Business 7: Corporate Insolvency Flashcards
What claims can be bought against directors of an insolvent company and what types of offence are they?
Wrongful trading (civil offence)
Fraudulent trading (s213 IA 1986) (criminal offence)
Misfeasance
Who can bring a claim for wrongful or fraudulent trading?
only a liquidator/administrator
Elements of wrongful trading?
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
Defence to wrongful trading?
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.
Steps Dirs can take to minimise change of successful
Examples of steps a director can take to minimise the chance of a sucessful wrongul trading claim?
*Seek professional advice (sol/accountant) at fist sign of problem
*Limit spending
*Check cos accounts regularly
*Keep record of own actions
What is fraudulent trading?
in the course of the co being wound 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.
What is misfeasance and what is the effect of it?
Breach of fiduciary/other duty by dirs
Effect: As well as being ordered to contribute to assets, may also be ordered to repay/restore/ account for money/prop that’s been disapplied in breach of duty
4 ways of proving a company is insolvent?
- If creditor serves statutory demand for £750 or more, and if Co doesn’t pay within 21 days
- Creditor obtains judgment against Co,tried to enforcem, but debt still not been paid in full/
- Cash flow test: Co is unable to pay its debts as they fall due (look at net current assets figure)
- Balance sheet test: Cos liabilities exceed its assets (look at net asset value-should be hugely positive to take into account short term liabilities)
Outcomes fo an insolvent company?
- Liquidation (aka. winding up)
- Administration
- Company Voluntary Arrangement
- Free standing Moratorium
- Restructuring plan
What is liquidation?
□ Process where business stops trading, assets sold, co ceases to exist
□ Dirs powers cease and liquidator runs co
What are the types of liquidation?
a. Compulsory liquidation
b. Creditors voluntary liquidation
c. Members voluntary liquidation (MVL)
How is compulsory liquidation commenced?
3rd party (petitioner) commences by presenting winding up petition at court on basis co unable to pay debts (1 of 4 grounds)
What happens during compulsory liquidation?
◊ Official Receiver automatically becomes cos liquidator
◊ Assets sold and proceeds used to pay creditors
When will the petitioner be prevented from proceeding with compulsory liquidation proceedings?
if 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)
When may a court adjourn compulsory liquidation proceedings?
if co indicates itll be able to pay within reasonable period of time
How is Creditors voluntary liquidation commenced?
Commenced by co via agreement between Dirs and SH (usually bc of pressure from creditors/fears about wrongful trading claims ect)
When is members voluntary liquidation used?
ONLY available if co solvent
Usually used when wants to cease trading or its dormant
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?
- Members voluntary liquidation (MVL)
- MUST convert to CVL
What order are assets distributed in for liquidation?
- Fixed charge holder (surplus to liquidatior, shortfall=unsecured creditor)
- winding up expenses
- Preferential creditors (who rank and abate equally)
*Employees (max £800)
*HMRC - Money subject to floating charges (in order of priority, subject to ring fencing)
- Unsecured creditors (who rank and abate equally)
- Shareholders
What does ‘Rank and abate equally’ mean?
all creditors in category, sharing the available money, receiving the same percentage of the outstanding debt that they are owed.
How do you calculate how much unsecured creditors will get?
Amount (pence in the £) unsecured creditors will get: Total available for unsecured creditors (divided by) value of unsecured creditors
What is ring fencing and how much can be ring fenced?
From 15 sept 2003
Is Setting aside portion of available money for floating charge holders for the benefit of unsecured creditors
Amount:
◊ 50% of the first £10,000 of money received from the property which is subject to floating charges ◊ AND 20% of the remaining money ◊ Up to a limit of £800k
(Prev limit of £600k for charges created before 6 April 2020 UNLESS ranks equally or in priority to pre April 2020 charge, £800k applies to both)
What happens during administration?
□ 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
What are the purposes of administration?
- Primary objective: rescue co as going concern
- If not practicable: achieve a better result creditors as a whole than if company was wound up
- If not practicable: realise (sell) property to pay one or more secured or preferential creditors
What does the administrator have a statutory duty to do?
increase assets available to creditors
What are Administrators statutory powers
(a) removing and appointing directors;
(b) paying creditors (but need court’s permission paying unsecured creditor;
(c) calling a meeting of creditors or shareholders;
(d) dealing with property subject to a floating charge;
(e) dealing with property subject to a fixed charge (with court permission);
(f) investigating and applying to have the company’s past transactions set aside/challenged
(g) commencing fraudulent or wrongful trading proceedings against directors.
What is a QFCH (Qualifying Floating Charge):
is a floating charge where the charge doc:
*States that para 14 of schedule B1 to the IA 1986 applies to it
*Allows the holder to appoint an administrator or administrative receiver.
*Covers substantially all company property (or does so when added to other security held by the same lender)
What is the difference between an administrator and an administrative reciever?
*Administrator: has a duty to all creditors.
Administrative Receiver: Primarily duty to appointing party; secondary duty to others.
What are the 2 routes for commencing administration proceedings?
- Court Route (court order following an application and hearing)
- Out-of-Court Route
What must the court be satisfied of before commencing administration under the court route?
*company is likely unable to pay its debts. *Administration can likely achieve one of the three purposes of liquidation (see administrators duties
As soon as reasonably practicable after applying for the court route for commencing administration, whi must the applicant must notify?
*Any person who has appointed/is entitled to appoint an administrative receiver. *Any Qualifying Floating Charge Holder entitled to appoint an administrator
How does the out of court route for commencing administration work?
- 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 - 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)
When cant the company commence administration?
if a winding-up petition is already filed: must apply for administration via the court.
What comes into effect when administration is commenced and what is the effect of this?
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.
What happens during administration?
- 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 those who vote against do not constitute more than 50% in value of the creditors who are unconnected to the company
