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SQE 1 > Business 7: Corporate Insolvency > Flashcards

Business 7: Corporate Insolvency Flashcards

1
Q

What claims can be bought against directors of an insolvent company and what types of offence are they?

A
  1. Wrongful trading (civil offence)
  2. Fraudulent trading (s213 IA 1986) (criminal offence)
  3. Misfeasance
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2
Q

Who can bring a claim for wrongful or fraudulent trading?

A

only a liquidator/administrator

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3
Q

Elements of wrongful trading?

A

1) Co has gone into insolvent liquidation/administration
2) Before commencement of winding up, dir knew, or ought to have known, that there was no reasonable prospect of the company avoiding insolvent liquidation
3) The person was a Dir of the Co at the time

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4
Q

Defence to wrongful trading?

A

They took every step with a view to minimising the potential loss to creditors as they ought to have taken.
Judged to the standard expected if of a reasonably diligent person having both:
(a) Objective: the general knowledge, skill and experience reasonably be expected of a person carrying out the functions carried out by the dir in relation to the co
(b) Subjective: the general knowledge, skill and experience that the dir has.

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5
Q

Examples of steps a director can take to minimise the chance of a sucessful wrongul trading claim?

A

*Seek professional advice (sol/accountant) at first sign of problem
*Limit spending
*Check cos accounts regularly
*Keep record of own actions

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6
Q

What is fraudulent trading?

A

In the course of winding up, it appears the cos business has been carried on with intent to defraud creditors of the co or creditors of any other person or for any fraudulent purpose.

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7
Q

What is misfeasance and what is the effect of it?

A
  • Breach of fiduciary/other directors duty
  • Effect: ordered to contribute to assets and/or repay/restore/ account for money/prop that’s been disapplied in breach of duty
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8
Q

4 ways of proving a company is insolvent?

A
  1. Creditor serves statutory demand for £750 or more, and Co doesn’t pay within 21 days
  2. Creditor obtains judgment against Co, tried to enforce, but debt still not been paid in full
  3. Cash flow test: Co is unable to pay its debts as they fall due (look at net current assets figure)
  4. Balance sheet test: Cos liabilities exceed its assets (look at net asset value-should be hugely positive to take into account short term liabilities)
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9
Q

Which way of proving insolvency is not conclusive and why

A

Cash flow test as it is just a snapshot in time

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10
Q

Outcomes fo an insolvent company?

A
  1. Liquidation (aka. winding up)
  2. Administration
  3. Company Voluntary Arrangement
  4. Free standing Moratorium
  5. Restructuring plan
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11
Q

What is liquidation?

A

□ Process where business stops trading, assets sold, co ceases to exist
□ Dirs powers cease and liquidator runs co

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12
Q

3 types

What are the types of liquidation?

A

a. Compulsory liquidation
b. Creditors voluntary liquidation
c. Members voluntary liquidation (MVL)

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13
Q

How is compulsory liquidation commenced?

A

3rd party (petitioner) commences by presenting winding up petition at court on basis co unable to pay debts (1 of 4 grounds)

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14
Q

What happens during compulsory liquidation?

A

◊ Official Receiver automatically becomes cos liquidator
◊ Assets sold and proceeds used to pay creditors

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15
Q

When will the petitioner be prevented from proceeding with compulsory liquidation proceedings?

A

Co can show theres a genuine and substantial dispute in relation to the money owed (BUT court has unlimate discretion to wind up co if shows its unable to pay debts)

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16
Q

When may a court adjourn compulsory liquidation proceedings?

A

if co indicates itll be able to pay within reasonable period of time

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17
Q

How is Creditors voluntary liquidation commenced?

A

Commenced by co via agreement between Dirs and SH (usually bc of pressure from creditors/fears about wrongful trading claims ect)

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18
Q

When is members voluntary liquidation used?

A

ONLY available if co solvent
Usually used when wants to cease trading or its dormant

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19
Q

Which type of liquidation can ONLY be used when the company is solvent and what happens if the liquidator realises the company is insolvent during it?

A
  1. Members voluntary liquidation (MVL)
  2. MUST convert to CVL
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20
Q

What order are assets distributed in for liquidation?

A
  1. Fixed charge holder (surplus to liquidatior, shortfall=unsecured creditor)
  2. winding up expenses
  3. Preferential creditors (who rank and abate equally)
    *Employees (max £800)
    *HMRC
  4. Money subject to floating charges (in order of priority, subject to ring fencing)
  5. Unsecured creditors (who rank and abate equally)
  6. Shareholders
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21
Q

What does ‘Rank and abate equally’ mean?

A

all creditors in category, sharing the available money, receiving the same percentage of the outstanding debt that they are owed.

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22
Q

How do you calculate how much unsecured creditors will get?

