Buisness Law And Practice: Insolvancy Flashcards
What are the four tests for insolvency as set out in section 122 123 of the AI 1986?
- a creditor has served a statutory demand for an outstanding amount over £750 and creditor fails to pay of create arrangement within 21 days
- a creditor has obtained a judgement and debt has still not been paid
- it can be proved to the court that the company is unable to pay its debts
- it can be proven that the companies debts outweigh its assets
What does insolvency mean?
- is the state in a which a business is unable to pay its debts
Why is it important for a creditor to know a company is insolvent?
- in order to request a company is wound up the creditor must first prove the company is insolvent
What are the options for winding up an insolvent company?
- go into liquidation
- appoint an administrator
- for security created before 15th sep 2003 appoint an administrative receiver
What is liquidation?
Is when a company stops trading all assets are sold and company no longer exists
What is compulsory liquidation?
- when a third party initiates insolvency proceedings against an insolvent company
What is creditors voluntary liquidation?
- is commenced by the company itself when it is insolvent
What is members voluntary liquidation?
- proceedings commenced by a solvent company because it wishes to stop trading
Can an insolvent company enter into a member’s voluntary liquidation?
- no only solvent company
Once a liquidator has completed their work what must they do?
- they must apply to be released the registrar of companies will then dissolve the company three months later
When can avoidance of certain floating charges be registered by companies liquidator?
- a floating charge may be invalid where at a relevant time a charge was granted without receiving fresh considering
- relevant time charge granted two years from the onset of insolvency to a person connected or
- 12 months from the onset of insolvency to any other person
What does the onset of insolvency mean?
- the point in time the company becomes insolvent
What are preferences?
- where a company gives preference to a creditor to put them in a better position this can be challenged by a liquidator if it occurred within the relevant time and there is a desire to the prefer the other party
What is a transaction at an undervalue?
- where a company enters into a transaction or gifts another person and receives consideration which is significantly lower than its value
Example selling a £60,000 office to a director for £10,000
Is there a defence for when a liquidator or administrator challenges a transaction at an undervalue?
- yes if the transaction was entered into with good faith
- with the purpose of carrying on the business
- and there were reasonable grounds for believing that it would benefit the company
In what order must assets be distributed when a company is going through liquidation?
- Any fixed charge holders are paid if the asset they hold the fixed charge is sold for less than owed then the creditor must join pool of unsecured creditors for the shortfall
- Expenses for winding up must be paid
- Money subject to floating charges must be paid
- Unsecured creditors who rank and abate equally
What are preferential debts?
- are debts in the event of insolvency or bankruptcy are given priority over others examples being employees wages
What is ring fencing?
- a statutory procedure where by a portion of money is set aside to be made available for floating charge holders
In reference to ring fencing what proportion of money must be set aside by liquidators/ administrator for floating charge holders?
- 50% of the first £10,000 received for the property that is subject to floating charges
- and 20% of the remaining money
How does a liquidator work out how to distribute assets for unsecured creditors?
- the amount left to distribute divided by the amount owed
Example
75,000 /165,000 =0.46 for each pound the creditor is owed
What does it mean for a company to go into administration?
- by making an application to the court demonstrating a company is likely to become unable to pay its debts
- an out of court route the company its directors and holder of a debt must file documents to the court
How can a company go into administration?
- by making an application to the court demonstrating a company is likely to become unable to pay its debts
- an out of court route the company its directors and holder of a debt must file documents to the court demonstrating
What is appointment of administrator by QFCH?
- an appointment of an administrator made by a qualifying floating charge holder
- the charge document empowers the holder of the floating charge to appoint a administrator
How can a qualifying floating charge holder appoint an administrator?
- by completing and filing the relevant forms with the court this includes:
- statutory declaration by the lender stating the the lender is a holder of the charge
- that the floating charge is enforceable
- and the enforcement complies with AI 1986 SC b1
How can administration be ended?
- administration ends one year from the date the administration took affect but can be extended
What is pre pack administration?
- when a company goes into administration and the administrator sells its assets and company straight away
What is a CVA?
- company voluntary arrangement is an contract between the company and its creditors to receive payment of the debt owed at a later date or accept partial payment
How can a CVA be approved?
- if 75% or more in value of companies creditors and
- 50% or more of non connected creditors
What conditions apply to companies not being able to enter into moratorium under CIGA 2020?
- if a company had already entered into a moratorium during the previous twelve months
- and if the company is a bank (financial services exemption)
How long does a Moratorium last?
- 20 business days starting the business day after the moratorium came into affect
What is a LPA receiver?
- this is when a fixed charge holder appoints a receiver to administrate sale of the asset as the company has defaulted or breach the terms of the loan agreement
What are administrative receivers?
- administrative receivers are appointed by floating charge holders when the the floating charge is over the companies whole undertaking
- can only be taken for floating charges created before 15th September 2003
How can a company go into voluntary liquidation
- directors agree by majority that the company is insolvent making a starlet declaration
- Start the winding up
- Petition advertised in London gazette
- Must within before the end of 7 days of passing the resolution inform creditors
- File with companies house a copy of the resolution to wind up and be advitised in London gazette
- Liquidator investigates and reports to creditors and collects assets and distributes in statory order
- Final return filed with the registrar of companies
- Company dissolved after three months
When is a person insolvent?
- under s 267 of the IA 1986 a person is insolvent when:
- a debt it payable but the debtor does not have the money to pay it
- or the debt is payable in the future but there is no prospect of the debtor being able to pay it
What is the minimum debt required to serve a statutory demand on an individual, and what are the key timeframes for response?
The minimum debt is £5,000. The debtor has 21 days to pay or 18 days to apply to set it aside.
After how long do the interests of creditors prevail over anyone living in a home during bankruptcy?
After 12 months, creditors’ interests generally override those of anyone residing in the home, unless there are exceptional circumstances.
