BLP - Week 9 Corporate Insolvency Flashcards
What is the definition of insolvency under IA 1986?
A company is insolvent if it can’t pay its debts, indicated by:
* Cash flow test: Inability to pay debts as they fall due
* Balance sheet test: Liabilities exceed assets
* Failing to meet a statutory demand over £750
* Failing to pay a creditor to satisfy a debt enforcement judgment
Key indicators of insolvency help identify the financial distress of a company.
What should directors do when their company is in financial difficulties?
- Directors should actively monitor financial health and look for signs such as:
* Pressures from unpaid creditors
* Overdrawn accounts with banks refusing further credit
* Debt levels and loans exceeding asset values - Directors must make informed decisions to address financial issues and minimize creditor losses.
List the options available to directors of a company facing financial difficulties.
- Do Nothing - Risk of personal liability.
- Negotiate with Creditors - Informally or via CVAs/restructuring.
- Appoint an Administrator - Consider all creditors.
- Appoint a Receiver - Secured creditors recover debt.
- Liquidation - Final step, assets distributed to creditors.
What is an informal agreement with creditors?
An informal agreement is used to avoid:
* The time and cost of formal insolvency arrangements
* Ending the life of a company
These agreements may be contractually binding but are not regulated by insolvency statutes.
What is a pre-insolvency moratorium?
A pre-insolvency moratorium provides time to negotiate with creditors and prepare a CVA or restructuring plan, during which:
* No creditor can enforce security against assets
* Legal proceedings against the company are stayed
* No winding up procedures can commence
* No administration procedure can be commenced
This moratorium helps protect the company while seeking solutions.
What documents are required to obtain a pre-insolvency moratorium?
Documents include:
* A statement that the company is, or is likely to become, unable to pay its debts
* A statement from a licensed insolvency practitioner (Monitor) supporting the moratorium
The Monitor oversees the moratorium period.
What happens to pre-moratorium debts during a moratorium?
Pre-moratorium debts do not have to be paid, except:
* Monitor’s remuneration or expenses
* Goods and services supplied during the moratorium
* Rent during the moratorium
* Wages or salary
* Loans under financial services contracts
This is known as a ‘statutory repayment holiday’.
What is a Company Voluntary Arrangement (CVA)?
Directors prepare a proposal, supervised by an insolvency practitioner.
What are the advantages of a CVA?
Advantages include:
* No court sanction required
* Directors remain in control
* Company can continue to trade during CVA
* Trade creditors tend to support CVAs
CVAs can provide a quicker and less costly resolution compared to other procedures.
What are the steps involved in setting up a CVA?
- Proposal & Nominee – Directors draft a CVA proposal and appoint an insolvency practitioner as Nominee. If in liquidation/administration, the liquidator/administrator does this.
- Submission – Directors submit the CVA proposal and company’s financial statement to the Nominee (who often drafts it).
- Nominee’s Review – Within 28 days, the Nominee reports to court on whether creditors and shareholders should vote.
- Voting Process – Creditors get at least 14 days to vote; shareholders meet within 5 days after creditors decide.
- Approval
- Court Report & Implementation – The Nominee reports approval to court and usually becomes the supervisor to implement the CVA.
What are the approval requirements for a CVA?
- 75% in value of unsecured creditors (excluding secured creditors).
- Majority of unconnected creditors.
- Simple majority of shareholders.
What is the effect of a CVA on creditors?
A CVA is binding on all unsecured creditors, including those who did not vote or voted against it, but not on secured or preferential creditors without consent.
A creditor can challenge a CVA within 28 days of the CVA’s approval by creditors being reported to the court on the grounds of ‘unfair prejudice’.
This can limit the effectiveness of the CVA for some creditors.
What is a Restructuring Plan?
A Restructuring Plan can only be used by companies facing financial difficulties and requires:
* Court approval (sanction)
* Creditors and shareholders divided into classes
* Approval by at least 75% in value of those voting in each class
This plan can bind all creditors, including secured creditors.
When can the court exclude creditors and shareholders from voting on a restructuring plan?
If they have no genuine economic interest in the company.
What is a cross-class cramdown in a Restructuring Plan?
Under what conditions can the court approve a cross-class cramdown?
- A cross class cramdown means that one rank of creditor can force the Plan on another class of creditor who has voted against the Plan.
- The dissenting class is no worse off than if the Plan were not approved.
- At least one class of creditors/members who would receive payment or have a genuine economic interest in the company has approved the Plan.
What are the statutory objectives of an administrator in administration?
Objectives are:
1. Rescue the Company as a Going Concern
2. Maximise Returns for Creditors
3. Sell Assets for Secured Creditors
What is the role of the administrator?
An administrator can:
* Carry on the business
* Take possession and sell company property
* Borrow money
* Make decisions on behalf of the company
* Remove and appoint directors
Directors cannot make management decisions without the administrator’s consent.
True or False: An administrator can pay dividends to unsecured creditors without court permission.
False
Administrators must obtain court permission to pay dividends.
Fill in the blank: The CVA proposal must be reported to court but there is no requirement for the court to _______.
[approve the CVA proposal]
This allows for flexibility in the process.
Who can initiate a Company Voluntary Arrangement (CVA)?
Initiated by:
* Directors
* Liquidator
* Administrator
This allows for various stakeholders to propose a CVA depending on the company’s circumstances.
