administrator using the ‘out of court’ procedure, what 3 processes must they follow?
(1) Serve…
(2) File…
(3) File…

A

(1) Serve ‘notice of intention of administration’ on (a) court and (b) QFCH
(2) File at court ‘statutory declaration’ company unable to pay its debts and is not in liquidation
(3) File a ‘notice of appointment’

31
Q

A qualifying floating charge holder (QFCH) is a floating charge where the ‘security document…(1) and (2)?

A

(1) Security document allows floating charge holder to appoint an administrator / administrative receiver
(2) Security document relates to the whole / substantially the whole of company’s property

32
Q

For a QFCH to appoint an administrator though the ‘out-of court procedure’, what 2 processes must be followed?
(1) Notify…
(2) File…

A

(1) Notify a QFCH with PRIORITY
(2) File a ‘Notice of Appointment’

33
Q

In the ‘out-of court procedure’ in appointing an administrator, when will the ‘moratorium take effect’?

A

After the ‘Notice of Appointment’ is filed

34
Q

In ‘administration’, what 3 key effects will a ‘moratorium’

A

(1) No ‘winding up’ order
(2) No security enforced
(3) No legal proceedings started / continued

35
Q

(1) What is the general power that at an ‘administrator’ has?
(2) Give 3 examples of powers that an ‘administrator’ has?

A

(a) Power to do ‘anything necessary’

(b)
(1) Remove / appoint a creditors
(2) Pay creditors (IF unsecured - court permission)
(3) Disposing of property subject to fixed charge and floating charge (IF fixed - court permission)

36
Q

When an ‘administrator’ proposes their solution to creditors. What 2 thresholds have to be met for it to be accepted?

A

(1) Majority (>50%) of creditors PRESENT & VOTING AND
(2) NO more than 50% in VALUE of UNCONNECTED creditors vote against

37
Q

(1) What is the general rule about when ‘Administration’ must come to an end?
(2) What is the exception to the rule in (1)?
(3) What are the 2 possible outcomes when Administration ends?

A

(1) After 1 year (unless extended)
(2) UNLESS court extends
(3) Company will EITHER:
(a) Exit administation
(b) Enter liquidation

38
Q

What is a Company Voluntary Arrangement (CVA)?

A

Settlement / compromise agreement between company and its creditors

39
Q

What 3 groups of people can apply for a Company Voluntary Arrangement (CVA)?

A

(1) Director
(2) Liquidator
(3) Receiver

40
Q

What is the only type of creditor a Company Voluntary Arrangement (CVA) binds unless they agree to be boun

A

Unsecured
(NOT secured / preferential)

41
Q

What 2 thresholds are needed to approve a Company Voluntary Arrangement (CVA)

A

(1) At least 75% of Creditors
(2) At least 50% of non-connected creditors

42
Q

What are the 2 main advantages of a Company Voluntary Arrangement (CVA) over Administration or Liquidation for Creditors?

A

(1) Cheaper / simpler
(2) Likely to be paid more

43
Q

What are the 2 types of ‘receivers’ in Receivership?

A

(a) LPA Receiver
(b) Administrative Receiver

44
Q

What is the main purpose of ‘Receivership’?

A

To repay creditors (NOT save the company)

45
Q

For an ‘LPA Receiver’:
(1) The holder of what type of charge is this used for?
(2) Where does the power to appoint one normally derive from?

A

(a) Fixed charge
(b) Charge / security document

46
Q

For an ‘administrative receiver’?
(1) The holder of what type of charge is this used for?
(2) Where does the power to appoint one normally derive from?

A

(1) Floating charge created BEFORE 15 Sep 2003
(2) Loan agreement

47
Q

For a floating charge created AFTER 15 Sep 2003, what process instead of ‘Receivership’ should be used?

A

Administration

48
Q
A

(APD) Business Law and Practice (11 decks)

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