A

Amount (pence in the £) unsecured creditors will get: Total available for unsecured creditors (divided by) value of unsecured creditors

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23
Q

What is ring fencing and how much can be ring fenced?

A

From 15 sept 2003
Is Setting aside portion of available money for floating charge holders for the benefit of unsecured creditors

Amount:
◊ 50% of first £10k of money received from prop is subject to floating charges
◊ AND20% remaining
◊ Up to a limit of £800k (or £600k for charges created before 6 April 2020 UNLESS ranks equally or in priority to pre April 2020 charge, £800k applies to both)

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24
Q

What happens during administration?

A

□ Independent insolvency practitioner (administrator) appointed to manage company (is in charge of co assets although doesn’t own them)
□ Dirs powers to run co. cease but they remain in office

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25
Q

What are the purposes of administration?

A
  1. Primary objective:rescue co as going concern
  2. If not practicable: achieve a better result creditors as a whole than if company was wound up
  3. If not practicable: realise (sell) property to pay one or more secured or preferential creditors
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26
Q

What does the administrator have a statutory duty to do?

A

increase assets available to creditors

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27
Q

What are Administrators statutory powers

A
  1. remove/app directors
  2. pay creditors (need court’s permission for unsecured creditor)
  3. callmeeting of creditors/SH
  4. dealing with property subject to floating charge
  5. dealing with property subject to fixed charge (with court permission)
  6. Investigate and apply to have transactions set aside/challenged
  7. commence fraudulent/wrongful trading proceedings against dirs
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28
Q

What is the difference between an administrator and an administrative reciever?

A
  • Administrator:duty to all creditors.
  • Administrative Receiver: primary duty to appointing party; secondary duty to others
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29
Q

What are the 2 routes for commencing administration proceedings?

A
  1. Court Route (court order following an application and hearing)
  2. Out-of-Court Route-appointment by Co,Dirs/QFCH
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30
Q

Who can use the out of court route for commencing administration (aka. appoint an administrator out of court)?

A
  1. The company or its directors
  2. A Qualifying Floating Charge Holder
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31
Q

What is a QFCH (Qualifying Floating Charge):

A

A floating charge where the charge doc:
1. States para 14 of schedule B1 to the IA 1986 applies to it
2. Allows holder to appoint an administrator or administrative receiver.
3. Covers substantially all company property (or does so when added to other security held by the same lender)

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32
Q

What must the court be satisfied of before commencing administration under the court route?

A
  1. Company is likely unable to pay its debts.
  2. Administration can likely achieve one of the three purposes of liquidation (see administrators duties)
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33
Q

As soon as reasonably practicable after applying for the court route for commencing administration, who must the applicant must notify?

A
  1. Any person who has appointed/is entitled to appoint an administrative receiver.
  2. Any Qualifying Floating Charge Holder entitled to appoint an administrator
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34
Q

What is the process for appointing an administrator out of court?

A
  1. Appointment by Co/directors:
    *serve notice on Court, QFCH, Lenders entitled to appoint an administrative receiver
    *file statutorty dec that co cant pay debts and ISNT in liquidation
  2. Appointment by QFCH:
    *Notify other QFCH with priority (so they can appoint an administrator if desired)
    *Floating charge must be enforceable (=charge holder entitled under the loan agreement to enforce the Security)
    *File a notice of appointment at court with A statutory declaration confirming QFC status, Floating charge enforceable, Appointment complies with IA 1986 (Sch B1)
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35
Q

When cant the company commence administration?

A

if a winding-up petition is already filed: must apply for administration via the court.

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36
Q

What comes into effect when administration is commenced and what is the effect of this?

A

Statutory Moratorium (freeze on creditor action)=
* No Legal Action: Prevents initiation/ continuation of legal claims against co
* No Judgment Enforcement by judgments.
* No Winding Up Petitions without the administrator’s consent.

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37
Q

Whats the process for administration?

A
  1. Administrator puts forward proposals to creditors (can request info/suggest amendments)
  2. Proposals approved if:
    majority in value of the creditors, present and voting, vote in favor PROVIDED that voting against arent more than 50% in value of creditors unconnected to the company
38
Q

When does administration end?

A

◊ Automatically after 1y (can be extended)
◊ By application to court if objective achieved/administrator feels it can no longer be achieved
◊ By application to court by creditor (who may then present winding up petition)

39
Q

What is Pre packaged(pack) administration?

A

=Company’s assets and business sold immediately upon entering administration, often to the existing management.
* The sale is pre-arranged before the administrator is appointed.

40
Q

What is Pre packaged(pack) administration often used for?

A
  • Legal way of selling business as a going concern.
  • Increases the likelihood of saving jobs.
  • BUT unsecured creditors not consulted and unlikely to receive much for debts owed
41
Q

What 5 claims can a liquidators/administrators may bring to preserve/increase assets?

