admin Flashcards
A company goes into administration. The administrator tries to rescue the company but fails. The administrator decides to distribute the assets to the creditors. The company has a total debt of £612,000. A bank lent £300,000 and took a mortgage over the company’s headquarters. A private investor lent £150,000 and took a floating charge over all the company’s assets. HMRC is owed £75,000 in VAT. The company has no employees. There are no expenses in the administration or distribution of assets. The company’s headquarters are worth £175,000 and the assets are worth £400,000. There is also £87,000 of trading debt.
Presuming the prescribed part amount comes to £86,000 how much will the bank be repaid?
A. £175,000
B. Nothing, because an administrator does not have the power to liquidate according to order of priority.
C. £227,000
D. £278,750
E. £300,000
Correct
Answer: D. The fixed charge assets (which includes any asset mortgaged) are sold first. Here, we have one fixed charge asset: the company’s headquarters. That is sold and the proceeds go straight to the bank (remember: no expenses here). The bank’s remaining debt is £125,000. The bank becomes an unsecured creditor. The administrator now sells the other assets charged by floating charge. First, an amount must go to HMRC (no employees here) = £75,000 taken off the £400,000 proceeds. Then you set aside the prescribed part, £86,000, for the unsecured creditors. That gives you £239,000 of floating charge assets proceeds. The investor’s full £150,000 debt can be repaid. That leaves £89,000. Add the prescribed part: £175,000. The total unsecured creditor debt is £212,000 (trade debt plus the amount the bank is still left to be paid). Do 175/212 x 100 = 83p in £. Bank therefore gets 83% of the total £125,000 = £103,750. Add the £175,000 paid already = a total of £278,750.
Blackletter law rule: on a distribution of assets of an insolvent company by a liquidator or administrator, the statutory order of priority under the Insolvency Act 1986 is applied. Fixed charge holders are paid first, then preference creditors (employees and HMRC), then the prescribed part, then floating charge holders, then unsecured creditors, and then shareholders.
A bank is owed £90,000 by a private limited company. This amount is due under a loan secured by a floating charge granted in early 2023. The company is in liquidation. The liquidator has realised the company’s assets. After paying the expenses of the liquidation and preferential creditors, the liquidator holds £100,000.
Calculate the amount the bank is likely to receive.
a) £90,000. incorrect
b) £85,000. incorrect
c) £80,000. incorrect
d) £77,000. correct
e) £72,000. incorrect
Incorrect. The liquidator is required to make a prescribed part of the company’s net property available for unsecured creditors. This amount is 50% of the first £10,000 and 20% of the remainder up to a maximum value of £800,000. Here, this would be 50% of £10,000 = £5,000 plus 20% of £90,000 = £18,000, which gives a total of £23,000. Taking this from the available £100,000, the bank is likely to receive £77,000.
Section reference: 28.9.5
C, a creditor of D, has presented a bankruptcy petition to court. Following presentation of the petition and before any order has been made by the court, D makes a payment of rent to his landlord. The court subsequently makes a bankruptcy order in respect of D.
Which of the following best describes the status of D’s payment of rent?
a) It will be void. incorrect
b) It will be void unless the court approves it. correct
c) It will be valid. incorrect
d) It will be valid unless it was the subject of legal proceedings. incorrect
e) It will be void unless the petitioner agrees to it being made. incorrect
Incorrect. Any payment of money following the presentation of a bankruptcy petition, if the debtor is subsequently adjudicated bankrupt, will be void unless the court approves the transaction either before or after it takes place.
C, a creditor of D, has presented a bankruptcy petition to court. Following presentation of the petition and before any order has been made by the court, D makes a payment of rent to his landlord. The court subsequently makes a bankruptcy order in respect of D.
Which of the following best describes the status of D’s payment of rent?
a) It will be void. incorrect
b) It will be void unless the court approves it. correct
c) It will be valid. incorrect
d) It will be valid unless it was the subject of legal proceedings. incorrect
e) It will be void unless the petitioner agrees to it being made. incorrect
Incorrect. Any payment of money following the presentation of a bankruptcy petition, if the debtor is subsequently adjudicated bankrupt, will be void unless the court approves the transaction either before or after it takes place.
W Ltd is a wholly owned subsidiary of X plc. Y plc is proposing to buy the entire share capital of X plc such that it takes over the entire X plc group of companies. As part of this proposed deal, W Ltd is to pay Y plc’s substantial legal fees in respect of the share purchase
Which of the following best summarises the status of the proposed payment of Y plc’s legal fees by W Ltd?
a) It will constitute unlawful financial assistance because it is part of a larger transaction, being the takeover of the X plc group by Y plc. incorrect
b) It will constitute unlawful financial assistance by a private company for the purchase of shares in a public company parent. incorrect
c) It will not constitute unlawful financial assistance because it is for the purchase of shares in a parent company rather than the company itself. incorrect
d) It will not constitute unlawful financial assistance because the payment of professional fees constitutes neither payment nor security for the purchase of shares in X plc. incorrect
e) It may constitute unlawful financial assistance if the amount involved reduces W Ltd’s net assets to a material extent. correct
Incorrect. Any form of financial assistance given by a private company subsidiary for the purchase of shares in a public company parent may be unlawful if the amount involved reduces the subsidiary’s net assets to a material extent. What is a material reduction is not defined: it will be assessed by reference to the individual circumstances of each case. There is an exception to the general prohibition on financial assistance if a company’s principal purpose in giving assistance is not for the purpose of the acquisition of shares or is an incidental part of some larger purpose: here, the assistance appears directly linked to the acquisition of the shares of X plc.
Section reference: 11.3.4
A Bank took a fixed charge over plant and machinery owned by your client’s company. The charge to A Bank was executed on 2 April 2024 and registered with the Registrar of Companies on 18 April 2024. B Bank took a fixed charge over the same plant and machinery. The charge to B Bank was executed on 5 April 2024 and registered with the Registrar of Companies on 12 April 2024. The banks did not enter into any agreement as to priority.
Which of the following correctly describes the legal status of the charges?
a) The company cannot grant two charges over the same asset. incorrect
b) A Bank’s charge ranks ahead of B Bank’s charge. correct
c) B Bank’s charge ranks ahead of A Bank’s charge. incorrect
d) The charge granted to A Bank is void. incorrect
e) The charge granted to B Bank is void. incorrect
Incorrect. It is possible to create more than one fixed charge over the same asset and neither charge is void. Where there is more than one fixed charge over the same asset, the order of priority (in the absence of any alternative agreement between the creditors, for example the banks) is fixed by law. Common law has established that fixed charges have priority in order of their date of creation, not their date of registration, provided they were registered at Companies House within 21 days as they were here. A Bank’s charge therefore ranks ahead of B Bank’s charge.
A company’s accounting period runs to 31 December each year. Its profits for the accounting period that ended in December 2023 were £780,000. Corporation tax rates for the financial years 2023 and 2024 were 19% and 25% respectively.
What was the company’s liability for corporation tax for its accounting period that ended on 31 December 2023
a) £148,200. incorrect
b) £195,000. incorrect
c) £206,700. incorrect
d) £183,459. correct
e) £183,300. incorrect
Incorrect. You have charged all profits at 25%. The accounting period straddles two financial years with differing applicable rates. You should review your calculation.
Section reference: 33.3.3.2
