Corporate Insolvency Flashcards
What is corporate insolvency?
Inability of a company to pay its debts
What are the aims of insolvency law?
To save companies in financial difficulties, control company directors, and protect companies creditors.
What act governs insolvency?
Insolvency Act 1986
Which sections of IA set out the test for corporate insolvency?
S 122 and 123
What is the test to work out if a company is insolvent?
A company is insolvency (unable to pay its debts), when:
A creditor has served a statutory demand for an outstanding sum of £750 or more, and the company does not pay or comes to an arrangement with the creditor within 21 days of service of statutory demand
A creditor has obtained judgement against the company, and has tried to enforce that judgement, but the debt has not been paid in full or at al
It can be proved to the court that the company is unable to pay its debts as they fall DUE (cash flow test)
If can be proved to the court that the company’s liabilities EXCEEDS its assets (balance sheet test)
Why do we need to know if a company is insolvent?
Insolvency is a prerequisite to a creditor commencing insolvency proceedings.
Certain remedies against directors of the company, which court result in a director being held personally liable to the company.
What are the possible outcomes for an insolvent company?
It may go into liquidation, administration or CVA.
Creditors may force the company to enter into any of these processes.
Depending on the terms of security, they may be able to:
Appoint an LPA reciever
Appoint an administrator out of court
Appoint an administrative receiver for security
What 2 new insolvency rescue regimes were introduced in CGA 2020? (Corporate insolvency and governance act 2020)
Moratorium
Restructuring plan
What is liquidation?
Winding up
Process where businesses stop trading, assets are sold, company ceases to exist.
When a liquidation proceeding begins, a liquidator is appointed. The directors power ceases, and liquidator runs the company.
What are the 3 types of liquidation?
Compulsory liquidation
Creditors voluntary liquidation
Members voluntary liquidation
What is compulsory liquidation?
Where a third party commences insolvency proceedings against an insolvent company
What is CVL?
Creditors voluntary liquidation. This is commenced by the company itself when it is insolvent (usually in response to pressures from creditors)
What is MVL?
Members voluntary liquidation.
This is commenced by a SOLVENT company, because it wishes to cease trading,or becuase it is dormant and wants to bring its affairs to an end.
What is the third party that commences compulsory liquidation called?
The petitioner.
When may a petitioner commence compulsory liquidation?
On the basis that the company is unable to pay its debts.
Petitioner may do this by establishing one or more o the grounds set out in s 123 of IA.
When may a petitioner be prevented from proceeding with a winding order petition?
If the company can show that there is genuine and substantial dispute in relation to the money owed.
What is the issue with creditors voluntary liquidation?
The directors, if refuse CVL, will be conscious of facing personal claims for misfeasance or fraudulent or wrongful trading if they continue to trade.
When must a company convert from an MVL to CVL?
If the company is actually insolvent.
What is the 6 powers of liquidator?
Carry on companys business
Commence and defend litigation
Investigate company’s past transactions
Investigate the directors conduct
Collecting and distributing the companys assets
Doing all that is necessary to facilitate winding up of a company
What are the 5 potential claims to preserve and increase assets during liquidation?
Avoidance of certain floating charges
Preferences
Transactions at an undervalue
Transactions defrauding creditors
Extortionate credit transactions
What is avoidance of certain floating charges?
These are invalid floating charges, which are automatically void under s 245 IA.
A charge is automatically void where, at “relevant time” before the inset of the companys insovlency, a charge was granted WITHOUT the company recieving FRESH CONSIDERATION in exchange for granting security.
What is the relevant time for avoidance of floating charges?
If the charge was created in favour of a person who is connected with the company, during the 2 YEARS ending with onset of insolvency, or
If the charge was created in favour of any other person, during 12 months prior to the onset of insolvency
What is the onset of insolvency?
Date of presentation of the winding up petition for compulsory liquidation
Formally entering liquidation for CVL
When company files notice of intention to appoint administrator, in administrtation.
Who counts as a person “connected” with the company, for the avoidance of floating charges?
Director or shadow director
Close relative of a director or shadow
An associate of the company (company in the same group as the company, or is controlled by a director of the insolvent company)
What happens when the liquidator/administrator writes to the charge holder and says that their floating charge is invalid?
They can seek an injunction on the basis that the charge is invalid.
What is a preference?
Where the company puts the other person in a BETTER POSITION, in the event taht the company went into insolvent liquidation, than they woudl have been in otherwise.
Given preference to someone else within relevant time.
What is the relevant time for preferences?
If the preference was given to a person who is connected with teh company, during the 2 years ending with the onset of insolvency or
If the preference was given to any other person during 6 MONTHS bending with onset of insolvency.
What must the liquidator/administrator prove for preferences?
They must prove tha the company was insolvent at the time of the preference, or have become insolvent as a result of giving the preference.
They will produce financial information - such as the balance sheet, along with evidence of court proceedings against the company.
What is the Re MC Bacon case?
This is the leading insolvency case, concerning transactions at an undervalue and voidable preferences.
