BLP - Week 9 Corporate Insolvency v 2 Flashcards
What defines insolvency under the Insolvency Act 1986?
A company is insolvent if it cannot pay its debts, indicated by:
* Cash flow test – can’t pay debts as they fall due
* Balance sheet test – liabilities exceed assets
* Unpaid statutory demand over £750
* Unpaid enforcement judgment
What are directors’ obligations when their company faces financial difficulty?
Monitor finances, watch for signs (e.g., creditor pressure, bank overdrafts), act in creditors’ interests, seek legal/insolvency guidance to address financial issues and minimise creditor losses.
What options do directors have if their company is in financial trouble?
Directors can:
* Do nothing (high risk)
* Informal negotiations / CVA
* Appoint an administrator
* Appoint a receiver
* Liquidation
What is a pre-insolvency moratorium and how is it obtained?
Temporary pause on creditor actions to allow restructuring. Creditors can’t do the following:
- enforce security
- stay of legal proceedings
- no winding up procedures
File with court + Monitor’s statement of likelihood to rescue the company.
How long does a moratorium last?
20 business days, extendable by directors, creditors or court (up to a year).
Which debts must still be paid during a moratorium?
Debts that must be paid include:
* Monitor fees
* Goods/services during moratorium
* Rent
* Wages/redundancy
* Financial services loans
What are informal creditor agreements?
Non-statutory, used to avoid insolvency, but all creditors must agree; may involve restructuring or cost-cutting.
What is a CVA?
A Company Voluntary Arrangement is a deal with creditors to pay debts in part or over time; needs 75% creditor approval (excluding secured creditors).
What is a Restructuring Plan?
Court-approved arrangement binding all creditors, including dissenters. Can involve cross-class cram down and debt-for-equity swaps.
What are the goals of administration?
Goals of administration include:
* Rescue company
* Maximise creditor return
* Asset sale for secured creditors
What is a pre-packaged sale?
Sale agreed before administration, executed immediately to protect value and jobs.
What are the types of receivership?
Types of receivership include:
* Administrative (rare, pre-2003 charges)
* Fixed charge (common, over specific assets)
* Court-appointed (disputes or misconduct)
What is liquidation?
The process of closing a company, selling assets, and distributing funds to creditors.
What are the types of liquidation?
Types of liquidation include:
* Compulsory (court-ordered)
* Voluntary:
* Members’ Voluntary Liquidation (MVL) – solvent
* Creditors’ Voluntary Liquidation (CVL) – insolvent
How is MVL different from CVL?
MVL – solvency declaration by directors. CVL – no solvency declaration; creditors approve liquidator.
None
What is the statutory order of payments in insolvency?
The order of payments includes:
* Liquidator fees (fixed charges)
* Fixed charge creditors
* Liquidator expenses
* Preferential creditors (e.g., employees, HMRC)
* Prescribed part (unsecured creditors)
* Floating charge creditors
* Unsecured creditors
* Interest on unsecured debts
* Shareholders
