9 Insolvency procedures Flashcards
Under the Insolvency Act ‘86, what is the meaning of insolvency?
- when a company is unable to pay its debts
- when a court may make a winding up order is respect of a company
Four situations/ tests for when a company is deemed to be unable to pay its debts under IA 86
- unable to pay its debts as they fall due - cash flow test
- has liabilities that are greater than its assets - the balance sheet test
- does not comply with a statutory demand for a debt over £750 - evidence that co is cash flow insolvent
- has failed to pay a creditor to satisfy enforcement of a judgment debt
Who’s duty is it to decide what action to take when a company is facing financial difficulties?
Directors
Options for a company facing financial difficulties
- Do nothing (risk of liability)
- Do a deal - with creditors formally or informally
- Appoint an administrator
- Request the appointment of a receiver (where a secured creditor enforces its sector by appointing a receiver who then sells the secured assets with a view to paying the sale proceeds to the secured creditor)
- Place the company into liquidation
What may a company have to do to obtain creditor insolvency agreement (informally)?
- Grant a new or additional security
- Replace directors to senior employees
- Sell failing businesses/ subsidiaries or profitable ones to raise cash
- Reduce costs
- issue new shares to the creditors
What is a pre-insolvency moratorium?
a period during which creditors are unable to take action to exercise their usual rights and remedies, thereby creating a breathing space for the company to attempt to resolve the situation.
The actions restricted by the moratorium
- no creditor can enforce its security against the company’s assets
- there is a stay of legal proceedings against the company and a bar on brining new proceedings against it
- no winding up procedures can be commenced in respect of the company and no shareholder resolution can be passed to wind up the company
- no administration procedure can be commenced in respect of the company
Procedure of obtaining the pre-insolvency moratorium
- file documents:
- statement that company is or is likely to become insolvent
- a statement from a licensed insolvency practitioner, known as Monitor starting that moratorium would rescue co
How long does the pre-insolvency moratorium last?
20 business days but can be extended further 20 business days
When would a pre-insolvency moratorium terminate?
if co enters liquidation or administration
What are pre-moratorium debts?
debts which have fallen due BEFORE or during the moratorium by reason of an obligation incurred before the moratorium.
What are moratorium debts?
debts that fall due during or AFTER the moratorium by reason of an obligatio n incurred during the moratorium.
they usually relate to payment for goods or services ordered by the company during the moratorium period.
Main advantage of formal arrangements for insolvency procedures
if the requisite majorities of creditors and/or shareholders vote in favour of it, it is legally binding, even if some of those creditors voted against it or did not vote on it at all or did not receive notice of the relevant procedure.
Two types of formal arrangements
- Company Voluntary Arrangement (CVA)
- Restructuring Plan
Meaning of a Company Voluntary Arrangement (CVA)
Provides a way for companies in insolvency to pay off their debts over a fixed period of time
Who is the CVA supervised and implemented by?
a Supervisor who is an Insolvency Practitioner
Who can initiate a CVA?
Directors, liquidator, administrator
Approval of a CVA
- at least 75% in value of unsecured creditors but invalid if more than 50% of unconnected creditors vote against
- over 50% of shareholders
CVA - who does it bind?
All unsecured creditors
Advantages of CVA
No court sanction required so can be quicker and less costly to implement
Limitations of CVA
Preferential and secured creditors not bound without express consent
Purpose of Restructuring Plan
to compromise a company’s creditors and shareholders and restructure its liabilities so that a company can return to solvency
Who can initiate a Restructuring Plan?
Company, creditor, member, liquidator or administrator
Approval of the Restructuring Plan
- sanctioned by the court
- at least 75% in value of each affected class of creditors/ shareholders
Restructuring Plan - who does it bind?
Binds all creditors and shareholders
Advantages of a Restructuring Plan
Binds all creditors including dissenting creditors and potentially classes of creditors who do not approve the Plan as the court may sanction the Plan even if one or more classes do not approve
Limitations of a Restructuring Plan
Court process can be costly and time consuming and need to consider if creditors are in separate classes for voting
Statutory objectives of administration
- to rescue the company as a going concern
- to achieve a better result for the company’s creditors as a whole that would be likely if the company were wound up
- to realise the company’s property in order to make a distribution to one or more secured or preferential creditors
When would a court appoint an administrator?
where the company is or is likely to become unable to pay its debts on the application of: the company, directors, a creditor, the supervisor of a CVA or a liquidator.
Who may appoint an administrator out of court?