Transaction was not voidable preference under s 239, because the company was not influenced by a DESIRE to put the creditor in a better position than it would have been on liquidation.
Rather, they did not want to lose the financial support it had.
What is a transaction at an undervalue?
Where teh company makes a gift to the other person, or enters into a transaction and receives consideration which is significantly lower in value than the consideration provided by the company.
What is the relevant time for transactions at an undervalue?
2 years ending with the onset of insolvency
What must the liquidators prove for transactions at an undervalue?
Must prove that the company was insolvent at the time of the transaction, or have become insolvent as a result of the company entering into the transaction.
What is the defence for transactions at an undervalue?
if the transaction was entered into in good faith, for the purpose of carrying on the business, and where, when the transaction was entered into, there were reasonable grounds for believing that it would benefit the company.
What are extortionate credit transactions?
A transaction that is grossly exorbitant payments to be made.
These are rare.
What is a transaction defrauding creditors?
These are transactions at undervalue, which the company enter into in order to put assets beyond the reach of someone making a claim against it, or to prejudice the interests of that person int elation to any claim they might make.
What is the order f payment of different creditors in an insolvency process?
Fixed charge holders will receive the amount they are owed when the asset which was the subject of the fixed charge is sold.
Any surplus is paid to LIQUIDATOR
If there is a shortfall, the fixed charge holder can JOIN the pool of unsecured creditors and try to obtain a contribution towards the rest.
What must the liquidator send to unsecured creditors during liquidation?
A standard form, which they are required to fill in with details of the debt owed to them. This is proving the debt.
Once the liquidator has the forms, they can decide to approve or reject the creditors claim.
What is the order of unsecured creditors for winding up?
Expenses of the winding up
Preferential debts (employees and HMRC)
Money which is subject to floating charges (in order of priority)
Unsecured creditors, who rank and abate equally
Any money left is distributed to shareholders.
What are preferential debts?
Paid before all other unsecured creditors.
Wages/salaries.
HMRC, but ONLY in relation to PAYE and VAT.
What is ring fencing?
Statutory procedure brought into force in 2003, setting aside a portion of available money for floating charge holders, for the benefit of unsecured creditors.
What amount should be set aside during ring fencing?
50% of the first 10,000 of money received from property which is subject to floating charges
2% of the remaining money
Up to a LIMIT of 800,000 (was 600,000 for before 2020 April 6)
What are the 6 alternatives to liquidation?
Administration
Company voluntary arrangements (CVA)
Schemes of arrangements
Restructuring plans
Freestanding moratorium
Informal agreements with creditors
What is administration?
Process where an administrator is appointed to run the company and make whatever changes are necessary to improve its financial performance.
Administrator will aim to get the company into a position where it can be sold as an ongoing concern.
What is the advantage of administration?
While administration is under way, there is a statutory moratorium. This menas it is NOT possible for ANYONE to commence or continue with legal action against the company, without administrators consent.
What are the duties of an administrator?
Must perform their duties in the interests of all the company’s creditors as a whole, and have as a primary objective the wish to rescue the company as an on going concern.
How should administrators commence administration? (2 ways)
Court route
Out-of-court route
What is the court route for administration?
By court order, following application and court hearing.
Only made if court is satisfied that the company is likely to become unplayable to pay its debts, and the administration order is reasonably likely to achieve one of the 3 purposes of administration.
Who must the applicant notify when an administrator applies for administration?
Amy person who has appointed or is entitled to appoint an administrative recieve of the company, and any qualifying floating charge holder (QFCH)
What is the out-of-court route for administration if appointed by the company or its directors?
Serve notice of intention of administration on the court, any QFCH and any lender.
Directors must file at court a statutory declaration that the compay is unable to pay its debts, and is NOT in liquidation.
What is the out-of-court route for administration if appointed by the qualifying floating charge holders, QFCH?
QFCH is a floating charge wehre the document states that para 14 applies to it, and
The charge document PURPORTS the empower the holder of floating chagre to APPOINT an administrator, or,
The charge document purports to empower te holder of floating chagre to appoint an administrative receiver within the meaning of IA.
AND, the chagre document relates to the WHOLE or substantially the WHOLE of the companys property.
What happens if the QFCH applies for administration, and there is someone with a higher priority?
The lender must notify them in advance, to give them the opportunity to appoint the administrator if they wish.
What must the QFCH file to court during an out-of-court route?
Must file the notice of appointment at court, with certain documents.
Stating that:
- lender is a holder of qualifying floating charge,
- floating chagres is enforceable
- appointment complies with the IA
What is the process of administration?
A moratorium comes into effect.
Administrator will put forward proposals for the company to the creditor. The creditor can ask for more information on amended proposals.
If approved by majority in value of creditors, present and voting. Provided that those who vote against do not constitute more than 50% in value of creditors who are unconnected to company.
What is the effect of the administration order?
Once the administration order has been made, the company is managed by the administrator and the directors power ceases, even though they remain in office.
