BLP 7 - Insolvency

Question 1

What is corporate insolvency?

Answer 1

S122 and 123 of the IA 1986-
Unable to pay debts when;
-creditor served a statutory demand for an oustanding sum of £750 or more, company does not pay or come to an arrangement within 21 days of the statutory demand
-creditor has obtained judgement against the company and has tried to enforce that judgement but the debt still has not been paid in full or at all
-creditor has obtained judgement against the company and has tried to enforce that judgement but debt has still not been paid
-it can be proved to court that the company is unable to pay its debts as they fail the cash flow test
-it can be proven to court that the liabilities exceed it assets

Question 2

Cash flow and balance sheet

Answer 2

May not represent accurately
Court will take into account other factors

Question 3

Relevance

Answer 3

Creditors need to prove company insolvent
-Directors to be held liable must first show insolvency and whether it was due to their actions.

Question 4

Outcomes

Answer 4

• Administration
  -CVA (Company voluntary arrangement)
  -Liquidation

Creditors may encourage company to go into process.

Secured creditors may;
-appoint an LPA recieiver
-appoint an administrator out of court
-before 13 September 2003 appoint an administrative receiver.

Corporate Insolvency and Governance Act 2020
-moratorium
-restructuring plan

Question 5

Liquidation

Answer 5

Business stops trading. Assets sold and ceases to exist.
Can be called ‘winding up’.
Liquidator runs the company. May challenge past transaction to generate more money.

Three types;
-Compulsory liquidation - third party commences insolvency proceedings against an insolvent company
-Creditors voluntary liquidation (CVL) - commenced by company itself when insolvent.
-Member’s voluntary liquidation - commenced by solvent company as wishes to cease trading.

Question 6

Compulsory liquidation

Answer 6

Third party presenting winding up petition at court.
Company is unable to pay debts (s122 IA 1986).

Statutory demand unpaid for three weeks.
Or may obtain judgement against the company

Unless genuine and substantial dispute about money owed.
Court has ultimate discretion.

If can pay within reasonable period may adjourn
Court will appoint Official Receiver (OR) employed by insolvency service.
Can appoint private insolvency practitioner depending on nature and wishes.

Question 7

CVL

Answer 7

Agreement between directors and shareholders
Directors normally pressured by creditors to avoid personal claims for misfeasance and fraudulent or wrongful trading.

Question 8

Members voluntary liquidation

Answer 8

If realise insolvent must convert to CVL.

If dormant or director wants to retire

Must swear a statutory declaration it is solvent

Question 9

Process

Answer 9

Liquidator takes over from directors
Powers include;
(a) carrying on the company’s business;
(b) commencing and defending litigation on the company’s behalf;
(c) investigating the company’s past transactions;
(d) investigating the directors’ conduct;
(e) collecting and distributing the company’s assets;
(f) doing all that is necessary to facilitate the winding up of the company

Sell assets and distribute to creditors. Prepare final accounts. Registrar of companies dissolves three months later.

Duties - preserve and increase assets
Distributing to the creditors

Question 10

Preserving and increasing assets

Answer 10

Duty to maximise assets.
Investigate transactions and directors actions.

May bring claims;
(a) avoidance of certain floating charges (s 245 IA 1986);
(b) preferences (s 239 IA 1986);
(c) transactions at an undervalue (s 238 IA 1986);
(d) transactions defrauding creditors (s 423 IA 1986); and
(e) extortionate credit transactions (s 244 IA 1986)

Question 11

Avoidance of certain floating charges

Answer 11

Automatically void under s245 IA 1986;
where at the relevant time before the onset of the companys insolvency a charge was granted without the company receiving fresh consideration in exchange for granting security

‘Relevant time’
-charge created in favour of person who is connected with company during two years ending with onset of insolvency
-charge was created in favour of any other person during the twelve months prior to onset of insolvency

‘Onset of insolvency’
Date of presentation of winding up petition (CVL)
Date formally enters into insolvency for administration (date goes into administration).

If unconnected must be insolvent at time or as a result

Question 12

‘Connected’

Answer 12

ss249 and 435 IA 1987
-director or shadow director of the insolvent company
-close relative or business associate of a director or shadow director
-associate of the company -company in the same group as the company of which is controlled by a director of the insolvent company.

