Business Law and Practice

Question 1

What decisions do shareholders make?

Answer 1

1. Decisions which the shareholders alone make. E.g. changing the articles or changing the name.
2. Decisions which give the directors permission to enter into certain types of contract which carry particular risks for the company, or where the directors could potentially use their position as a director to benefit personally from the contract.

Question 2

Which model article provides for delegation of decision-making activities amongst directors?

Answer 2

MA 5

Question 3

What are some rules to do with board meetings?

Answer 3

MA 9 - Notice. Notice must be reasonable.
MA 11 - Quorum. Quorum shall be 2, unless there is 1 director.
MA 14 - Interest. A director may not count in the quorum or vote if a proposed decision of the board is:
- concerned with an actual or proposed transaction or arrangement with the company;
- in which a director is interested
s177 CA - Interest. Where a director has a personal interest in a proposed transaction or arrangement with the company, the must declare the nature and extent of this interest to the board.
MA 7 - Vote. Board resolutions are passed by a simple majority.

Question 4

What are the exceptions to the requirement for directors to declare any interest with relation to a proposed transaction?

Answer 4

1. If it cannot reasonably be regarded as likely to give rise to a conflict of interest.
2. If, or to the extent that, the other directors are already aware o fit.
3. If, or to the extent that, it concerns terms of a service contract that have been or are to be considered…by a meeting of the directors.

Question 5

How may a poll vote be demanded?

Answer 5

By:
a) the chair of the meeting;
b) the directors;
c) two or more persons having the right to vote on the resolution; or
d) a person or persons representing not less than one tenth of the total voting rights of all shareholders having the right to vote on the resolution.
(MA 44(2))

Question 5

What is the difference between ordinary and special resolutions?

Answer 5

Ordinary - majority vote.
Special - 75% vote.

Question 6

How are general meetings called?

Answer 6

By the directors through a board resolution. This may be following the request by shareholders.
There is no requirement for AGMs under CA 2006, unless inserted in the articles.

Question 7

What are some rules regarding general meetings?

Answer 7

s307 and s360 CA - Notice. The minimum notice period required for a general meeting is 14 clear days. If notice is sent by post or email, it is deemed to be received 48 hours after the notice was posted or emailed.
s318 CA - Quorum. Subject to the articles, the quorum is 2.

Question 8

What happens if a shareholder is personally interested in a matter?

Answer 8

Shareholders are generally not prevented from counting in the quorum or voting if they are personally interested in the matter. There are two situations in which a shareholder may vote but their votes may not be counted if it is their votes which make the difference:
1. A resolution to buy back some or all of a shareholder’s shares, because the shareholder in question could be voting in their own interests, not the company’s when voting; and
2. An ordinary resolution to ratify a director’s breach of duty under s239 CA where the director in question is also a shareholder because they would almost certainly vote in favour of ratifying their breach of duty as a director.

Question 9

How can a generally meeting be called on short notice?

Answer 9

s307(5)-(6) CA:
For a general meeting to be validly held on short notice:

• a majority in number of the company’s shareholders;
• who between them hold 90% or more of the company’s voting shares

must consent.

Question 10

Can shareholders of a private company pass a written resolution?

When are they passed?

Answer 10

Yes - under s288 CA. But shareholders of public companies cannot.

Written resolutions are passed when the required majority of eligible members have signified agreement to the resolution. The lapse date is 28 days from circulation (doesn’t matter which method used). Agreement after this date will not be counted.

Question 11

What are the post-decision requirements?

Answer 11

1. Filing at companies house. Copies of all special resolutions must be filed and some ordinary resolutions too.
2. Internal administration. E.g. registers, board minutes etc.

Question 12

All companies must keep adequate accounting records. Directors of every company (apart from private companies classed as a small company or micro-entity under CA) must prepare a directors’ report for each financial year to accompany the accounts. Whats. a small company?