A
  1. Avoidance of floating charges
  2. Preferences
  3. Transaction at undervalue
  4. Transactions defrauding creditors
  5. Extortionate credit transactions
42
Q

What is a claim for the avoidance of floating charges?

A

Charge automatically void where, at the ‘relevant time’ before the onset of insolvency, a charge was granted without the company receiving fresh consideration in exchange for granting security.

43
Q

Avoidance of floating charges: what is the ‘relevant time’?

A

◊ Charge for connected person=2y ending with onset of insolvency
◊ Anyone else= 12mo before onset of insolvency.

44
Q

Avoidance of floating charges: what is the ‘onset of insolvency’?

A

◊ Compulsory liquidation=date winding up petition presented
◊ CCL=date co formally enters liquidation (files notice of intention to app administrator or actual date it goes into admin if earlier)

45
Q

Avoidance of floating charges: what must be shown?

A

Charge to unconnected person:
◊ co was insolvent at time floating charge was given
◊ OR became insolvent as a result

Charge to connected person: not necessary to show this

46
Q

Avoidance of floating charges: who is a Person connected with co?

A
  1. Director/shadow director
  2. Close relative or business associate of a director or shadow director
  3. Associate of co (co in same group/co controlled by dir of insolvent co)
47
Q

Defences to Avoidance of floating charges

A

none, charge automatically invalid

48
Q

What is a preferences claim by liquidators/administrators?

A

Challenging transaction where co, at relevant time, has given preference to another party

49
Q

Preferences: what is a ‘Preference’?

A

where co positivley desires to put someone in a better position, in the event that the company went into insolvent liquidation or administration, than they would have been in otherwise.

50
Q

Preferences: what is the ‘Relevant time’

A

◊ preference to connected person=2y ending with onset of insolvency
◊ non connected person=6mo months ending with onset of insolvency

51
Q

Preferences: what must be shown?

A

◊ Co was insolvent at time of preference, or became insolvent as a result of preference.
◊ NO presumption of insolvency if the preference was given to connected person.

52
Q

Effect if a preference is proven?

A

Court may order:
◊ Release of security given by co
◊ Payment of proceeds of sale of prop forming part of transaction to co

Put co into position it would have been in if hadn’t entered transaction

53
Q

Defence to preference?

A

Commercial pressures-had no option ie bank would call in other loans if didn’t pay up/ preference a condition of a loan

54
Q

What is a claim for a transactions at an undervalue?

A

Can challenge any transaction entered at undervalue at relevant time
(can never inc granting of floating charge as this doesn’t deplete cos assets)

55
Q

Transactions at an undervalue: what is an ‘undervalue’?

A

Co makes a gift/ transaction for no consideration or significantly lower consideration than the consideration provided by the company

56
Q

Transactions at an undervalue: what is the ‘relevant time’?

A

2y before insolvency

57
Q

Transactions at an undervalue: what must be shown?

A

Co was insolvent:
*At time entered transaction
* OR as a result of entering transaction

(If transaction with connected person: Insolvency rebuttably presumed (=administrator doesn’t need to show co was insolvent, co must rebut in court))

58
Q

Defence to transactions at an undervalue

A

Transaction was entered into :
1. in good faith
2. AND for purpose of carrying on the business
3. AND when it was entered into, there were reasonable grounds for believing that it would benefit co
Eg. Couldn’t find another buyer at market price

59
Q

effect of succesful claim for Transactions at an undervalue

A

Court try restore the position to what it would have been if the company had not entered into that transaction”
Unless sold to Bonafide purchaser for value, director may be liable

60
Q

What is a claim for transactions defrauding creditors

A

Atransaction at an undervalue which the co entered into in order to put assets beyond the reach of someone making a claim against it or to prejudice the interests of that person in relation to any claim they might make

61
Q

Is there a time limit for transactions defrauding creditors?

A

No

62
Q

What can the court order for transactions defrauding creditors?

A

Challenge bought at discretion of court who will:
*Order prop be returned
* Discharge any security given by co as part of the transaction
No time limit (Usually only bought when time limits expired to bring

63
Q

Other than liquidators/administrators, who else can bring a claim for transactions defrauding creditors

A

Creditors as a ‘victim’ of the transaction.

64
Q

What is a claim for an Extortionate credit transaction

A

Can challenge extortionate transactions made 3y ending with the day company went into administration/liquidation

65
Q

Extortionate credit transaction: what does ‘extortionate’ mean?

A

Payments which are grossly exorbitant, or which otherwise grossly contravene ordinary principles of fair dealing.