Liquidator or administrator will write to charge holder saying they believe invalid. If continues injunction

Question 13

Preferences

Answer 13

Can challenge where given preference to someone else. Preference where putting someone else in a better position in the event they went into liquidation/administration but they would have been otherwise.

Relevant time;
Preference given to a person who is connected to the company during the two years ending with the onset of insolvency
If the preference was given to any other person during the six months ending with the onset of insolvency/administration

Insolvent at time or insolvent as a result.

Desire rather than intention to other party.
On liquidator to prove to court (no presumption of insolvency)

Question 14

Re Mc Bacon

Answer 14

Desire to prefer.
-not desire to prefer but because it would not survive.
Held not voidable.

Question 15

Preference in practice

Answer 15

-one creditor is paid before others
-unsecured given security

Question 16

Transactions at an undervalue

Answer 16

Entered into at undervalue at relevant time.
Gift or consideration significantly lower.

Relevant time - two years ending with onset of insolvency

Company must be insolvent at time or become insolvent as a result. Insolvency presumed where person connected to the company (unlike preferences).
Can be rebutted.

Defence - entered into in good faith, for purpose of carrying on business and there was reasonable grounds it would benefit the company.

Question 17

Extortionate credit transactions

Answer 17

Three years ending with the day on which company went into administration.

Grossly exorbitant payments to be made or grossly contravene ordinary principles of fair dealing.

Question 18

Transactions defrauding creditors

Answer 18

Transaction at undervalue defrauding creditors. Entered into in order to put assets beyond reach or prejudice interests of that person in relation to claim.

Brought at discretion of court. May be ordered to return property.

Usually used when undervalue time limits expired. Creditors may also bring claim.

Question 19

Distribution of assets during liquidation

Answer 19

Fixed charge over floating when selling asset fixed was over. Surplus paid to liquidator. If shortfall join pool of unsecured creditors.

Forms sent to unsecured (proving the debt). Approve or reject. Small claims (under £1,000) usually automatically accepted.

Order after set out in IA 1986;
(a) the expenses of the winding up (the fees payable to the liquidator and their professional
advisers);
(b) preferential debts, which rank and abate equally (same percentage of debt they are owed);
(c) money which is the subject of floating charges, in order of priority; and
(d) unsecured creditors, who rank and abate equally.

Remaining distributed to shareholders.

Question 20

Preferential debts

Answer 20

Paid before other unsecured.
E.g. Wages/Salaries of employees for work in the immediate 4 months. Up to £800. Accrued holiday pay as well.

HMRC as well. But only on PAYE and VAT.

Question 21

Ring fencing

Answer 21

2003 - 15 September
Setting aside portion of money for floating charge holders for benefit of unsecured creditors.

• 50% of the first £10,000 of money received from the property which is subject to floating charges
  -20% of the remaining money

Up to £800,000 * before 6 April 2020 £600,000.
Unless floating charge created before 6 April 2020 ranks equally or in priority to the pre-april 2020 charge. £800,000 would apply to both.

Question 22

Alternatives to liquidation

Answer 22

(a) administration (under Sch B1 IA 1986);
(b) company voluntary arrangements (under Part I IA 1986);
(c) schemes of arrangement (under ss 895–901 CA 2006);
(d) restructuring plans (under Part 26A CA 2006);
(e) a free-standing moratorium (under Part A1 IA 1986); or
(f) informal agreements with creditors.

Question 23

Schemes of arrangements

Answer 23

Not strictly insolvency procedure. Any time in company life.
Two court hearings and meetings of creditors and shareholders.

Restructuring (CIGA 2020) - propose plan to creditors or members. Easier to be sanctioned by court despite creditor protests.

Free-standing moratorium - breathing space to rescue.

Informal - creditors may still apply to wind up company.

Question 24

Administration

Answer 24

Administrator or independent insolvency practitioner runs company to improve financial performance or in position to be sold.

Statutory moratorium - not possible to commence legal proceedings, enforce judgement or issue winding up petition without consent.

Question 25

Duties

Answer 25

• Interest of creditors
  -rescue company as a concern

Will priotise creditors. Achieve better result. If not must sell property to pay secured or preferential creditors.

Question 26

Starting administration

Answer 26

Court order - application to court - court hearing.

-Company, directors or qualifying floating charge holder or unsecured creditor - filing documents at court

Question 27

Court route

Answer 27

Court make order if likely to unable to pay debts. Reasonable that it will set out the objectives (creditors, rescue, sell).