Answer 12

A company with a balance sheet total of not more than £5.1 million, a turnover of not more than £10.2 million, and no more than 50 employees in a particular financial year.

Question 13

Must a company have a secretary?

Answer 13

No for private companies but public companies must.

Secretaries for private companies do not need specific qualifications. They will normally have apparent authority to enter into contracts of an administrative nature, but not trading contracts.

They can resign or be removed by board resolution.

Question 14

Must a company have an auditor?

Answer 14

Yes, unless you are a small company. Dormant companies are also exempt from audit.

Auditors do not owe a duty of care to shareholders. They can be sued for negligence by the company they are auditing.

They can be removed at any time by ordinary resolution.

Question 15

Who needs to keep a PSC register?

Answer 15

All private companies and non-traded public companies.

Question 16

What are the grounds for an unfair prejudice petition?

Answer 16

1. The company’s affairs have been conducted in a manner that is unfairly prejudicial to the interests of the members generally, or some part of its members (including the claimant); or
2. an actual or proposed act or omission of the company is would be so prejudicial.

Most common is an order that the other shareholders must buy the shares of the unfairly prejudiced shareholder or to order the company to buy them back.

Question 17

What is a derivative claim?

Answer 17

A claim instigated by a shareholder for a wrong done to a company which has arisen from an act or omission of a director. This allows shareholders to instigate legal action instead of the board, because the board is neglecting to bring a claim or is refusing to do so .

Question 18

What is a substantial property transaction?

Answer 18

A SPT is where:
- a director, int heir personal capacity, or someone connected with a director
- buys from or sells to the company
- a non-cash asset
- of substantial value.

If the board wishes to enter into a SPT, the consent of shareholders by ordinary resolution is required. If not got, the transaction is voidable.

Question 19

Who is a person connected to a director?

Answer 19

Set out in ss252-254 CA 2006.

Is either a member of a director’s family or a company in which the director i or a person/persons connected with a director:
- own/owns at least 20% of the body corporate’s shares; or
- is/are entitled to exercise or control the exercise of more than 20% of the voting power at any general meeting of the company.

The director’s family is defined as:
- spouse or civil partner
- child or stepchild
- parents
- a person who lives in an enduring relationship with the director as their partner
- any children of a person who lives in an enduring relationship with the director as their partner

Question 20

What is a non-cash asset?

Answer 20

Any property or interest in property, other than cas. A loan is not covered.

Question 21

What is classed as substantial for SPTs?

Answer 21

Two ways:
- automatically classed as substantial is valued over £100,000
- substantial if worth more than £5,000 and more than 10% of the company’s net asset value.

Question 22

Who is liable if the company enters into an SPT wihtout the necessary consent of shareholders?

Answer 22

The following individuals may be ordered to account to the company for any gain they may have made ans to indemnify the company for any loss or damage resulting:
- any director with whom the company entered into the arrangement;
- any person with whom the company entered into the arrangement who is connected with a director of the company or of its holding company, and the director with whom any such person is connected; and
- any other director of the company who authorised the arrangement or any transaction entered into in pursuance of such an arrangement.

Question 23

What form do you fill out to incorporate a new company? What do you submit it along with?

Answer 23

Form IN01

Memorandum of association, articles of association (maybe) and the applicable fee

Question 24

What is significant control?

Answer 24

• holds more than 25% of the shares in the company; or
• holds more than 25% of the voting rights in the company; or
• holds the right to appoint or remove a majority of the board of directors of the company.

Question 25

What must you file at Companies House to re-register as a public company?

Answer 25

• special resolution
• an application for re-registration on Form RR01, which includes a statement of compliance
• the fee for re-registration
• the revised articles
• a balance sheet and a written statement from the company’s auditors, and a valuation report on any shares which have been allotted for non-cash consideration between the date of the balance sheet and the passing of the special resolution.

Question 26

What protections are available to minority shareholders?

Answer 26

• Unfair prejudice petitions
• Derivative claims

Question 27

Can a loan be made to a director?