What must a company do within 8 weeks of entering administration?
Produce a proposal to restructure liabilities through a scheme of arrangement, restructuring plan, or CVA. Must be approved by creditors.
What is a key advantage of putting a company into administration?
The company gains protection through a ‘full moratorium’.
What does a full moratorium prevent?
- No order or resolution to wind up the company may be made or passed
- No administrative receiver may be appointed
- No steps may be taken to enforce security over the company’s property
- No legal proceedings may be commenced or continued against the company
- A landlord may not forfeit a lease of the company’s premises
What is a pre-packaged administration?
A sale of the business and assets prepared for a selected buyer prior to the company’s entry into administration.
What is receivership?
An enforcement action for secured creditors, distinct from administration’s collective creditor focus.
What are the three types of receivership?
- Administrative receivership
- Fixed charge receivership
- Court-appointed receivership
What is compulsory liquidation?
A court-based process for placing a company into liquidation.
Who can apply for a winding up order?
- A creditor
- The company (acting by shareholders)
- The directors
- An administrator
- An administrative receiver
- The supervisor of a CVA
- The Secretary of State for Business
What is the most common ground for a winding up petition?
The company’s inability to pay its debts.
What happens to employees upon a winding up order?
Employees are automatically dismissed.
What is a Members’ Voluntary Liquidation (MVL)?
A liquidation process available only to solvent companies.
What declaration must directors make for an MVL?
A declaration of solvency stating the company can pay its creditors in full within 12 months.
What is the role of a liquidator?
- Secure and realise the assets of the company
- Distribute to the company’s creditors
- Take control of all property of the company
What is the statutory order of priority for creditor payments in liquidation?
- Liquidator’s fees and expenses
- Amount due to the fixed charge creditor
- Liquidator’s other remuneration, costs, and expenses
- Preferential creditors (Tier 1 and Tier 2)
- Unsecured creditors
What are the two types of voluntary liquidation?
- Members’ voluntary liquidation
- Creditors’ voluntary liquidation
What is the principle of ‘pari passu’ in liquidation?
Creditors of the same rank share on an equal and proportionate basis relative to the assets available.
What happens if a liquidator assesses that a company cannot pay its debts during an MVL?
The MVL must be converted into a Creditors’ Voluntary Liquidation (CVL).
What is the liability for false declaration in an MVL?
Directors without reasonable grounds can face fines or imprisonment.
What is the role of the Official Receiver in compulsory liquidation?
Becomes the first liquidator and notifies the Registrar of Companies and all known creditors.
What is the maximum amount for employee claims classified as preferential creditors?
£800 per employee plus accrued holiday pay.
What must happen for a creditor’s choice of liquidator to take precedence in a CVL?
Creditors must approve the nominated liquidator or put forward their own choice.
True or False: A fixed charge receiver must be a licensed insolvency practitioner.
False. Fixed charge receivers do not have to be licensed insolvency practitioners.
What is the purpose of a validation order in the context of a winding-up petition?
To approve any transfer of company assets after a winding-up petition is filed.
Fill in the blank: Liquidators have very limited powers to carry on the business of a company and will usually _______.
close a company’s business and dismiss employees.
What is Tier 1 in employee claims during winding up?
Employee claims for unpaid remuneration due in the four months before the relevant date, subject to a maximum of £800 per employee plus accrued holiday pay and certain pension scheme contributions.
What does Tier 2 include in the context of winding up?
Specific Crown debts such as unpaid PAYE, employee NI deductions, and VAT owed to HMRC.
What is the priority of Tier 1 and Tier 2 preferential debts?
Tier 1 preferential debts must be paid in full before Tier 2 preferential debts.
What is the purpose of the prescribed part fund?
To reserve funds for unsecured creditors that do not flow into the pockets of floating charge holders.
When was the prescribed part fund introduced?
The Enterprise Act 2002 introduced the prescribed part fund.
What does ‘net property’ refer to in the context of winding up?
The proceeds of selling property other than that subject to a fixed charge, after deduction of the liquidator’s expenses and any preferential debts.
What percentage of the first £10,000 of net property proceeds is ring-fenced for unsecured creditors?
50% of the first £10,000 of net property proceeds.
What is the maximum fund limit for floating charges created before and after 6 April 2020?
£600,000 for floating charges created before 6 April 2020 and £800,000 for those created on or after that date.
How are remaining funds from floating charge assets distributed?
Distributed to floating charge creditors, usually in the order of priority agreements between them.
What does ‘pari passu’ mean in relation to unsecured creditors?
All unsecured creditors are treated equally, sharing funds proportionally.
How are interest payments handled for unsecured creditors?
Interest accrues on unsecured debts from the commencement of the winding up.
What is the payout priority for shareholders in a winding up scenario?
Shareholders are paid last, with preference shareholders typically having priority over ordinary shareholders.
Why do most insolvent companies lack funds for shareholders?
Assets are typically depleted by higher-ranking creditor claims.
In most insolvent liquidations, what do shareholders generally receive?
Shareholders do not receive any return from their shares.
Fill in the blank: The prescribed part fund is ‘_______’ and applies to realisations from floating charges created on or after 15 September 2003.
ring-fenced
True or False: A floating charge holder can claim for a dividend out of the prescribed part fund for any shortfall incurred under its security.
False