Applicant must notify as soon as reasonably practicable any person who has or is entitled to appoint administration receiver of company and any qualifying charge holder.

Question 28

Out-of court method

Answer 28

Serve notice of intention of administration on;
the court
-any qualifying charge holder
-any lender who is entitled to appoint an administrative receiver.

Directors file at court statutory delcaration that company unable to pay its debts and is not in liquidation.
If have compulsory winding up petition cannot do.

Motatorium comes into effect immediately when notice of intention to appoint filed at court.

Question 29

Appointment by QFCH (Qualifying Charge Holder

Answer 29

To be a QFCH must state Para 14 of schedule B1 to the IA 1986 applies;
and
-the charge document purports to empower the holder of the floating charge to appoint an administrator
-the charge document purports to empower the holder of the floating charge to appoint an administrative receiver within the meaning of the IA 1986.

and
The charge document relates to the whole or substantially the whole of the company property.

If other QFCH have priority, lender must notify in advance. Must be enforeceable

Lender will file notice of appointment at court by saying’
-lender is a holder of QFC in company property
* the floating charge is enforceable; and
* the appointment complies with the IA 1986, Sch B1.

Question 30

Process

Answer 30

Motatorium comes into effect,

• Proposal put to creditors.

-Can suggest amendments

-Approved if majority in value present and voting vote in favour. If voted against cannot constitute more than 50% in value of creditors who are unconnected.

Question 31

Effect

Answer 31

• Administrator holds company assets

-Directors powers stop.

Question 32

Administrator powers + duties

Answer 32

(a) removing and appointing directors;
(b) paying creditors, but only with the court’s permission if the payment is to an unsecured
creditor;
(c) calling a meeting of creditors or shareholders;
(d) dealing with property that is subject to a floating charge;
(e) dealing with property that is subject to a fixed charge (with the permission of the court);
(f) investigating and applying to have the company’s past transactions set aside or
challenged (see 8.10); and
(g) commencing fraudulent or wrongful trading proceedings against directors.

Order similar to liquidation

Question 33

End

Answer 33

• One year from date took effect *can be extended.

-Can be ended by application to court form creditor or administrator if unobtainable (present winding up petition instead).

Question 34

Pre-pack admnistration

Answer 34

• Sell assets and business straight away- often to management.

Question 35

CVA

Answer 35

Cannot interfere with rights of secured creditors

• Written agreement which binds all parties. Wait longer for debt or payment in part.
  Cheaper and better for creditors.

Must be approved by;
75% or more in value of company’s creditors
50% or more of non-connected creditors

Chair of CVA decides who is connected.
Secured not allowed unless they have part unsecured.
Binding on past but not future.

Question 36

Restructuring plan (CIGA 2020)

Answer 36

Court-supervised.
Agreement between company, secured and unsecured creditors and shareholders.
Not insolvent but have encountered or likely to expeirence financial hardship.

Directors (or creditors) apply to court for approval to call meeting of creditors and shareholders.

Two court hearings
Creditors make representations at first.
Second court will decide to sanction plan.

75% of classes of shareholder and then class of creditors must approve.

Cross-class cram down provision’ - dissentiing class to be crammed down so cannot block viable plans. No member must be worse off.

Question 37

Moratorium (CIGA 2020)

Answer 37

• Protected from before but in period must pay debts.

Directors remain in control but independent practitioner acts as independent monitor.

Must be unable to pay or likely to be unable
-Cant have entered in last 12 months
- Financial services (banks) not allowed.

English companies with no oustanding winding up petitions.

Director file and monitor must confirm likely rescue.

Debts excluded- employee wages, monitors renumeration, and goods or services supplied during.

Lasts 20 business days. Beginnign business day after comes into force (date of filing)
Can be extended further 20.

Can be extended to a year if creditors allow because not going to be paid due to payment holiday.

Question 38

Secured creditors

Answer 38

• Appoint receiver if breach charge holder loan agreement.

Law of Property Act (LPA) receivers
Appointed by fixed charge holder. If sum not realised will become unsecured creditor. Surplus returned to company. Do not have to be licensed

Administrative receviers-
Floating charge holders when charge over company whole undertaking. Charges created after 15 Sept 2003 use administration instead.

-Loan agreement lists trigger events.
Runs company and sells charged assets. Use to pay their own costs.

