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
Non-Rescue Procedures
Winding up/Liquidation
Compulsory Liquidation (who can petition)
A company may be obliged to wind up by the court; this may follow a petition by
- a creditor that a company cannot pay its debts
- the company itself
- the company’s directors or one or more members
- the administrator or the receiver
- the Secretary of State for Trade and Industry
- the Financial Services Authority (FSA)
Tends to be more time-consuming & expensive process than a voluntary winding-up
Non-Rescue Procedures
Winding up/Liquidation
Compulsory Liquidation (Petitions)
A petition may be brought for a compulsory winding-up on one of seven statutory grounds (s.122 IA ‘86)
The most significant ones are
-that the company is unable to pay its debts
-that it is just and equitable to wind up the company (member may also apply … BUT … only if the company is solvent and he has been a registered shareholder for at least six of the last 18 months prior to the petition)
Must show that there is no other way they can save the company and this is a last resort
Non-Rescue Procedures
Winding up/Liquidation
Compulsory Liquidation Official Receiver
The court will usually appoint an Official Receiver (an officer of the court); he may be replaced by an insolvency practitioner at a later date
The Official Receiver must investigate
- the causes of the failure of the company
- its promotion, formation, business dealing and affairs
The liquidation starts when the petition is presented to the court
Non-Rescue Procedures
Winding up/Liquidation
Compulsory Liquidation Consequences
- Any disposition of the company’s property and any transfer of its shares subsequent to the commencement of liquidation is void unless the court orders otherwise
- Any legal proceedings in progress against the company are halted (and none may be commenced) unless the court gives leave
- Any seizure of the company’s assets after commencement of liquidation is void
Non-Rescue Procedures
Winding up/Liquidation
Compulsory Liquidation Consequences
- the employees of the company are automatically dismissed and
- the liquidator assumes the powers of management previously held by the directors
- any floating charge crystallises
- the assets of the company may remain the company’s legal property but under the liquidator’s control, unless the court orders the assets to be vested in the liquidator
- the business of the company may continue, but it is the liquidator’s duty to continue it with a view only to realisation (for instance by sale as a going concern)
Winding up/ Liquidation
Difference between Compulsory & voluntary liquidation
Timing (commences on the day)
Compulsory Liquidation- the court is presented with the petition
Voluntary Liquidation- the resolution to wind up the company is passed
Winding up/ Liquidation
Difference between Compulsory & voluntary liquidation
Liquidator
Compulsory Liquidation- the Official Receiver administers a compulsory winding up (officer of the court)
Voluntary Liquidation- the members and creditors chose and appoint a liquidator under the voluntary process (not an officer of the court)
Winding up/ Liquidation
Difference between Compulsory & voluntary liquidation
Legal Action
Compulsory Liquidation- the company receives automatic stay of legal proceedings
Voluntary Liquidation- the company receives no automatic stay of legal proceedings (however, the liquidator can apply to the court for any order that it would grant under compulsory liquidation)
Winding up/ Liquidation
Difference between Compulsory & voluntary liquidation
Employment
Compulsory Liquidation- employees are automatically dismissed
Voluntary Liquidation- employees are not automatically dismissed
Winding up / Liquidation
The role of the liquidator (carry out the whole process)
- Settle the list of contributories (ie members who have a liability to contribute (eg unpaid shares/guarantee must be paid) in the event of a winding-up)
- collect and realise the company’s assets
- discharge the company’s debts
- redistribute any surplus to the contributories according to the entitlement rights attached to their shares
On his appointment, the powers of the directors cease (to the extent that they are permitted to continue by the liquidator or – in voluntary winding-up – by the company or creditors).
Avoidance of charges
Charges not registered within 21 days are void against the liquidator and creditors (and the chargee becomes an unsecured creditor)
Avoidance of charges
Floating Charge
A floating charge created within 12 months prior to winding up (or 2 years if given to a connected person) may be void or voidable
Avoidance of charges
Fixed Charges
A fixed charge created within 6 months prior to winding up may be void or voidable
Distribution of a company’s assets when the company is wound up
In order
1) fix charges (ranked in the order based on the creation of fixed charges)
2) the liquidator’s remuneration and the costs and expenses of winding up
3) the preferential creditors at the time of winding up
Ordinary preferential creditors (employee related debts & obligations)
- contributions to occupational pension
- schemes
- unpaid wages
- unpaid holiday pay
Secondary preferential creditors (only became this in 2020)
-HMRC (for amounts collected and held by businesses on behalf of other taxpayers)
Eg VAT, Payee, Income Tax…..
Distribution of a company’s assets when the company is wound up
Floating Charges
4) Floating charges created before 15 September 2003
top-sliced (ring-fenced) assets for distribution to the unsecured creditors
- applies to floating charges created on or after 15 September 2003
- set aside a certain % of the assets which would otherwise be payable to floating charge holders → this amount can be paid to unsecured creditors
- where there is a minimum found for distribution of £10,000
- 50% of the first £10,000 of floating charge realisations and 20% of the floating charge realisations thereafter
5) floating charges created on or after 15 September 2003
Distribution of a company’s assets when the company is wound up
Floating Charges Top-sliced (ring-fenced)
If its more than £10,000 then a certain percentage will be set aside for unsecured creditors before the floating charge holders could actually be paid.
Distribution of a company’s assets when the company is wound up
In order
6) the unsecured creditors (will rank equally with each other meaning they may not be paid at all due to insufficient funds)
7) sums due to members but not yet paid (e.g. declared but not yet paid dividends)
8) the members of the company, as set out in the Articles of Association
Distribution of a company’s assets when the company is wound up
Rules
- each class of creditors is paid full before the class below is paid anything
- IF there are insufficient funds to pay a class in full, all members of that class receive the same percentage of what they are owed
- floating charge holders are secured creditors → a floating charge holder who faces a shortfall on their debt cannot share in the amount top-sliced and available to unsecured creditors
Non-Rescue Procedures
Striking-off
Ways in which a company can be dissolved
Striking-off at the instigation of the Registrar: defunct companies
- the Registrar has a reasonable cause to believe that a company is not carrying on business or is not in operation
- the Registrar has not received documents from the company which should have been sent to him
- correspondence sent to the company’s registered office by the Registrar has been returned undelivered
