Business Law Flashcards
Insolvency options for a sole proprietor or partnership
- negotiation with a creditor for less time to pay or reduction in what must be paid (though lack of consideration)
- An individual voluntary arrangement in which number of creditor agree to accept a reduced amount of money and payment at a different time
- Bankruptcy
IVA requirements (sole trader/partnership)
Insolvency practitioner engaged and will:
- have the debtor prepare statement of affairs
- apply to the bankruptcy court for an interim order which prevents creditors from filing a bankruptcy petition
- prepare a report advising whether there is a realistic chance a proposal can be crafted that might be accepted and calling a meeting of creditors
Approval of an IVA requires approval of the creditors owed at least 75% of the unsecured debts owed by the debtor (and 50% of all)
IVA binding on all ordinary unsecured creditors
Preferential, creditors and secured creditors are not bound unless they agreed to the proposal
Insolvency practitioner will supervise and implement the plan
If the debtor fails to comply with the IVA or provides misleading statements, the supervisor or any creditor who is the party to the IVA may position for the debtor’s bankruptcy
Bankruptcy (effect and application)
Judicial process in which the assets of the bankrupt are passed to a third-party, the trustee bankruptcy, who liquidates the assets and uses the money from the liquidation to pay off as many of the debtor’s debts as possible
An official receiver (trustee is bankruptcy) can be appointed unless the creditors seek to appoint their own nominee
The debtor’s creditors must stop chasing after the debtor and the debtor will be discharged for most of their debts after one year
The debtor can apply online for a bankruptcy order, the supervisor of the IVA may apply of debtor in default of the IVA or an unsecured creditor owed at least £5,000 may apply
Debtor’s property vests in the trustee, but the debtor may keep things needed for day-to-day living, salary or tools for their job
The bankrupt may not apply for a credit over a prescribed amount, act as a company director, be a partner, trade under another name
Unsecured creditor applying for debtor’s bankruptcy
Must be owed at least £5,000
The application must prove that the debtor is insolvent (unable to pay its debts) by showing either that the debt is payable immediately and the debtor does not have funds to pay OR the debt is payable in the future, and the debtor has no reasonable prospects of being able to pay
- liquidated debt: creditor may make a statutory demand for payment and if the debt is not paid within three weeks or the debtor does not set aside the statutory demand within three weeks, the debtor will be deemed insolvent
- future liability: statutory demand for proof of ability to pay, and if the debtor doesn’t show a reasonable prospect of being able to pay the debt when it falls due or set aside the order, deemed insolvent
- the creditor can seek to execute a judgment debt and if not successful, deemed insolvent
Insolvency options for a company or LLP
- receivership
- Restructuring plan
- Administration
- company voluntary arrangement
- moratorium
- liquidation (voluntary or compulsory)
Receivership
- available for creditors with a fixed charge
- If the company defaults the creditor can appoint a receiver to take the charged asset and sell it to pay off the debt
- no proof of insolvency needed
- Duties are owed to the secured creditors only
Restructuring plan
Allows companies to restructure their debts with the sanction of the court if approved by those owed at least 75% in value of the unsecured debts
Administration
Enables the administrator (an independent insolvency practitioner) to run, re-organize and/or sell the company as a going concern
Administrator acts in the interest of the creditors as a whole
Company can go into administration through 1) a formal court hearing or 2) by by filing certain papers with the court
The court can make the order only if the court is satisfied that the order is likely to achieve a better result for the company’s creditors than liquidation
Company voluntary arrangement
The process is started by the directors of the company who make a written proposal to the creditors and nominated is always a practitioner to supervise the CVA
75% or more value of the unsecured creditors must agree to the CVA
Moratorium
Can be sorted whilst the company seeks to implement liquidation devices
The moratorium is a court order which halts most actions by creditors to enforce their rights
The directors of the company will appoint an insolvency practitioner as a monitor to oversee the company’s affairs, and ensure that it is likely that the moratorium will result in a rescue of the company as a going concern
The directors remaining in charge of running the business
Voluntary liquidation
In a member’s voluntary liquidation the members and directors control the process from the start to finish
- it’s available only if the company is insolvent, but the individuals involved wish to wind it up
In a creditor is voluntary liquidation, the directors start the process, which is then taken over by the creditors.
- Usually commenced because the directors are advised that the company is insolvent, and if they continue trading, they could be personally liable for the debts of the company through fraudulent or wrongful trading
- The director resolve that the company is insolvent and should be placed into liquidation, and the members pass a special resolution to start the liquidation
Company compulsory liquidation
A creditor who can show that the company is unable to pay its debts can petition for the company to be wound up
The court does not have to accept the petition
Liquidator or creditors nominee will be appointed to pay the debts
Company unable to pay debts if
- creditor is owed more than 750 pounds and they serve a statutory demand which is not paid within 21 days
- Creditor has obtained judgment and attempted to execute it, but is not fully satisfied
- Company is unable to pay debts as they fall due (cash flow test)
- Value of assets less than liabilities (balance sheet test)
Setting aside a floating charge and ring fencing
Floating charges automatically void if the floating charge was created
- for no consideration within 12 months ending with the onset of insolvency (or 2 years for a connected person); and
- at the time, the company was insolvent or became insolvent as a result (if to a non-conmected person, otherwise no need to show this)
Ring fencing
- A liquidator is required to set aside part of the assets, subject to a floating lien for the benefit of unsecured creditors
- 50% of the first £10,000 in value of the property, subject to a floating charge and 20% on amounts above, up to a maximum ring-fenced amount of £800,000
