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y1 : lfa > company law : insolvency > Flashcards

company law : insolvency Flashcards

1
Q

what is insolvency?

A

when a company has insufficient assets to meet their debts (now or when they fall due)

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2
Q

what are the possible rescue methods for insolvency if a rescue is possible?

A

rescue methods :
- pre-packs
- administration
- CVA
- schemes of arrangement
- moratorium
- restructuring plans

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3
Q

what is the protocol for insolvency if a rescue is not possible?

A

liquidation

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4
Q

what is a pre-pack as a rescue method in relation to insolvency?

A

before administrator meets creditors, company may have received an offer to buy company. can accept offer if in interests of C & company and C have no claim over the new company.
if offer comes from “connected persons” then evaluation report needed. flaw - report doesn’t need to be favourable.

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5
Q

what is adminstration as a rescue method in relation to insolvency?

A

trad. method whereby insolvency practitioner manages company for 1yr-ish. cannot wind up company in this time, enforce security, start / continue legal proceedings.

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6
Q

what is the purpose of adminstration as a rescue method in relation to insolvency?

A
  • restructure firm to save company
  • achieve more money for creditors than might be otherwise achieved from liquidation
  • sell property & distribute to certain creditors
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7
Q

which act upholds adminstration as a rescue method in relation to insolvency?

A

insolvency act 1986

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8
Q

what is CVA as a rescue method in relation to insolvency?

A

company voluntary agreement. method is proposed by directors who stay in control under supervision of IP. creates contract and plan between company and unsecured creditors to pay back debts.

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9
Q

which act upholds CVA as a rescue method in relation to insolvency?

A

insolvency act 1986

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10
Q

what are the pros of using a CVA as a rescue method in relation to insolvency?

A
  • do the deal yourself as directors
  • directors stay in post, allows continuity
  • less stigma attached
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11
Q

what are the cons of using a CVA as a rescue method in relation to insolvency?

A
  • may get trouble from secured creditors
  • have high failure rate (eg. BHS)
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12
Q

what is scheme of arrangement as a rescue method in relation to insolvency?

A

similar to CVA but can use at earlier stage and can bind contract between company and secured creditors (not jut unsecured like CVA). need to meet strict approval threshold though.

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13
Q

which act upholds scheme of arrangement as a rescue method in relation to insolvency?

A

companies act 2006 part 26
p26 CA 2006

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14
Q

what is a moratorium as a rescue method in relation to insolvency?

A

method initiated by directors where company is at risk of insolvency and IP states that company is going concern which can be rescued. business continues with same board for 20days, just under IP supervision.

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15
Q

which act upholds moratorium as a rescue method in relation to insolvency?

A

corporate insolvency & governance act 2020

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16
Q

what are the cons of using moratorium as a rescue method in relation to insolvency?

A
  • may not work, could slip into liquidation or administration
  • certain debts arent frozen, so debt still accumulates
17
Q

what is a restructuring plan as a rescue method in relation to insolvency?

A

method initiated by directors solvent or insolvent. conducted for genuine economic interest of company.

18
Q

what is compulsory liquidation?

A

liquidation done by the order of the court. court appoints liquidator.

19
Q

on what grounds can a compulsory liquidation happen?

A
  • not traded for 1yr
  • plc members fall below 2
  • unable to pay debts (can be as little as £750 - court can refuse this though)
20
Q

what is the role of a liquidator?

A
  • dismiss employees
  • contact all known creditors
  • collect & sell (liquidate) company assets
  • distribute to creditors
21
Q

which act determines the order of payments when liquidating a company?

A

insolvency act 1986
enterprise act 2002

22
Q

what is the usual order of payments for liquidation purposes?

A
  1. secured creditors (fixed charges)
  2. costs of winding up
  3. preferential creditors
  4. secured creditors (floating charges)
  5. unsecured creditors
  6. members
23
Q

if more money needs to be found for the purpose of liquidation, when do directors have to make a personal contribution?

A
  • wrongful trading (continued to trade with insufficient steps to minimise potential loss to creditors) S214 IA 1986
  • fraudulent trading (intent to defraud creditors) S213 IA 1986
24
Q

if more money needs to be found for the purpose of liquidation, how can transactions be escaped?

A

s178 IA 1986 unprofitable contracts
s238 IA 1986 contracts made at an undervalue made within two years prior to insolvency (unless in good faith)
s239 IA 1986 contracts made with preference to creditors within two years of insolvency
s244 IA 1986 extortionate credit agreements
s423 IA 1986 intention to defraud creditors & dishonesty

25
Q

what is a voluntary liquidation?

A

keeping liquidation in house and is initiated by members of the company

26
Q

what is the process of voluntary liquidation if the company is solvent?

A

director must make declaration that company is solvent. company then ceases trading & members appoint liquidator through MVL (members voluntary liquidation)

27
Q

what is the process of voluntary liquidation if the company is insolvent?

A

director unable to make declaration that company is solvent, so company ceases trading. results in CVL (creditors voluntary liquidation) whereby can avoid expense of court by taking control over choosing the liquidator.

28
Q

what is a romalpa cause?

A

retention of title clause (boilerplate clause). clause sometimes put into contracts that gives seller the right to reclaim ownership of goods if the buyer becomes insolvent or fails to make payments. helps protects sellers and increases the chances of recovering the unpaid amount.

29
Q

how does a romalpa clause work?

A

when a buyer and seller enter a contract, romalpa clause may be present in the contract. means that legal ownership of the goods stays with the seller until the buyer pays the full purchase price. therefore, buyer does not have full ownership rights until price is paid in full.

30
Q

why is a romalpa clause useful in situations of insolvency?

A

in the event of the buyers insolvency or failure to make payment, the romalpa clause gives the seller the right to reclaim ownership of the goods. crucial as allows seller to have priority over other creditors in recovering their unpaid amounts.

y1 : lfa (19 decks)

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