Business - Insolvency Flashcards
What is corporate insolvency?
A company is deemed unable to pay its debts when certain conditions are met, such as failure to pay a statutory demand or being unable to pay debts as they fall due.
Conditions for insolvency are specified in Sections 122 and 123 of the IA 1986.
What are the five tests for corporate insolvency?
- A creditor has served a statutory demand for £750 or more and the company does not pay within 21 days
- A creditor has obtained judgment and the debt remains unpaid
- It can be proved to the court that the company cannot pay its debts as they fall due (cash flow test)
- It can be proved to the court that the company’s liabilities exceed its assets (balance sheet test)
- A winding-up petition has been presented against the company.
What is liquidation?
The process where a company’s business stops trading, its assets are sold, and it ceases to exist.
A liquidator is appointed to run the process.
What is compulsory liquidation?
A process commenced by a third party, usually a creditor, presenting a winding-up petition at court.
The petitioner must prove that the company is unable to pay its debts.
What is a winding-up petition?
The first stage in a company’s liquidation where creditors seek to recover debts by selling the company’s assets.
It is often issued when creditors believe they will not be paid.
What is creditors’ voluntary liquidation (CVL)?
A process initiated by the company through agreement between directors, shareholders, and creditors, often under pressure from creditors.
Directors may face personal claims if they continue trading while insolvent.
What is members’ voluntary liquidation (MVL)?
A liquidation process available only if the company is solvent, requiring directors to declare the company solvent.
Common in dormant companies or when directors wish to retire.
What are the claims that liquidators and administrators may bring?
- Avoidance of certain floating charges
- Preferences
- Transactions at an undervalue
- Transactions defrauding creditors
- Extortionate credit transactions
What is the definition of a void floating charge?
A charge that is automatically void if granted without fresh consideration before insolvency, within specific timeframes.
The relevant time varies depending on whether the charge is to a connected person or not.
What constitutes a preference in insolvency terms?
A preference occurs when a company gives another party a better position in insolvency than they would otherwise have.
This can include paying one creditor before others.
What is a transaction at an undervalue?
A transaction where the company makes a gift or receives significantly less consideration than it gives.
Challenged by liquidators if entered into while the company was insolvent.
What is an extortionate credit transaction?
A transaction requiring grossly exorbitant payments or contravening fair dealing principles, challengeable by liquidators.
Rarely proven due to difficulty in establishing grossly exorbitant payments.
What is a transaction defrauding creditors?
A transaction at an undervalue intended to put assets beyond the reach of creditors or prejudice their claims.
It involves deliberate actions to hinder creditor recovery.
What is the order of payments in liquidation?
- Expenses of winding up
- Preferential debts
- Money subject to floating charges
- Unsecured creditors
‘Rank and abate equally’ means creditors in the same category share the funds proportionally.
What are preferential debts?
Debts that must be paid before other unsecured creditors, including employee wages and holiday pay.
HMRC became a secondary preferential creditor for certain taxes in December 2020.
What is administration in insolvency?
A process where an administrator is appointed to run the company and improve its financial performance, aiming for a better outcome than liquidation.
Legal actions against the company are paused during administration.
What is a company voluntary arrangement (CVA)?
A procedure that allows a company to propose a repayment plan to creditors to avoid liquidation, requiring majority approval.
It is often less expensive and simpler than administration.
What are the three ways a creditor can prove individual insolvency?
- Serving a statutory demand for £5,000 or more
- Serving a statutory demand for a future liability of £5,000 or more
- Obtaining a court judgment for £5,000 or more and attempting execution without success.
What is the bankruptcy procedure?
Begins with a creditor presenting a petition or a debtor applying for bankruptcy online, requiring a debt of £5,000 or more.
The court decides whether to make a bankruptcy order.
What property can a bankrupt keep?
Essential items for daily living such as work tools and household items, although high-value items may be sold by the trustee.
The bankrupt’s estate generally includes most of their property.
Who decides whether to make a bankruptcy order?
An adjudicator from the Insolvency Service.
What property is the bankrupt allowed to keep?
Items needed for day-to-day living, such as:
* Tools of their trade
* Everyday household items (clothing, furniture)
What happens to a bankrupt’s home?
The bankrupt’s interest passes to the trustee unless someone else has a legal interest.
What is the trustee’s primary duty?
To the creditors.