Answer 27

No - unless the transaction has been approved by the shareholders by ordinary resolution.

Question 28

What are executive directors?

Answer 28

Those who have been appointed to the board of directors and also have an employment contract with the company.

Question 29

When must the shareholders approve entrance into a service contract?

Answer 29

When the service contract has a guaranteed term of more than two years. Ordinary resolution needed.

If company has power to terminate under two years, doesn’t fall in this category.

Question 30

What is special notice?

Answer 30

This means that the ordinary resolution to remove the director is not effective unless notice of the intention to pass it has been given to the company at least 28 days before the general meeting at which the resolution is proposed.

Question 31

What is a Bushell v Faith clause?

Answer 31

Such a clause gives someone who is both a shareholder and a director greater voting rights as a shareholder if the resolution in question is a resolution to remove that person as a director.

Question 32

What does s551 CA provide?

Answer 32

An ordinary resolution of the shareholders is needed before the company can allot shares.

Question 33

When do pre-emption rights not apply?

Answer 33

• allotment of bonus shares
• if the consideration for the allotment is wholly or partly non-cash
• if the shares are to be held under, allotted or transferred pursuant to an employee share scheme

Question 34

What does s 550 CA provide for?

Answer 34

Where a private company has only one class of shares, the directors can allot shares of that class/grant rights to subscribe for or convert security for such shares, subject to the articles.

Question 35

What is share capital?

Answer 35

The money provided by shareholders in return for shares.

It is a long-standing principle of company law that this fund cannot be reduced, because it is the fund which creditors look to for payments of debts owed to them.

Question 36

What is needed for a company to buy back its own shares?

Answer 36

Ordinary resolution.

Question 37

What requirements for share buyback does the CA provide?

Answer 37

1. The company’s articles must not forbid buyback
2. The shares must be fully paid
3. The company must pay for the shares at the time of purchase
4. The shares must usually be paid for out of distributable profits or the proceeds of a fresh issue of shares made for the purpose of financing the purchase.
5. The shareholders must pass an ordinary resolution authorising the buyback contract
6. A copy of the buyback contract, or a summary of it, must be available for inspection for at least 15 days before the general meeting and at the general meeting itself (or be sent with the proposed written resolution when or before it is circulated)
7. a copy of the buyback contract or, if not in writing, a written memorandum setting out its terms, must be made available for inspection at the company’s RO or SAIL as soon as the contract has been concluded, for a period of ten years starting with the date of the buyback.

Question 38

What is an exception the rule that shareholders can vote on matters which they are interested in?

Answer 38

An ordinary resolution to approve a buyback.

Question 39

Can companies buyback shares out of capital?

Answer 39

Private - yes, if they have exhausted all their distributable profits first and if the articles do not forbid this.

Public - no.

Question 40

What is needed for a company to buyback shares out of capital?

Answer 40

1. Directors make a statement of solvency, no sooner than one week before the GM, stating that the company is solvent and that it will remain so during the year after the buyback.
2. Auditors’ report annexed to the statement.
3. Payment of capital must be approved by special resolution. In addition to ordinary resolution to approve buyback contract. Written - shareholder in question can’t vote, meeting - can vote but can’t be deciding factor.
4. copy of the statement and report must be available to members
5. within 7 days of the special resolution being passed, the company must put a notice in the London Gazette, stating that the shareholders have approved payments of capital.
   - must specify amount of capital to be used
   - date of SR
   - where the report etc. is available for inspection
   - state that creditors can apply to prevent this under s721 within five weeks of SR
   must also be published in appropriate national newspaper or give notice to creditors.
6. copy of statement and report filed at CH before or at the same time as the notices in Gazette and newspaper
7. must be kept available for inspection at RO from time of first notice until 5 weeks after SR
8. if no objections, board meeting to be held and approve entry into contract. payment of capital must be made no earlier than 5 weeks after date of SR to approve and no later than 7 weeks after - so board has 2 weeks to approve contract.

