Business - Corporate Insolvency (14) Flashcards
What is corporate insolvency?
Corporate Insolvency: Corporate insolvency generally occurs when a company is unable to pay its debts. It will then typically be made subject to an insolvency procedure (these may apply in other instances as well).
(1) Insolvent Company: Company cannot pay its debts.
(2) Insolvency Procedure: A process to deal with the insolvent company. This could involve cessation, sale, or otherwise.
How is insolvency assessed?
Corporate insolvency
Insolvency Test: A company is insolvent when it cannot pay its debts. This can be determined in four ways (ss122-123 IA).
(1) Statutory Demand: A creditor serves a ‘statutory demand’ for a debt of at least £750, and the company does not pay or come to an arrangement within 21 days.
(2) Court Judgment: A creditor has obtained a court money judgment against the company, and attempted unsuccessfully to enforce it. More typical for larger debts.
(3) Cash Flow Test: The company cannot pay its debts as they fall due, irrespective of value. On the balance sheet, current liabilities outweigh current assets. This is difficult for a creditor to prove.
(4) Balance Sheet Test: The company’s net liabilities outweigh its net assets, as shown on the balance sheet. This can be difficult to prove as well.
>Balance sheets are only snapshots, meaning assets may be worth more or less than they seem.
Apart from insolvency why would a company want to enter an insolvency procedure?
Other Forms: Whilst not technically insolvent, there are other reasons that a company may enter an insolvency procedure.
(1) Voluntary: The board may voluntarily enter a procedure, either to bring a company to an end or in response to pressure.
(2) Member Petition: Shareholders can petition the court to force the company to wind up, if ‘just and equitable’ to do so (s122 IA). This may be because there is a deadlock in membership that cannot be resolved.
How are insolvency procedures commenced?
Insolvency Procedure: An insolvent company does not automatically enter an insolvency procedure. Nor does a company necessarily need to be insolvent to enter every insolvency procedure. It will differ case-by-case (below).
What is a company voluntary arrangement?
Company Voluntary Arrangement: CVAs are insolvency procedures in which a company will enter a binding arrangement with its creditors in order to avoid more stringent procedures such as liquidation.
(1) Arrangement: The arrangement will normally be an agreement to delay or reduce debts, usually with the benefit that creditors are more likely to receive payout.
(2) In Practice: CVAs are more common where a company is operational but ‘technically’ insolvent, i.e. cash flow issues. It is usually cheaper than other insolvency procedures, and permits the board to retain control.
What is the procedure for a company voluntary arrangement?
Procedure: The board will propose the arrangement to the creditors, who must vote in favour. Alternatively, a liquidator or administrator can enter a CVA during their control of the company.
(1) Approval: The arrangement must be approved by: a) 75% in value of all unsecured creditors; and b) 50% in value of all unconnected unsecured creditors (connections determined by the Chairperson).
(2) Secured Creditors: Secured creditors do not have to vote, as they can recoup debts through their security. However, they can vote and become bound if they desire.
What is liquidation?
Liquidation: Liquidation is an insolvency procedure in which the company is wound up, and its assets sold to satisfy debts. It is therefore a very consequential process that companies generally try to avoid (ss73-229 IA).
How is liquidation commenced?
Commencing Liquidation: Liquidation can be commenced in three ways.
(1) Compulsory Liquidation: A party presents a winding-up petition to court, evidencing that the company is insolvent. The court can then force the company into liquidation (unless debts can be paid in a reasonable time).
>Parties may be creditors, administrators, or even the company.
(2) Creditors’ Voluntary Liquidation: The Company may enter liquidation itself in response to creditor pressure. This requires special resolution, followed by ordinary resolution to appoint a liquidator.
>Directors will usually do this to avoid personal liability for mismanagement.
(3) Members’ Voluntary Liquidation: The Company may enter liquidation to cease trading in an ordered manner. This also requires SR followed by OR.
>Directors must declare that the company can pay its debts during the winding up period (>12 months).
What is the procedure for liquidation?
Procedure: The liquidation process is as follows:
(1) Appointment: A liquidator is appointed. This will be an officer of the court if compulsory, or a private practitioner if voluntary.