66
Q

What is a Company Voluntary Arrangement (CVA)

A

a written agreement (statutory contract) between a company and its creditors where creditors agree to wait longer to receive debts OR accept part payment

67
Q

When is a Company Voluntary Arrangement (CVA) generally used?

A

business fundamentally sound BUT facing temporary cash flow issues (to prevent liquidation)

68
Q

How is a CVA proposal approved?

A

By:
○ 75% or more (in value)of creditors
○ 50% of non-connected creditors
(Secured creditors can only vote on unsecured debt owed to them)

69
Q

Who is chair of CVA meeting and whats their role?

A

○ Is generally the insolvency practitioner seeking to be appointed to supervise
○ Decides if creditors connected or not

70
Q

Effect of approval of CVA

A

*proposal is binding on all unsecured creditors in relation to past (not future debts)
*Does not affect the rights of secured or preferential creditors unless they agree.
*No moratorium unless use free standing one

71
Q

What is a scheme of arrangement?

A

*Not strictly an insolvency procedure.
*Can use at any time
*Requires two court hearings and creditor/shareholder meetings.
*Costly and complex used for large companies to restructure, often pre-takeover.

72
Q

When is a company eligible for a free-standing moratorium? (under CIGA 2020)

A
  1. Co unable/likely to become unable to pay its debts.
  2. Hasnt entered a moratorium in the past 12 months.
  3. Excludes certain companies (e.g., banks, financial services).
  4. English co without ongoing winding-up petitions.
73
Q

How is a Free standing Moratorium obtained?

A
  1. Directors file relevant docs at court
  2. Proposed monitor must confirm the moratorium could help rescue the company as a going concern.
74
Q

Effect of free standing moratorium?

A

*Dirs remain in control, BUT a qualified insolvency practitioner oversees the moratorium and can terminate in some circumstances
*Pre-moratorium debts: Suspended (with some exceptions).

75
Q

Which pre-moratorium debts are NOT suspended during the moratorium and must be paid in full?

A
  1. Wages
  2. monitor’s fees
  3. new goods/services supplied during the moratorium
76
Q

How long does a Free standing Moratorium last?

A

*20 business days, starting the business day after filing.
*Can be extended by up to 1y with creditors consent

77
Q

What is a restructuring plan?

A

*A court-supervised tool for restructuring Co
*Is a compromise/arrangement between co and creditors/shareholders.

78
Q

Process of a restructuring plan?

A
  1. Dirs prep plan and apply to court to convene meetings of creditors/ OR Creditors/SH initiate
  2. First hearing: Creditors can make representations
  3. creditor and SH meetings: (Creditors and SH grouped into classes, A class approves the plan if 75% (by value) vote in favor)
  4. Second hearing: Court decides whether to sanction the plan.
79
Q

What is a key feature of a restructuring plan?

A

Cross-Class Cram Down:
Dissenting classes of creditors can be forced to accept the plan (“crammed down”) if:
◊ Plan is deemed viable.
◊ Court ensures no dissenting class would be worse off than in a liquidation scenario before sanctioning the plan.

80
Q

What are options for secured creditors on insolvency/if a co defaults on its loan agreement?

A

Have right to appoint a receiver to manage or sell the secured property if the company defaults on its loan agreement:
1. Appoint an LPA receiver
2. Appoint an administrative receiver

81
Q

What is a receivers role?

A

Appointed to sell the charged property for the benefit of the charge holder. After the sale, the receiver has no further involvement with the property.

82
Q

What are triggers for going into Receivership?

A
  • Usually when company defaults on the loan agreement.
  • Charging doc specifies when a receiver can be appointed
83
Q

Does a company need to be insolvent to go into receivership?

A

no

84
Q

Who can appoint an LPA reciever?

A

a fixed charge holder

85
Q

What will an LPA receiver do?

A

Sell charged property to repay the creditor.
Surplus proceeds (if any) are returned to the company and can be distributed to unsecured creditors.

86
Q

Must an LPA reciever be a licensed insolvency practitioner?

A

no

87
Q

What is an administrative receivers role?

A

*Run company
*Sell charged assets
*Use proceeds to pay own costs and charge holders loan

88
Q

Who can appoint an administrative reciever?

A

*Floating charge holders
*Generally for floating charges created before 15 September 2003
*Where charge is over cos whole undertaking

89
Q

When can an administrative reviever be appointed

A

Loan agreement will specify events triggering lenders ability to appoint receiver

90
Q

What happens to an administrative receiver post-sale?

A

Administrative receivers generally resign, but liquidation often follows since the company typically cannot continue as a going concern after asset sales.

91
Q

What type of creditors vote on the approval of a CVA?

A

unsecured only, secured creditors have no vote, apart from in relation to any part of the debt owed to them which is unsecured.

SQE 1 (46 decks)

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