Question 41

What are the restrictions placed on companies re borrowing?

Answer 41

The Model Articles do not place any restrictions on borrowing.

Important to check articles/memorandum.

Question 42

Who can enter into debentures and what is it?

Answer 42

A loan agreement in writing between a borrower and a lender that is registered at Companies House. It gives the lender security over the borrower’s assets.

Only companies and LLPs can enter into debentures.

Question 43

What does a mortgage involve?

Answer 43

With the exception of land, a mortgage involves the transfer of legal ownership from the mortgagor to the mortgagee. Right to immediate possession is held in reserve and exercised only if the borrowed money is not repaid.

Question 44

What does a charge give a lender?

Answer 44

It gives the lender important rights over the asset should the borrower fail to repay the money borrowed.

Question 45

What rights does a fixed charge give to a lender?

Answer 45

Control of the asset.

If the chargor gets into financial difficulties, the fixed charge holder will have the right to sell the asset and be paid out of the proceeds of the sale.

Question 46

What rights does a floating charge give to a lender?

Answer 46

It secures a group of assets that is constantly changing.

The company retains freedom to deal with the assets in the ordinary course of business until the charge crystallises.

The floating charge will automatically crystallise if:
a) the chargor goes into receivership
b) the chargor goes into liquidation
c) the chargor ceases to trade
d) any other event occurs which is specified in the charge document

Question 47

Do you need to register a charge?

Answer 47

It is voluntary. However, security may become void if not registered in certain time period so it is definitely preferable to register it.

Failure to register the charge renders the charge void against a liquidator or an administrator of the company, and also against the company’s other creditors.

Same consequence if registered late.

Question 48

Can the 21 day period for registering of a charge be extended?

Answer 48

Yes - if delivery of documents was accidental or due to inadvertence or if it would not prejudice the position of other creditors or shareholders. if successful, the charge will have priority only from date of actual registration.

Question 49

What is a negative pledge clause?

Answer 49

This clause prohibits the company from creating later charges with priority to the floating charge without the floating charge holder’s permission.

Constructive knowledge of such clause is not enough. Must have actual knowledge for the floating charge to take priority over subsequent charges.

Question 50

What additional reports must be produced in addition to the balance sheet and profit and loss account?

Answer 50

• Strategic report
• Chair’s report
• Director’s report
• Auditors’ report
• Notes

Question 51

How are trading profits or losses calculatd?

Answer 51

Chargeable receipts LESS deductible expenditure LESS capital allowances

Question 52

What is deductible expenditure?

Answer 52

Must be of an income nature and incurred ‘wholly and exclusively’ for the trade. Its deduction must not be prohibited by statute.

Question 53

What happens with capital assets re tax?

Answer 53

There is a capital allowance.

Then, each financial year the business is entitled to a writing down allowance of 18%.

Question 54

What is the annual investment allowance?

Answer 54

The AIA allows businesses to deduct the whole cost of plant and machinery purchased in that particular accounting period from chargeable receipts.

Currently is £1m.

A group of companies will only receive one AIA for the group in each accounting period.

Question 55

What is full expensing?

Answer 55

It allows COMPANIES to deduct 100% of the cost of plant and machinery purchased in that particular accounting period from chargeable receipts.

Brand new assets only.

100% allowance - uncapped.

Question 56

What is start-up loss relief?

Answer 56

When the taxpayer suffers a loss in any of the first four years of the new business.

Loss can be carried back and set against taxpayer’s total income in the three tax years immediately prior to the tax year of the loss.

Loss must be set against earlier years before later years.

Claim for this relief must be made on or before 31 January after the end of the tax year in which the loss is assessed.

Question 57

What can you do with trading losses?

Answer 57

1. set against total income from the same tax year
2. set against total income from the tax year preceding the tax year of the loss
3. set against total income from the same tax year until that income is reduced to zero, with the balance of the loss being set against total income from the tax year preceding the tax year of the loss
4. set against total income from the tax year preceding the tax year of the loss until that income is reduced to zero, with the balance of the loss being set against total income from the tax year of the loss

Question 58

What is the cap on reliefs?

