Corporate Insolvency Flashcards
What are the 4 definitions of insolvency?
- Cash Flow Test: company unable to pay its debts as they fall due
- Balance Sheet Test: company’s liabilities exceed value of its assets
- Statutory Demand: company fails to comply with statutory demand for a debt over £750.
- Company failed to pay a judgment creditor.
What is an informal arrangement?
Company can agree with creditors to enter an informal moratorium governed by contract law. However, because technically no consideration, risk that creditor can go back and enforce debt at any time.
What is a pre-insolvency moratorium?
A period during which creditors are not allowed to exercise rights and remedies:
* enforce security
* commence litigation or continue existing litigation
* Wind up the company
* Commence administration
Lasts for 20 business days and can be extended by directors for further 20 business day with court permission where moratorium debts (debts falling due during / after moratorium due to obligation incurred during moratorium) are paid but company is unlikely to repay pre-moratorium debts.
Further extension with creditors’ consent (max 1 year subject to further court order).
What is the procedure for a pre-insolvency moratorium?
Company must file statement of insolvency (cash flow test) at court ad statement from LIP stating that moratorium likely to rescue company as a going concern.
Terminates automatically on commencement of insolvency procedure.
What is a Creditors’ Voluntary Arrangement?
Directors / administrator / liquidator makes proposal that creditors agree to part-payment of debts or an extended timetable for repayment.
1) The nominee (LIP / administrator / liquidator) receives draft proposal from directors and within 28 days must report to court on whether (s)he approves.
2) Nominee must allow creditors at least 14 days to vote on proposals and shareholders must meet within 5 days of the decision
* at least 75% in value of creditors vote in favour + no more than half connected to company; AND
* Simple majority of shareholders vote in favour.
3) Nominee reports to court that CVA approved then becomes supervisor and implements CVA.
4) Send final report on implementation to shareholders and creditors.
What is the effect of a CVA?
Binding on unsecured creditors, including those voting against CVA.
Secured / preferential creditors not bound unless they specifically agreed.
Creditor can challenge CVA on grounds of unfair prejudice or material irregularity within 28 days. After this, CVA becomes automatically binding.
What is a restructuring plan?
Shareholders and creditors compromise and restructure liabilities so company can return to solvency.
- Requires court approval
- May be commenced by company, creditor, shareholder, administrator or liquidator.
- Can bind secured and preferential creditors.
What is the procedure for a restructuring plan?
- Creditors / shareholders divided into classes.
- Plan must be approved by at least 75% in value of voting persons in each class. BUT Court can sanction cross-class clamp down where just and equitable.
- Court may exclude shareholders / creditors where they have no genuine economic interest in company.
What is administration?
Collective insolvency procedure where administrator acts in interests of creditors as a whole.
Aim to:
1. rescue company as going concern; or
2. achieve better outcome for creditors than by winding up; or
3. realise company property to make distribution to secured / preferential creditors.
What is the court procedure for appointing an administrator?
Company, director, creditor, supervisor or liquidator can apply where cash flow insolvent.
* Interim moratorium applies
* where winding up has already started, director / company must use the court procedure and winding up proceedings will be automatically dismissed if order made.
What is the out of court procedure for administration by directors?
File notice of intention to appoint at court + QFCH is given 5 business days to appoint its own administrator.
If QFCH does not appoint, director or company can choose and file notice of appointment not less than 10 business days after NOI filed and served.
What is the out-of-court procedure for administration by a QFCH?
Qualifying floating charge = together with any other security relates to substantially the whole of the company’s property + document creating it provides Sch B1 para 14 applies or that holder has power to appoint administrator / administrative receiver.
Where QFCH is not first in priority, must give 2 business days’ notice to other priority QFCH and can only proceed with their consent. Appoint + file notice of appointment.
What powers does an administrator have?
- Power to take possession and sell property with consent of fixed charge holder / the court (consent of floating charge holder not needed).
- Borrow money
- Execute documents in company’s name
- No power to pay dividend to unsecured creditor without court permission
- Remove / appoint directors
- Bring proceedings for wrongful / fraudulent trading.
What is the interim moratorium during administration?
- No proceedings (commenced, continued)
- No forfeiture of lease
- No order to wind up company
- No appointment of administrative receiver
- No steps to enforce security or repossess goods
What is receivership? What are the 3 kinds?
Individual insolvency procedure.
1) administrative receivership
2) Fixed charge receivership
3) Court appointed receivership