(2) Removal of Directors: Directors lose their power. The liquidator takes control of the company.
(3) Liquidation: The liquidator directs the day to day business of the company, challenging relevant transactions, selling assets and paying creditors. Their duty is to maximise debt repayments.
(4) Winding Up: The liquidator will then wind up the company, and prepare ‘final accounts’. The Registrar of Companies will officially dissolve the company 3 months after application.
What is the purpose of administration?
Administration: Administration is similar to liquidation, but generally preferred for its three aims. In order these are:
(1) Rescue: The primary aim is to rescue the business as a going concern.
(2) Better Outcome: Failing this, it aims to provide a better outcome to all creditors than is likely in liquidation.
(3) Ordered Distribution: Failing this, it aims to realise and distribute property to secured and preferential creditors, typically aiming to provide higher returns than in liquidation.
How is administration commenced?
Commencing Administration: There are two ways administration can be commenced. The court route and the out-of-court route.
(1) Court route: Applicant applies to court for administration order. Court needs to be satisfied that a) the company is likely to become unable to pay its debts and b) it is reasonably likely to achieve one of the three purposes of administration.
- Notice: As soon as reasonably practicable after applying, the applicant must notify any person who has appointed or is entitled to appoint an administrative receiver of the company and any qualifying charge holder who is entitled to appoint an administrator (see below).
(2) Out-of-Court-Route: There are two Out-of-Court-Procedures, the first is initiated by the company/directors/unsecured creditor. An administrator can be without application to the court.
- Notice: Notice of intention of administration served on a) the court, b) QFCH and c) any lender entitled to appoint administrative receiver.
- Statutory Declaration: Directors must file a statutory declaration at court to state that company is unable to pay debts and is not in liquidation. As soon as filed at court, moratorium starts.
- Compulsory Winding Up Petition: If a compulsory winding up petition has been presented at court, this route cannot be used. Must apply to court for order that the winding up petition be replaced by administration.
(3) Out-of-Court-Route (QFCH): The second Out-of-Court-Procedure allows a Qualifying Floating Charge Holder (QFCH) to appoint an administrator without application to the court. Administration commences when necessary documents are filed at court.
- Charge Document: Must a) state that the charging document empowers the holder to appoint an administrator, b) the charge document/the lender’s aggregated charges relate to the whole or substantially the whole of the company’s property, c) the loan agreement must be enforceable under the charge e.g. due tolate payment.
- Other Lender with Priority: The lender must notify them in advance to give them the opportunity to appoint the administrator if they wish.
- Notice: The lender must file notice at court.
- Statutory Declaration: Alongside the notice, must file a statutory declaration confirming everything in Charge Document.
What is the procedure for administration?
Procedure: The administration process is as follows:
(1) Appointment: The administrator is appointed, and can be a court officer or private practitioner.
(2) Removal of Directors Powers: The directors lose their powers, but remain in office.
(3) Statutory Moratorium: A statutory moratorium is imposed, preventing the issue or continuation of litigation or winding up petitions without approval of the administrator.
(4) Administration: The administrator can change the board, pay creditors, organise meetings, deal with charges, and will challenge transactions and directors (below).
(5) Creditor Arrangements: The administrator will propose arrangements to the creditors, usually to maximise their returns (similar to a CVA).
>Majority in value of present unsecured creditors must vote in favour, provided connected creditors are not more than 50% in value.
(6) End of Administration: Administration ends automatically after 1 year unless extended. This can be ended early by application to court, if administration has been successful or objectively cannot be.
What is pre-pack administration?
Pre-Pack Administration: Companies can also enter ‘pre-pack’ administration. The administrator sells the business and its assets immediately. This is a means of preserving jobs when a company has agreed to sell. Unsecured creditors get no say.
Aside from the key corporate insolvency arrangements, what are the other arranagements?
Other Arrangements: There are a number of other insolvency procedures that exist as well, though are less common.
Restructuring Plan
Free-Standing Moratorium
Secured Creditor Procedures
Who can challenge transactions?
Challenging Transactions: A major power of liquidators and administrators is the ability to investigate and set aside ‘improper transactions’ that occurred prior to insolvency. The company can reclaim its losses in order to pay creditors.