Answer 58

Start up and carry across/carry back relief are all subject to a cap of the greater of £50,000 or 25% of the taxpayer’s income in the tax year in relation to which the relief is claimed.

Not much of impact as applies to income from sources other than the trade which produced the loss.

Question 59

When must a person be registered as a taxable person?

Answer 59

If the value of their taxable supplies in the preceding 12 months exceeded £85,000.

Question 60

When is VAT payable?

Answer 60

Anyone registered for VAT must submit a return to HMRC and pay VAT it owes within one month from the end of each quarter in respect of taxable supplies made in that quarter.

Question 61

Should you register for VAT?

Answer 61

Only those registered for VAT can reclaim input tax.

However, is that worth losing the advantage of being able to undercut VAT-registered rivals when competing for business?

Question 62

Who is a chargeable person for CGT?

Answer 62

• individuals
• PRs
• partners
• trustees

Question 63

What is the annual exemption for CGT?

Answer 63

6000

Question 64

What are the rates of CGT?

Answer 64

• if the taxpayer’s capital gains and taxable income added together do not exceed the threshold for basic rate income tax (37,700), the rate of tax payable on the gains is 10%.
• if the taxpayer’s capital gains and taxable income added together exceed the basic rate threshold, the rate of tax for any gains up to the basic rate threshold is 10%, and any gains which exceed the threshold are taxed at a rate of 20%.

If residential property but not main residence, there is a surcharge of 8%.

Trustees and PRs always 20% (or 28)

Question 65

How do you calculate the gain for CGT?

Answer 65

Consideration for sale - initial expenditure - subsequent expenditure - incidental costs of disposal

Question 66

What is relief on replacement of business assets (rollover relief)?

Answer 66

This enables sole traders and partners to sell certain assets without paying CGT, provided the proceeds of sale are invested in other qualifying business assets. The seller will have to pay tax eventually, but the charge to CGT is postponed until the seller disposes of the new assets.

Principle qualifying business assets = land, buildings and goodwill. So are plant and machinery but their sale usually result s in a loss.

Question 67

What is rollover relief on incorporation of a business?

Answer 67

It applies, subject to certain conditions, when an individual sells their interest in an unincorporated business (i.e. a sole trader or a partner) to a company.

So when buying shares CGT is payable when you sell them (they roll over into the shares) not when you buy them.

Taxpayer loses benefit of annual exemption if they apply for this relief.

Question 68

What is hold-over relief on gifts?

Answer 68

Allows an individual to make a gift or certain types of business asset, or the gift element of a sale them at an undervalue, without paying CGT. If the donee disposes of the asset, the donee will be charged tax on their own gain and the donor’s gain.

Question 69

What is business asset disposal relief?

Answer 69

if applied, tax reduced to flat rate of 10%.

must be a qualifying business disposal.

Up to £1m in gains.

Question 70

What are the corporate tax rates?

Answer 70

Companies with taxable profits up to 50,000 = 19%

more than 250,000= 25% on all taxable profits

between = tapered tax rate between 19 and 25

Question 71

When is a company insolvent?

Answer 71

When:

1. a creditor has served a statutory demand for an outstanding sum of £750 or more and the company does not pay or come to an arrangement with the creditor within 21 days of service of the statutory demand
2. a creditor has obtained judgement against the company and has tried to enforce that judgement, but the debt still has not been paid in full or at all
3. it can be proved to the court that the company is unable to pay its debts as they fall due (cash flow test)
4. it can be proved to the court that the company’s liabilities exceed its assets (balance sheet test)

Question 72

What are the three types of liquidation?

