Corporate insolvency Flashcards
What is the relevant date for the Enterprise Act?
15 September 2003
What is one of the circumstances defined as insolvency?
Unable to pay debts
What are the situations where a company is deemed unable to pay its debts?
- Cash flow test: unable to pay debts as they fall due
- Balance sheet test: liabilities greater than assets
- Doesn’t comply with statutory demand for debt over £750
- Failed to pay creditor to satisfy enforcement of judgement
Who must continually review the financial performance of a company?
Directors
What are directors options when there is financial difficulty?
- do nothing
- do a deal
- request appointment of receiver
- put company into liquidation
What are the risks involved with doing nothing as a director where the company is facing financial difficulty?
- personal liability
- breach of duties
What are the options for informal arrangements between a company facing financial difficulty and creditors?
Informal arrangements
Pre-insolvency moratorium
What are the options for formal arrangements between a company facing financial difficulty and creditors?
Company voluntary arrangement
Restructuring plan
What may a company have to do in order to get creditor agreement for an informal arrangement?
- Grent new/additional security
- Replace directors/senior employees
- Sell failing business/subsidiaries or profitable ones to raise cash
- Reduce costs (eg redundancy or closure of unprofitable business)
- Issue new shares to creditors
What is a standstill agreement?
Creditors asked not to enforce rights/remedies for specified time to negotiate a contractual arrangement
What does moratorium mean?
period where creditors unable to take action
What are the restricted actions when there is a moratorium?
- No creditor can enforce security against assets
- Stay of legal proceedings/bar against new
- No winding up procedures can be commenced/Shareholder resolution to wind up
- No administration procedure can be commenced
What is the procedure for pre-insolvency moratorium?
Filing documents at court
What documents should be filed at court for pre-insolvency moratorium?
- Statement that company is/likely to become unable to pay debts as they fall due
- Statement from licensed insolvency practitioner stating their view that moratorium is likely to rescue company
What is the period for pre-insolvency moratorium?
20 business days, can be extended by directors for further 20 business days
When will a pre-insolvency moratorium automatically terminate?
- company enters liquidation/administration
- CVA approved
- Court sanctions restructuring plan/scheme of arrangement
What debts do not have to be paid during the moratorium?
pre-moratorium debts
What are the exceptions to pre-moratorium debts?
- Monitor’s remuneration/expenses
- Goods and services supplied during
- Rent during period
- Wages/salary/redundancy payments
- Loans under contract involving financial services (loans from a bank)
What are moratorium debts and do they have to be paid?
Must pay debts falling due/after moratorium for obligations incurred during
What is the advantage of a formal insolvency corporate arrangement?
If requisite majority of creditors vote for, legally binding on all creditors
What is a company voluntary arrangement?
Creditors agree to part payment of debts/extended timetable for repayment
Does the court have to approve a CVA?
No
Who supervises and implements a CVA?
Supervisor (insolvency practitioner)
What is the procedure for setting up a CVA?
- Directors draft CVA proposal and appoint nominee
- Directors submit proposal and statement of affairs to nominee
- Nominee considers proposal and within 28 days reports to court on their opinion whether creditors and shareholders should vote on proposal
- Nominee allows at least 14 days for creditors to vote
- Meeting of shareholders must take place within 5 days of creditors decision
- Nominee reports to court that CVA approved
- Nominee usually becomes supervisor
How is a CVA approved?
- At least 75% in value of creditors vote in favour BUT
- Decision invalid if those voting against includes more than half of total value of creditors unconnected to company and
- Simple majority of shareholders/members vote in favour
What is the effect of a CVA?
binding on all unsecured creditors
Not binding on secured/preferential creditors unless specifically consented
How long does a creditor have to challenge a CVA and on what grounds?
28 days from approval being reported to court
On grounds of unfair prejudice
What companies is a restructuring plan for?
companies which have or likely to encounter financial difficulty