Business Writing Topics Insolvency Flashcards
Insolvency options for sole proprietors
Sole traders and partners in general partnership
Options
1. negotiations with creditors
- not binding due to lack of consideration
- Individual Voluntary Agreement
- like negotiation but binding - Bankruptcy
- judicial process where assets are given to trustee
What are the advantages of an IVA to each party?
Debtor
- avoids restrictions of bankruptcy
- can continue to trade
Creditor
- may receive more than through bankruptcy
- keep potential customer
- quicker
What is the procedure (general for IVA)?
- take professional advice from insolvency practitioner
- Prepare Statement of Affairs
- Apply for interim order
- no bankruptcy petition/other proceedings without court permission
- lasts 14 days - Call meeting of creditors to vote on it
- at least 75% in value of unsecured creditors - Implementation
Who is bound / not bound by an IVA?
Bound
- all ordinary unsecured creditors who had notice of meeting
- preferential creditors ONLY unless they agree
Not bound
- preferential creditors:
- employees for wages/holiday pay in last 4 months
- secured creditors
When can petition for bankruptcy be brought during IVA? And by whom?
By:
- supervisor (practitioner)
- creditor who is party to IVA
If debtor:
- provided false or misleading information; or
- tried to put money or assets out of reach;
- gave preference to creditor; or
- failed to comply with IVA
Who can apply for bankruptcy?
One of 3 ways:
- debtor can apply online
- heard by adjudicator
- granted if found they are unable to repay debts - Unsecured Creditor(s)
- jointly owed £5k+
- present petition to bankruptcy court - From IVA
- if breach conditions; or
- give false/misleading info
- preference to creditor
- hid assets
How may a creditor show that debtor is insolvent?
Statutory Demand for Payment
- if not paid in 3 weeks; or
- debtor does not apply to set it aside in 3 weeks
Statutory Demand for Proof of Ability to Pay
- if debtor does not show reasonable prospect of being able to pay in 3 weeks (21 days); or
- does not apply to court to set aside demand (18 days)
Debtor owes judgement debt and Creditor Seeks to Execute
- and attempted fails
What is the bankruptcy implementation?
Official receiver appointed
- civil servant
- creditor can seek own
Bankruptcy estate vests automatically
Sell assets and repay in strict order
What is exempt from Bankruptcy Estate?
Assets needed for day to day living
Tools of Trade
Any Salary debtor makes
- subjecting to income payment order
- if salary exceeds amount for reasonable needs of debtor
- max of 3 years
Is home excluded from bankruptcy estate?
No passes to trustee subject to below. After one year like court will grant order
Cannot sell without court order if:
- held in joint names
- partner/spouse has equitable interest arising from trust
- spouse has right of occupation
- children under 18 live there
What are the restrictions on the debtor in bankruptcy?
- cap on amount of credit they can apply for
- cannot be a director
- cannot be a partner
- cannot trade under another name without disclosing bankruptcy
What is the order of distribution to creditors under bankruptcy?
- cost of bankruptcy
- preferential debts
- employees last 4 months
- VAT, PAYE and National Insurance - Ordinary unsecured creditors
- debts to Spouse
When monty runs out those in certain section are paid proportionately
When will bankruptcy end?
Not-Culpable
- 1 year
Culpable bankrupt (caused from own dishonesty, negligence or recklessness)
- up to 15
- restrictions can extend longer
Effect of partner being bankrupt
Partnership at Will
- dissolved
- money due to insolvent partner goes to trustee
Partnership not at Will
- if PA provides it doesn’t dissolve due to bankruptcy
- remaining partners purchase interest in accordance with retirement provision
LLP
- remaining partners purchase interest in accordance with retirement provision
Option for company facing insolvency?
- Restructuring plan
- renegotiate with creditors (including secured)
- requires court hearing
- 75% in value of each class (subject to cram-down) - Moratorium
- 20 working day breathing room - Administration
- Insolvency practitioner given power to run company to save or get better deal for creditors - CVA
- Company to offer to pay creditors over fixed period of time, subject to creditor approval - Company voluntary liquidation
- if still solvent - Creditors voluntary liquidation
- no longer solvent and don’t want to be liable
Options for creditors of company in case of insolvancy?
- Fixed asset receivership
- if fixed charge and terms breached - Compulsory Liquidation
- creditor can petition court if owed OVER £750 (statutory demand, tried executing judgement debt) - Administration
- if qualifying floating charge holder (over whole or substantially whole of companies assets)
How to apply for moratorium and when is it not available?
NOT available :
- bank, insurance firm
- subject to insolvency proceedings in past year
Process:
1. Directors file certain documents with court; and
- where company is subject to outstanding winding up petition, court order must be made.
- order only made if satisfied that it would achieve better results - monitor appointed and notifies CH and creditors
- Lapses in 20 business days (can be extended)
Effect of moratorium
- prevents the commencement of formal insolvency procedures
- no legal proceeding without court permission (except from employees)
- landlord cannot forfeit lease
- floating charge holders cannot crystallise
- payment holiday for debts (other than wages and to staff)
Does not prevent secured creditors
Lasts 20 business days
What to consider when deciding between Administration or CVA?
Administration
- if you still have substation assets and cashflow
- so can trade your way out
- get moratorium period
- insolvency practitioner means not risk of wrongful trading
- administrator can investigate director conduct
CVA
- if no assets or cashflow but believe business is still viable in long term
- no investigation into director conduct
- needs approval from creditors
- may not have moratorium
Pros and Cons of Administration
Pros
- get moratorium period
- insolvency practitioner means not risk of wrongful trading
Cons
- lose control of company
- public knowledge (must be disclosed)
- can be expensive so need cashflow
- creditors can seek to appoint own administrator, even if it was voluntary
- administrator can investigate director conduct
What powers does an administrator have? Is this limited?
- take control of property and sell it
- bring or defend legal proceedings
- remove/replace directors
- carry out companies business
- investigate previous transactions
- take action against directors for wrongful/fraudulent trading
Limit
- majority in value of creditors must approve proposals
What is the process for Members Voluntary Liquidation?
- Directors make statutory declaration of solvency
- Special resolution to start liquidation
- Ordinary resolution to appoint liquidator
- appointment of liquidator advertised in London Gazette and CH notified
- liquidator investigates and reports to creditors
- liquidator collects assets and distributes in statutory order
- Final accounts sent to creditors and members
- final return filled at CH
- Company dissolved after 3 months
What is the process for Creditors Voluntary Liquidation?
- directors resolve that company is insolvent
- special resolution to start liquidation
- resolution advertised in London Gazetted
- Within 7 days of resolution directors make statement in prescribed form to creditors
- directors seek nomination for liquidator from creditors
- appointment of liquidator advertised in London gazette
- CH notified of appointment
- liquidator investigates and reports to creditors
- Final accounts sent to creditors and members
- final return filled at CH
- Company dissolved after 3 months
Process for compulsory liquidation of company?
Creditors
- must be owed £750 or more
- if judgment order tried to execute
- otherwise made statutory demand that was not paid in 21 days (3 weeks)
Then
- can petition court
- court need not accept
- company can defend (debt in dispute or they will recover)
- if court agrees with creditor liquidator appointed
What is the order of distribution in liquidation?
- if liquidation within 12 weeks of end of moratorium pre- moratorium priority debts and certain other debts
- expenses of winding up
- preferential debts (employees and HMRC)
- floating charge (ring fencing)
- unsecured debts
- shareholders
If not enough for one level then done in proposition
What is ring fencing
- set aside part of assets for floating charge holders for unsecured creditors
Amount
- 50% of first £100k
- 20% of amounts above that
- up to max of £800k
