Corporate Fraud and Corporate Insolvency Flashcards
When is a company inslovent
A company is insolvent when it can’t pay its debts and liabilities as they fall due
What are the key legislation for Insolvency
Key legislation for insolvency are:
- Insolvency Act 1986
- Insolvency Rules 2016
What are the different tests for insolvency
Tests for insolvency are:
- Cash Flow Test
- Balance Sheet Test
What is the proof required for the cash flow test
The court needs proof the company cannot pay debts as they fall due
What is the proof required for the balance sheet test
The court needs proof that the companies liabilities exceed assets
What are the different insolvency procedures
The different insolvency procedures are:
- Liquidation
- Administration
- Company Voluntary Agreement (CVA)
- Receivership
How does liquidation work
Liquidation brings companies to an end by selling assets and distributing to creditors
What are the different types of liquidation
The different types of liquidation are:
- Compulsory liquidation
- Voluntary liquidation
Who orders compulsory liquidation
Compulsory liquidation is court ordered
Who initiates voluntary liquidation
Shareholders initiate voluntary liquidation
What does administration aim to do
Administration aims to rescue the company or achieve a better result for creditors than liquidation
What is company voluntary arrangement (CVA)
CVA is an agreement with creditors to pay debts over time, aiming to avoid liquidation
What does receivership allow
Receivership allows secured secured creditors to recover what is owed to them
What is the order of priority for the distribution of assets
Distribution of assets order of priority is:
- Fixed charge creditors
- Expenses of the liquidation
- Preferential creditors
- Unsecured creditors
- Interest on debts and deferred creditors
- Shareholders
What is section 212 of the Insolvency Act 1986
Misfeasance S.212 Insolvency Act 1986
What happens in misfeasance
Misfeasance is when directors may be ordered to repay or contribute to an insolvent company they were a part off
What happened in Wally v Doney
Whalley v Doney – Director redirected company sale proceeds to another business he owned
What is section 213 of the Insolvency Act 1986
Fraudulent Trading S.213
What is fraudulent trading
Fraudulent trading is when a business operates with intent to defraud traders
What is required to punish fraudulent trading
Fraudulent trading is rare and requires proof of intent and moral blame
What is a key case of fraudulent trading
Morphitis v Bernasconi
What is wrongful trading
Wrongful trading is when a director continues trading when they knew or aught to know the company couldn’t avoid insolvency
What is the key requirement to proving wrongful trading
Key requirement to proving wrongful trading is proving the director didn’t take every step to minimise losses to creditors