Answer 72

1. compulsory liquidation, where a third party commences insolvency proceedings against an insolvent company
2. creditors’ voluntary liquidation, which is commenced by the company itself when it is insolvent, usually in response to pressure from creditors
3. members’ voluntary liquidation, which is commenced by a solvent company, because it wishes to cease trading or because it is dormant and it wishes to bring its affairs to an end in an orderly manner.

Question 73

What are the powers of the liquidator?

Answer 73

(a) carrying on the company’s business

(b) commencing and defending litigation on the company’s behalf

(c) investigating the company’s past transactions

(d) investigating the directors’ conduct

(e) collecting and distributing the company’s assets

(f) doing all that is necessary to facilitate the winding up of the company

Question 74

Procedure for dissolving a company?

Answer 74

Liquidator will sell the company’s assets and distribute the money to the company’s creditors. After they have completed their work, which includes preparing final accounts, the liquidator will apply to be released. The Registrar of Companies dissolves the company three months later.

Question 75

When is a charge on a company void?

Answer 75

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

Question 76

What is the relevant time re insolvency?

Answer 76

Relevant time means:
- if the charge was created in favour of a person who is connected with the company, during the two years ending with the onset of insolvency; or
- if the charge was created in favour of another person, during the twelve months prior to the onset of insolvency.

Question 77

What is a preference?

Answer 77

Where the company puts another person in a better position, in the event that the company went into insolvent liquidation or administration, than they would have been otherwise, at a relevant time.

Company must have been insolvent at the time of the preference or have become insolvent as a result of giving the preference.

Must be a desire to prefer the other party, rather than just an intention to prefer them.

Question 78

What is a transaction at an undervalue?

Answer 78

A liquidator or administrator can challenge any transaction which the company has entered into at an undervalue at the relevant time. An undervalue is where the company makes a gift to the other person, or enters into a transaction and receives consideration which is significantly lower in value than the consideration proved by the company.

Insolvency is presumed where the transaction was with a person connected to the company, but this presumption can be rebutted (unlike with preferences).

Question 79

Defences to transactions at an undervalue?

Answer 79

If the transaction was entered into in good faith.

Question 80

What is an extortionate credit transaction?

Answer 80

A liquidator or administrator has the power to challenge an extortionate credit transaction made in the three years ending with the day on which the company went into administration or liquidation.

for a transaction to be extortionate, it must require grossly exorbitant payments to be made, or must otherwise grossly contravene ordinary principals of fair dealing. Rare as difficult to prove.

Question 81

What is a transaction defrauding creditors?

Answer 81

It is a transaction at an undervalue which the company 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.

Challenges to transactions defrauding creditors are brought at the discretion of the court. No time limit for bring such a claim. However, often difficult to show intention to put assets beyond someone’s reach or to prejudice their interests.

Usually only used where time limit for a transaction at an undervalue has expired.

Creditor can also bring this claim as a victim of the transaction.

Question 82

How are company’s assets distributed in liquidation?

Answer 82

Fixed charge holders receive the amount they are owed when the assets subject of the charge is sold. Any surplus is paid to the liquidator. If there is any shortfall, the fixed charge holder can join the pool of unsecured creditors and try to obtain some kind of contribution towards the outstanding debt.

during liquidation, liquidator sends standard form to unsecured creditors (proving the debt). once the liquidator has the forms they can decide whether to approve/reject the creditors’ claims.

debts for less than 1000 are effectively admitted automatically.

once assets sold and paid the holders of fixed charges, payments will be made in following order:

a) expenses of the winding up (fees to liquidator & professional advisors)

b) preferential debts, which rank and abate equally

c) money which is the subject of floating charges, in order of priority

d) unsecured creditors, who rank and abate equally

any leftover is distributed to shareholders.

rank and abate equally - received percentage equivalent to amount owed

Question 83

What are preferential debts?

Answer 83

Most common is wages/salaries of employees for the work carried out in the 4 months immediately preceding the date of the winding up order, up to a maximum of £800 per employee. Accrued holiday also a preferential debt.