Question 39

Personal insolvency

Answer 39

-

Question 40

When is a person insolvent?

Answer 40

S267 IA 1986;
* A debt is payable now but the debtor does not currently have enough money to pay; or
* A debt is payable in the future and there is no reasonable prospect that the individual will
be able to pay

Question 41

Proving insolvency

Answer 41

Creditors can (s268);
1. By serving a statutory demand on the debtor for a liquidated sum of £5,000 or more, and
waiting three weeks to see whether the debtor pays or applies to court to set aside the
statutory demand.
2. By serving a statutory demand on the debtor in respect of a future liability to pay a debt
of £5,000 or more, and waiting three weeks to see whether the debtor either:
a. shows a reasonable prospect of being able to pay the sum when it falls due; or
b. applies to court to set aside the statutory demand.
3. By obtaining a court judgment for a debt of £5,000 or more, and attempting execution of
the judgment without success.

Question 42

Options

Answer 42

• Talking to creditors
  -Apply for own bankruptcy
  -IVA (Individual Voluntary Agreement)
  -Debt relief order (60 days breathing space).

Question 43

Bankruptcy

Answer 43

Trustee takes over from bankrupt paying assets to creditors (bankrupt has restrictions on them).
-After paid or usually one year free from debt.

Student loan not part of this

Question 44

Procedure

Answer 44

Creditor apply to court if owed £5,000 or more. And debtor unable to pay or unlikely to. Creditors may group together provided amount owed not less than £5,000. Pay a deposit to met trustee and court fees.
-Apply at Country Court Hearing Centre. Personal service through agent (who signs witness statement). If not possible court may allow other method.

Own application;
Apply online. Adjuticator will decide. Debtor will pay Official Receivers fees. Decision within 28 days. Unless further information (42 days).

Question 45

Official Receiver

Answer 45

Acts as trustee.
Statement of affairs showing recent financial activity.
Estate vests automatically from order made.
Can challenge and investigate.
Sells to meet creditors demands.

• Keep everyday items. If high valuable sell and get cheaper alternatives.

Can receive salary but if too high - IPA (Income Payment Agreement). Max three years. If cannot agree court orde.r

Question 46

Home

Answer 46

• If owned passes to trustee
  -Anyone with legal and equitable interest cannot be evicted (bankrupt) must need court order.

-Weigh up circumstances. If after one year circumstances have to be exceptional not to sell.

Three years after transfers back -
UNLESS
-sold, applied for order for sale or possesssion or charging order, entered into agreement with bankrupt.

Question 47

Powers

Answer 47

Duty primarily to creditors
(a) disclaim onerous property (s 315 IA 1986);
(b) apply to set aside transactions at an undervalue (s 339 IA 1986);
(c) apply to set aside preferences (s 340 IA 1986);
(d) apply to set aside transactions defrauding creditors (s 423 IA 1986); and
(e) avoid extortionate credit transactions (s 343 IA 1986)

Question 48

Disclaiming onerous property

Answer 48

Unprofitable contracts, land that has burden of onerous covenant, lease with no capital value.

All bankrupts rights and liabilites come to an end. Anyone who suffers loss becomes unsecured creditor

Question 49

Transactions at an undervalue

Answer 49

Gift or consideration lower than value provided.
Trustee investigates transactions five years prior to presentation of petition.

More than two years back must show insolvent.

Rebutabble presumption insolvent when close relative or business associate.

Also
Transactions Defrauding Creditors

Question 50

Preferences

Answer 50

Creditor, surety or guarantor in better position than they would have been on bankruptcy.

Rebutabble presumption of intention to prefer if in favour of associate.

Can challenge six months prior to presentation. Or two years if associate.

Must have been insolvent at time or as a result of preference

Question 51

Extortionate credit transactions

Answer 51

Three years prior. Can apply to set aside.

Difficult in showing ‘grossly exorbitant’

Question 52

Distribution

Answer 52

Secured

Then IA 1986;
1. The costs of the bankruptcy. This means all of the expenses incurred as a result of the
bankruptcy, which will be mainly the trustee’s professional charges and disbursements (eg
legal fees).
2. Preferential debts.
3. Ordinary unsecured creditors.
4. Postponed creditors, who are the bankrupt’s spouse or civil partner.

