Bankruptcy & Insolvency Flashcards
Bankruptcy Procedure - realisation of assets to help discharge debts - assets sold, bankrupt discharged usually within 12 months
Creditors owed £5,000+ - apply to court for bankruptcy order
Debtor’s inability to pay the debt must be proved
If court satisfied then bankruptcy order issued
Debtor’s assets pass to Official Receiver - 28 days to make a decision
Official receiver appointed as Trustee in Bankruptcy
Trustee in Bankruptcy sells bankrupt’s property & uses proceeds to repay creditors
Bankrupt discharged usually within 12 months
Priority of Payments
Secured creditors with a legal charge over secured debts are paid first.
If residue then bankruptcy expenses and fees paid next
Preferential debts including employees pay up to 4 months + holiday pay & a year’s pension scheme contributions
Any creditor holding a floating charge over an asset e.g. debenture
Other debts - unsecured creditors
Interest on debts since bankruptcy
Debts to spouse
IVA - to enable an individual to agree proposals concerning debts - alternative to bankruptcy - settle debts over time & pay less then full amount
A low cost formal arrangement made by the debtor who agrees to repay some or all of their debts
Usually cheaper than bankruptcy& bankruptcy conditions avoided
Debtor has more control
Trust assets in Bankruptcy
Non statutory trusts {Interest in Possession, Discretionary & Bare} can be put aside if set up within previous 5 years
Within 2 years will be challenged
Between 2 & 5 years then challenged only if either bankrupt at the time or trust made them bankrupt
Statutory trusts then assets safe except bankrupt’s beneficial interest
Even if set up to defraud creditors only premiums paid may be claimed by Trustee in Bankruptcy
Corporate Insolvency - to rescue the company & achieve a better result for creditors than wind up, to realise assets to make a distribution to secured or preferential creditors
Liquidation - turning a company’s assets into cash & distributing to creditors - end of the road for a company - dissolution
CVA - avoids wind up, rearrangement of debts
Administration - designed to hold a business together whilst plans are formed to either restructure a rescue or sell the business & assets
Advertised in the London Gazette & on Companies House
Distribution of assets
If there is a surplus then the following are paid:
Liquidator’s expenses
Preferential creditors
Creditor’s with a floating charge
Ordinary unsecured creditors - assets of less than £10k then 50% held. Assets £10k+ then 50% of the first £10k & 20% of assets £10k+
CVA - to rescue the company - achievement of restructuring plan- keep company intact & trading - liquidation if CVA fails
All directors & members agree
Employ insolvency practitioner
Arrange payment schedule - writes to creditors & invites to a meeting to vote on it
Must be approved by creditors who are owed at least 75% of the debt {as well as 50% of unconnected creditors}
If approved, solvent and trading again.
Scheduled payments made until CVA paid off
Generally binds all unsecured creditors
Optional moratorium - shields the company from further action by it’s creditors so they cannot take action to wind up the company
Board & shareholder generally remain in control of the company
Prepackaged Administration - to maximise realisations for creditors - sale of the business to new corporate entity - agreed prior to insolvency - liabilities left behind
An agreement in which the sale of all or part of a company’s business or assets is negotiated with a purchaser before the appointment of an administrator
Avoids the costs & risks of continued trading after entering administration
Avoids the risk of the value of the business deteriorating if trading continues during administration
Lack transparency, best price may not be obtained, potential conflict of interest for the administrator - duty of care to act in the interests of the creditors
If business sold back to the original owners then it creates a Phoenix company
Insolvency Practitioner usually in control of the company
Phoenix Companies
Move the assets of a failing company to another company allowing the same core business to continue running under the same ownership as before
Only essential trade suppliers may be paid in full before transfer
Directors must not be disqualified
Assets must not be transferred at undervalues
Can be set up under prepack administration or CVA.
With a CVA the new company can buy the assets, goodwill and trading name from the liquidators at open market values
Wrongful Trading
Continuing to trade and causing avoidable losses to creditors after the point at which insolvent liquidation of the company becomes inevitable
A director who does so can be held personally responsible for those losses
Directors have to take every step to minimise the losses to creditors
Take professional advice from an insolvency practitioner to help ensure that risks are minimised