HMRC became a secondary preferential creditor - only in relation to taxes which companies collect on HMRC’s behalf, such as PAYE and VAT. Huge impact on other creditors.

Question 84

What is ring fencing?

Answer 84

Statutory procedure brought into force in 2003 setting aside a portion of the available money for floating charge holders (where security created on or after 15 Sep 2003) for the benefit of unsecured creditors.

Amount that should be set aside is:

• 50% of 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 £800,000.

previous limit of £600,000 still applies to charges created before 6 April 2020, unless a floating charged created after this date ranks equally or in priority to the pre-april 2020 charge, in which case, the limit of £800,000 will apply to both charge holders.

Question 85

What is administration?

Answer 85

The process whereby an administrator is appointed to run the company and make whatever changes are necessary to improve its financial performance. Or get it to a position where it can be sold as an ongoing concern.

Question 86

What is the main advantage of administration?

Answer 86

There is a statutory moratorium meaning that it is not possible for anyone to commence or continue with legal action against the company, enforce a judgement, or issue a winding up petition without the administrator’s consent.

Question 87

How is administration commenced?

Answer 87

Court route - application to court and court hearing.

Out-of-court route - company, its directors or holder of a qualifying floating charge or unsecured creditor filing certain documents at court.

Question 88

When does administration end?

Answer 88

Automatically one year from the date the administration took effect but this can be extended.

Question 89

How are CVAs approved?

Answer 89

Proposals put forward in a CVA for payment of creditors must be approved by:
- 75% or more in value of the company’s creditors; and
- 50% or more in non-connected creditors.

Question 90

What is the restructuring plan under CIGA 2020?

Answer 90

The restructuring plan is court-supervised and is an arrangement/compromise between the company and all of its secured and unsecured creditors and shareholders. Companies do not need to be insolvent to apply for a restructuring plan but they must have encountered or be likely to encounter financial difficulties.

Question 91

What is a moratorium under CIGA?

Answer 91

In the moratorium, the company is protected from actions by creditors relating to pre-moratorium debts, but it must pay debts incurred during the moratorium in full.

During the moratorium, the company’s directors remain in control, but a qualified insolvency practitioner acts as an independent monitor who has oversight of the moratorium and can terminate it in certain circumstances.

Requirement that the company must be unable to pay its debts or likely to become unable to pay its debts.

The moratorium lasts 20 business days beginning with the business day after the moratorium comes into force. Can be extended for a further 20 business days by filing certain documents at court.

Question 92

When is a person insolvent?

Answer 92

When:

• a debt is payable now but the debtor does not currently have enough money to pay; or
• a debt is payable in the future and there is no reasonable prospect that the individual will be able to pay.

Question 93

How can a creditor prove that an individual is insolvent?

Answer 93

1. by serving a statutory demand on the debtor for a liquidated sum of £5000 or more and waiting 3 weeks to see whether the debtor pays or applies to court to set it aside
2. by serving a statutory demand on the debtor in respect of a future liability to pay a debt of £5,000 or more, and waiting three weeks to see whether the debtor either:
   a) shows a reasonable prospect of being able to pay the sum when it falls due; or
   b) applies to the court to set it aside.
3. by obtaining a court judgement for a debt of £5,000 or more, and attempting execution of the judgement without success.

Question 94

What is bankruptcy?

Answer 94

The process whereby the debtor’s assets pass to a trustee in bankruptcy, whose job is to pay as many of the debts as possible to the debtor’s creditors.

After one year, (or possibly longer), the bankrupt is discharged.

Question 95

What happens if someone makes a loss as a result of the trustee in bankruptcy disclaiming onerous property?

Answer 95

They can prove as an unsecured creditor in the bankruptcy.

Question 96

What is the order of distribution of assets in an individual insolvency?

Answer 96

1. the costs of the bankruptcy
2. preferential debts
3. ordinary unsecured creditors
4. postponed creditors, who are the bankrupt’s spouse or civil partner.