Rank and abate equally

Question 53

Preferential debts

Answer 53

Wages/salary of employees carried out four months preceding up to £800 plus accrued holiday pay.

HMRC secondary as above.

Question 54

Discharge

Answer 54

After one year. May still be subject to a Bankruptcy Restriction Order or Bankruptcy Restriction Undertaking.

Property vested not returned apart from matrimonial home in some cases.

Question 55

Restrictions

Answer 55

• Bear in mind more culpable bankrupts subject to restrictions that last longer than a year.

-Can keep property needed for trades.
Criminal offence to get credit of more than £500 without disclosing bankruptcy.
Also cannot;
* act as a director of a company (Company Directors Disqualification Act (‘CDDA’) 1986);
* be involved in the management, promotion or formation of a company, unless the court
grants permission (CDDA 1986);
* trade under a different name from the name in which the bankruptcy order was made,
without disclosing to anyone they trade with that they are an undischarged bankrupt; or
* continue in partnership, unless the partnership agreement varies the default position
in the Partnership Act 1890, which is that the bankrupt will automatically cease to be a
partner when they are made bankrupt.

Cannot have overdraft or become solicitor without leave.

Question 56

Bankruptcy restriction orders

Answer 56

• Caused own bankruptcy by being dishonest, negligent or reckless.

Last between two and 15 years.
Cannot be director or have credit over £500.

Question 57

Alternatives

Answer 57

IVAs - insolvency practitioner formulates proposal and supervises implementation. - Only agree if sufficient assets.

-gather state of affairs, apply for interim order for moratorium. 14 days. Nominee agrees and then
-75% or more of creditors in value
-of which at least 50% are not associates.

Agree will be approved. Chair (the practitioner) decides who is an associate. Binding on all unsecured who entitled to vote but not secured and preferred.

If debtor makes dodgy transaction before may still apply for bankruptcy. Nominee (supervisor) implements the proposals.

• Avoid disqualifications and private public examination in cases
  -Low cost compared to bankruptcy.

Informal solution have advantages but not binding.

Question 58

Debt relief orders

Answer 58

Apply online. Assets and liabilities low in value
Not available if;
(a) has total unsecured liabilities exceeding £20,000;
(b) has total gross assets exceeding £1,000;
(c) has a car worth £1,000 or more (unless it has been adapted because the debtor has a
disability);
(d) has disposable income in excess of £50 per month, after deducting normal household
expenditure;
(e) has been subject to a DRO in the preceding six years; or
(f) is subject to another, formal insolvency procedure.

12 months, after free of debt. Must cooperate with official receiver. Expected to pay if improvements.

May last up to 15 (restrictions) if culpable. Official receiver will apply for Debt Relief Restrictions Order

Question 59

Debt respite scheme (Breathing Space)

Answer 59

Standard - 60 days. No legal, enforcement action and contract. Freeze most interest.

Mental health crisis - Long as treatment plus 30 days.

Apply to debt advice provider authorised by FCA. Debt adviser must be satisifed cannot pay some or all. Cannot be undischarged bankrupt or IVA or debt relief order. Not in previous 12 months breathing space.

Question 60

Wrongful trading

Answer 60

Court may ask director to contribute to assets ifl
the company has gone into insolvent liquidation or insolvent administration;
* before commencement of the winding up of the company, the director knew or ought
to have concluded there was no reasonable prospect that the company would avoid
insolvent liquidation; and
* that person was a director of the company at the time

Question 60

Claims against directors of insolvent companies

Answer 60

-

Question 61

Defence?

Answer 61

Took every step with a view to minimising loss to creditors as they ought to have taken.

Two-step test;
-facts director ought to have known or ascertained the conclusions which they ought to have reached and steps taken.
Standard expected is a reasonably diligent person having;
general knowledge, skill and experience reasonably excpected of person carrying out the functions.
-general knowlegde, skill and experience the director has.

Objective-
Then subjective to that director,

Claims brought by a liquidator or administrator.

Question 62

Fraudulent trading

Answer 62

Intent to defraud creditors of company or creditors of other person for any fraudulent purpose.

Only when insolvent as above and by same means

hard to prove intention.
Criminal conviction under s993 CA 2006.

Question 63

Misfeasance

Answer 63

• Breach of fiduciary duty or other duty
  S212 IA 1986 -
  ordered to contribute to assets (compensation).
  Repay restore or account for money that has been taken in breach of duty.