Directors or the company AND Qualifying Floating Charge Holder (QFCH) - 1st ranking
Role of the administrator
an officer of the court and has a duty to act in the interest of all the creditors to achieve the purposes of the administration
the directors are unable to exercise any of their management powers without the consent of the administrator
Powers of the administrator
- Remove and appoint directors
- dispose of property subject to a floating charge
- dispose of property subject to a fixed charge (with court’s consent)
benefits of administrative moratorium
- no order or resolution to wind up the company can be made or passed
- no administrative receiver of the company can be appointed
- no steps can be taken to enforce any security over the company’s property
- no legal proceedings can be commenced
- a landlord cannot forfeit a lease of the company’s premises
Receivership meaning
enforcement procedure which is conducted in the interests of a secured creditor
Types of receivers
- administrative receivers
- Fixed charge receivers
- court-appointed receivers
Liquidation
process by which a company’s business is wound up and its assets transferred to creditors and to its members
- company will then be removed from the register and dissolved
Liquidator’s function
to realise the company’s assets for cash, determine the identity of the company’s creditor and the amount owed to each of them and then pay a dividend to the creditors on a proportionate basis relative to the size of their determined claims
Types of liquidation
- voluntary
- compulsory
Compulsory liquidation
a court-based process for placing a company into liquidation
Compulsory liquidation - who can appoi
- creditor;
- the company,
- directors,
- administrator,
- administrative receiver,
- supervisor of a CVA;
- Secretary of State.
Compulsory liquidation - what are the grounds for the application?
- co is unable to pay its debts
- it is just and equitable for the company to be wound up.
Compulsory liquidation - main objective
wind up the company, sell the assets
Compulsory liquidation - is a moratorium available?
No
Compulsory liquidation - what effect does the procedure have on the employees and directors?
Directors and employees will automatically be dismissed.
Compulsory liquidation - Can the company continue trading?
No
2 categories of voluntary winding up and meaning
- Members’ voluntary winding up (MVL)
- where the company resolves by special resolution to wind up the company.
- the co MUST be SOLVENT - Creditors’ voluntary winding up (CVL)
- where the company resolves that it is advisable to wind up the company due to its inability to carry on its business.
- here the co is INSOLVENT
Role of the liquidator
Must either be a Qualified Insolvency practitioner or the Official Receiver
Liquidator’s powers to avoid certain transactions
- disclaim onerous property
- apply to court to set aside a transaction at an undervalue
- apply to court to set aside a preference
- apply to court to set aside a transaction that will defraud creditors
Statutory order of priority
- secured creditors
- preferential creditors (+ secondary preferential creditors)
- floating charge holders
- unsecured creditors
- interest payable on debts
- shareholders
A company granted fixed and floating charges to a bank to secure a term loan. The charges were properly registered at Companies House. The company has defaulted on the loan. The company owes unpaid wages to its employees for the last month and large amounts to various unsecured trade creditors. The company has no outstanding sums due to HMRC. The company goes into insolvent liquidation. The proceeds of the sale of the fixed charge assets are insufficient to pay the money owing to the bank in full.
In what order will the liquidator apply the money realised by the sale of the floating charge assets?
Select one alternative:
A. The Bank will be paid first. The remaining funds will be divided amongst the employees and the unsecured creditors.
B. The Bank will be paid first. A prescribed part fund will be set aside. The employees are then paid. The remaining funds together with the prescribed part fund will be divided amongst the unsecured creditors.
C. The Bank will be paid first. The employees are then paid. The remaining funds will be divided amongst the unsecured creditors.
D. The employees will be paid first. The Bank will be paid next. The remaining funds will be divided amongst the unsecured creditors.
E. The employees will be paid first. A prescribed part fund will be set aside. The Bank is then paid under its floating charge. The remaining funds together with the prescribed part fund will be divided amongst the unsecured creditors.
E
Secured creditors
fall into 2 subcategories:
- fixed charge assets
The proceeds of selling assets which are subject to a fixed charge (or mortgage) must first be used to pay off the debt secured by such charge (or mortgage). - floating charge assets
Registering a floating charge provides the lender with some security for the loan, but not on a specific asset as with a fixed charge.
Preferential creditors
- wages or salaries due to employees in the four months preceding the commencement of a winding up
- all accrued holiday pay
- employees occupational pension contribution
Who is a preferential creditor?
an individual or organization that has priority in being paid the money it is owed if the debtor declares bankruptcy.
Floating charge creditors
after payment under previous steps (order of priority), the liquidator then pays any remaining realisations from assets subject to floating charges to the floating charge holders themselves
Unsecured creditors
This category includes HMRC, suppliers, contractors and customers. Unsecured creditors are one of the last groups to be paid, being placed above the shareholders of the company.
Interest on unsecured debts
Interest accruing on unsecured debts from the commencement of the winding up.
Shareholders
Payment depends on the rights attributable to their particular class or classes of shares under the Articles of Association
who will ALWAYS be paid first
fixed charge holders
secondary preferential creditors
- HMRC in respect of VAT
- PAYE Income Tax
- employees National Insurance Contributions
main difference between liquidation and administration
- liquidation - fully ending a company’s life
- administration - rescuing the company so that it continues trading