What are the administrators powers and duties?
Removing and appointing directors
Paying creditors, but only with courts permission if unsecured
Calling a meeting of creditors or shareholders
Dealing with prperty that is subject to a floating charge
Dealing with property that is subject to a fixed charge
Investigating and applying to hae the companys past transactions set aside
Commencing fraudulent or wrongful trading proceedings.
How is administration ended?
Ends automatically one year from the date the administration took effect, but this can be extended.
It can also be ended earlier, including by application to the court, if its objective has been achieved.
What is pre-pack administration?
This is an arrangement where a company goes into administration and the administrator sells its assets and business STRAIGHT AWA, often to the management of the insolvent company.
Sale is agreed BEFORE they appoint an administrator.
What is the justification of a pre-pack administration?
More jobs are likely to be saved. BUT, unsecured creditors are not consulted, and wont received much in payment.
What is a CVA?
This is an ALTERNATIVE to liquidation, company voluntary arrangement
Who can apply to a CVA?
Anyone entitled to appoint a reciever or administrator.
What is a CVA
It is a written agreement which binds all parties to it, as long as the statutory procedures are followed.
Companys creditors agree to wait longer to recieve what they are owed
Why do companies use CVAs
When the company’s business is potentially fundamentally sound, but it is undergoing TEMPORARY cash flow difficult.
What is CVA’s aim?
To prevent liquidation.
What are the benefits of CVAs
It s cheap and simple compared to administration. It is available to liquidators, administrators and the company itself.
In a CVA, what are the percentages needed from creditors for approval?
75% or more in value of companys creditors
AND
50% or more of NON-CONNECTED creditors
Are secured creditors allowed to vote in CVA?
No, tehy are not allowed to vote apart from it being inf elation to any part of debt that is UNSECURED.
Once a CVA is approved, who does it bind?
It is binding on all unsecured creditors in relation to PAST DEBTS.
What is the restructuring plan under CIGA 2020?
This has features of schemes of arrangement.
It is a court-supervised, arrangement, or compromise, between the company and all of its secured and unsecured creditors and shareholders.
Companies do not need to be insolvent to apply fora. Restructuring plan, but they must have encountered or be likely to encounter financial difficulties.
What is the implementation of the restructuring plan?
Involves 2 court hearings, and creditors can make representations at the first hearing.
Creditor and shareholder meetings are held. Each class must approve the plan by 75% of value of class vote
At the second hearing, the court will decide whether to sanction the proposed plan.
What is the key feature in a restructuring plan?
“Cross-class cram down provision”
It provides flexibility. It enables a dissenting class of creditors to be crammed down, so that they cannot block viable plans, and it must be sanctioned by the court.
What is a Moratorium under CIGA?
The company is protected from actions by creditors, relating to re-moratorium debts, but it must pay its debts incurred during the moratorium in FULL.
During a moratorium, who is in control?
Directors remain in contract, but A qualified insolvency practicioner acts as an independent monitor who has oversight over it, and can terminate it in circumstances.
When is a moratorium available?
Only available for English companies with no outstanding winding up petitions against them.
To obtain the moratorium, the directors must file the relevant documents at court, and the proposed monitor must also confirm that it is likely that the moratorium Will result in the rescue of the company.
What debts are excluded from Moratoriums?
Most pre-moratorium debts are suspended during the moratorium, but certain debts are EXCLUDED from this payment holiday: including employees wages, or a salary of employment, monitors remuneration or expenses, goods and services supplied.
How long does the moratorium last?
20 business days, beginning with the business day after the moratorium comes into force. This is the date of filing of the documents at court or the court order.
can a moratorium be extended?
It can be extended for a further 20 business days, by filing certain documents at court.
It can be extended by the directors for a period of up to 1 year, if the creditors who are not going to get paid Becuase of payment holiday consent to this.
What are other options for secured creditors?
They may be able to appoint a reciever to take possession of the property that is subject to the charge, and deal with it for the benefit of the chagre holder.
What are the 2 types of receivers that secured creditors can appoint?
LPA receivers, law of property act receivers
Administrative receivers
What are LPA receivers?
These are appointed by a FIXED CHARGE holder.
The power to appoint is in the charge document.
To do with a property
The LPA then sells the secured property and if it does not reach the sum of the debt, they become unsecured creditor for the rest
What is the aim of an LPA reciever/
To sell the charged property so that the creditor can be repaid. If the sum is not enough, the creditor will become an unsecured for the remainder.
What is an administrative reciever?
Appointed by FLOATING charge holders, when the floating chagre is over the company’s WHOLE undertaking.
How do you appoint an administrative receiver?
The loan agreement will list the events that trigger the lender being ale to appoint.
Examples: failure to make payment, company unable to pay debts, breach of agreement, petition to wind up.
What does an administrative receiver do? /
They run the company and sells the charged assets. They use the proceedings to pay their own costs and pay the charge holder what they are owed.
Then, they resign and the directors take over the management of the company once more.
