Corporate Insolvency Flashcards
Insolvency
Will differentiate between personal insolvency and corporate insolvency.
Personal insolvency
Will relate to individuals
Corporate insolvency
Will relate to corporate bodies.
This is when a company is unable to pay its debts.
Insolvency Proceedings
These are the formal measures taken to deal with company debt.
We will differentiate between
- Voluntary &
- Compulsory proceedings
Company insolvency
Various procedures
Rescue procedures
The main aim is to keep the business in operation.
This can be done by
Administration
Company voluntary agreement
Company insolvency
Various procedures
Non-Rescue procedures
The aim is not to keep the business in operation but to liquidate/wind up the business
This can be done by
Receivership (Administrative & Fixed charge)
Liquidation (Voluntary, compulsory, striking off)
Within voluntary liquidation can talk about members and creditors
Legislation
Companies Act 2006
Insolvency Act 1986
Enterprise Act 2002
Legislation relating to company insolvency in Scotland is devolved.
The accountant in bankruptcy provides insolvency service and administers company insolvency.
Authorised insolvency practitioners
Supervisor
Administrator
Liquidator
Administrative receiver
The practitioner depends on the insolvency itself.
Company insolvency
Rescue procedures
Administration
The purpose of administration is to…
- To rescue the company and their financial position as a going concern
- If this is not possible, to achieve a better result for the company’s creditors as a whole than would be likely to winding-up (e.g. better price for the company’s assets)
- If neither is reasonably practicable, to realise the company’s assets to make a distribution to one or more preferential or secured creditors
Rescue procedures Administration
Advantages of administration
For the company
It does not necessarily cease to exist at the end of the process
It provides temporary relief from creditors to allow breathing space to formulate rescue plans
Rescue procedures Administration
Advantages of administration
For the members
If the administration is successful the value of their shares might will increase &
they might get dividend later
Rescue procedures Administration
Advantages of administration
For the creditors
Continued business relationship
Company insolvency Rescue Procedures
Company Voluntary Agreement
In this situation the company is facing serious financial difficulties. This is where the company comes up with an agreement with their creditors and will outline how the debts will be paid to them.
Introduced by the Insolvency Act 1986
Intended to avoid a company being wound up
A CVA is an agreement between the company and its creditors, which sets out
- how the company’s debts are to be paid and
- in what proportions
The company is entitled to continue trading for the duration of the CVA
What is individual voluntary arrangements?
Individual Voluntary Arrangements, IVA, is an arrangement available to an individual – sole traders, partners – to reach a compromise with his creditors, with the aim of avoiding bankruptcy
What is a Company Voluntary Arrangements (CVA) compromised of?
In practice, a CVA is often part of the administration process but it need not be.
A CVA may comprise either one or both of
- a composition of debts (the company agrees to pay a limited proportion of its total debts)
- a scheme of arrangement (the company agrees to pay its debts over a defined period, typically 3-5 years)
A CVA may result in one or more creditors taking an interest in the company by way of a debt-equity swap.
Non-Rescue Procedures
Administrative Receivership
The administrative receiver has management power. They will have control over the whole or substantial part of the business.
Appointed by a floating charge holder
A manager with management power
- control over the whole, or substantial part of the company’s property
- wide powers over the company’s business
With some exceptions can no longer be appointed by holders of floating charges created on or after 15 September 2003 … BUT … floating charge holders created before this date are still able to appoint a receiver
Where the company is in administrative receivership, an administrator can only be appointed by the court in specific circumstances (the appointment of administrator automatically dismisses the administrative receiver)
Receivership
FIXED CHARGE RECEIVER (NON-ADMINISTRATIVE REVCEIVER)
Appointed by the holder of a fixed charge over land in the event of the borrower’s default
- Without management power
- his role is to collect rent and / or sell the property
- does not need to be a qualified insolvency practitioner (in practice often a chartered surveyor or other property specialist is appointed)
- an administrator can still be appointed (the administrator is entitled to require the receiver to vacate office)
- once a company is in administration, fixed charge holders cannot enforce their security (except with the consent of the administrator or the court)
Receivership
The appointment of a receiver will normally cause floating charges to crystallise and become fixed charges
-May provide a relatively quick and inexpensive remedy for a lender
Once the receiver has performed his duties and vacated office
- it is often followed by liquidation
- BUT … it is quite possible that the company remains solvent & continues in business
Non-Rescue Procedures
Winding up/Liquidation
Members voluntary Liquidation
There is no doubt that the company is actually solvent however the members still decide to liquidate the company
The members may resolve to wind up the
company either
- by ordinary resolution (where the articles provide for dissolution on the expiry of a fixed term or the happening of a specified event) or
- by special resolution (for any reason)
Floating charge holder can
Appoint an administrative receiver
Fixed charge holder can
Appoint a non administrative receiver
Non-Rescue Procedures
Winding up/Liquidation
Members voluntary Liquidation
Directors declaration of solvency
The directors need to make and deliver a declaration of solvency to the registrar
- the company will be able to pay its debts in full, together with interest
- within a specified period not exceeding 12 moths
- made by all the directors or, if there are more than two, by a majority of them
- include a statement of the company’s assets & liabilities as at the latest practicable date before the declaration is made
- made not more than five weeks before the resolution to wind up is passed
Non-Rescue Procedures
Winding up/Liquidation
Members voluntary Liquidation
The winding up is deemed to commence when the resolution is passed and
- notice must be given in the Edinburgh Gazette within 14 days
- notice must be sent to the Registrar and AIB (Accountant in Bankruptcy) within 15 days after the meeting
- the company may appoint a liquidator by passing an ordinary resolution
- the creditors play no part (it is assumed that their debts will be paid in full) … BUT a members’ voluntary liquidation may become a creditors’ voluntary liquidation where the process is not progressing to the satisfaction of the company’s creditors
Non-Rescue Procedures
Winding up/Liquidation
Creditors voluntary Liquidation
This type of liquidation is not initiated by the creditors
- company intends to wind-up voluntarily but the directors are unable to make a declaration of solvency
- notice of the meeting to pass the resolution to wind-up the company must be made in the Edinburgh Gazette and two locally circulated newspapers
- creditors meeting is held within 14 days of the meeting where resolution is passed
