Corporate Insolvency Flashcards
What is the main statute dealing with corporate insolvency?
The Insolvency Act 1986.
What were the aims of the corporate insolvency reforms in the EA 2002?
To promote the rescue culture removing the stigma associated with insolvency and therefore encourage an entrepreneurial culture;
And
To increase entrepreneurship by giving prominence to collective insolvency procedures over enforcement procedures.
What two new insolvency procedures did the Corporate Insolvency and Governance Act 202 (CIGA) introduce?
- The pre-insolvency moratorium.
- The restructuring plan for companies.
What are the four tests for when a company is unable to pay its debts?
- Cash flow test - unable to pay its debts as the fall due.
- The balance sheet test - has liabilities that are great than its assets.
- Does not comply with statutory demand for a debt of over £750, so provides evidence that the company is cash flow involvement.
- Has failed to pay a creditor to satisfy enforcement of a judgement debt.
Directors have to continually review the financial performance of a company and recognise when it is facing financial difficulties. What are some examples of financial difficulties?
- The company has many unpaid creditors who are putting pressure on the company to pay the amounts owed to them.
- The company has an overdraft facility that is fully drawn, and the bank is refusing to provide further credit by increasing the facility.
- The company has loans and other liabilities that exceed the value of its assets.
Who is responsible for deciding what action to take on behalf of the company?
The directors are responsible for making decisions on behalf of the company, with advice regarding their duties, responsibilities, and liabilities under the IA 1986 and CIGA 2020 for resolving their company’s financial difficulties and minimising the exposure of creditors to losses.
What are the options for a company facing financial difficulties?
- Do nothing - but there is potential risk of personal liability and breach of their directors duties.
- Do a deal - reach a formal or informal arrangement with some or all of the company’s creditors.
- Appoint an administrator- a collective formal insolvency procedure.
- Request appointment of a receiver - where a secured creditor enforces its security by appointing a receiver who then sells the secured assets to pay sale proceeds to the creditor.
Place the company into liquidation - a formal collective insolvency procedure.
Why must directors ensure they take urgent advice and action when a company is in financial difficulty?
Because directors may be personally liable under the IA 1986 where the company is insolvent if they do not take the correct steps and they are in breach of their duties under CA 2006.
What is an informal agreement in insolvency arrangements?
An informal agreement is when a company can negotiate informally with its creditors to resolve its financial issues, creating a contractually binding agreement that is not regulated by IA 1986 or CIGA 2020.
To obtain creditor agreement for an informal arrangement, what may the company have to do?
- Grant new or additional security.
- Replace directors or senior employees.
- Sell failing businesses or subsidiaries, or profitable ones to raise cash.
- Reduce costs through redundancy or closure of unprofitable business.
- Issue new shares to the creditors ( debt for equity swap).
To obtain creditor agreement for an informal arrangement, what may the company have to do?
- Grant new or additional security.
- Replace directors or senior employees.
- Sell failing businesses or subsidiaries, or profitable ones to raise cash.
- Reduce costs through redundancy or closure of unprofitable business.
- Issue new shares to the creditors ( debt for equity swap).
What preliminary step to negotiating an informal arrangement can a company make?
A company may ask creditors to enter into a Standstill Agreement where the creditors agree not to enforce their rights and remedies for a specified period to give the company time to negotiate an arrangement with them to resolve the company’s financial issues.
What is a moratorium?
A moratorium is a period during which creditors are unable to take action to exercise their usual rights and remedies, thereby creating a breathing space for the company to attempt to resolve the situation.
What is a moratorium?
A moratorium is a period during which creditors are unable to take action to exercise their usual rights and remedies, thereby creating a breathing space for the company to attempt to resolve the situation.
What actions are restricted by a moratorium?
- No creditor can enforce its security against the company’s assets.
- There is a stay of legal proceedings against the company and a bar on bringing new proceedings against it.
- No winding up procedures can commence in respect of the company and no shareholder resolution can be passed to wind up the company.
- No administration procedure can be commenced in respect of the company.
What can pre-insolvency moratorium’s introduced by CIGA 2020 do for struggling companies that are not in formal insolvency proceedings?
They can be used by a company to buy itself some time to reach an informal agreement with some or all of its creditors or as a preliminary step to proposing a CVA, a restructuring plan, or a scheme of arrangement.
What documents must be filed at court by a company attempting to obtain a pre- insolvency moratorium.
- A statement that the company is, or is likely to become, unable to pay its debts as they fall due.
- A statement from a licensed insolvency practitioner, known as a monitor, stating that in their view, it is likely that a moratorium will result in the rescue of the company.
How long does the pre-insolvency moratorium last?
It lasts for 20 business days but can be extended by the directors for a further 20 business days.
What are pre-moratorium debts?
Debts which have fallen due before or during the moratorium by reason of an obligation incurred before the moratorium.
What is a statutory repayment holiday?
A period of time where there is a pre-insolvency moratorium, so a company does not have to pay any pre-moratorium debts during that time.
What is the main advantage of formal arrangements a.k.a using statutory procedures?
The main advantage of a formal arrangement is that if the requisite majority of creditors vote in favour of it, it is legally binding on all creditors, regardless of whether some voted against it.
What are the two possible types of formal arrangement?
- A company voluntary arrangement under IA 1986.
- A restructuring plan under CIGA 2020.
What is a company voluntary arrangement (CVA) ?
A CVA is a composition in satisfaction of its debts or a scheme of arrangement of its affairs. It is a compromise between a company and its creditors whereby creditors agree to part payment of debts owed to them or extend the timetable for repayment.
What are the 7 steps to setting up a CVA?
- Directors draft a CVA proposal and appoint a Nominee.
- Directors submit CVA proposal and a statement of the company’s affairs to the Nominee.
- Nominee considers the CVA proposal, and within 28 days, must report to court on whether they think the company’s creditors and shareholders should be asked to vote on the CVA proposal.
- Nominee must allow 14 days for creditors to vote on the CVA proposal. A meeting of the shareholders must take place within 5 days of the creditors decision.
- Voting - the CVA proposal will be approved if at least 75% in value of those voting on the CVA proposal, or a simple majority of shareholders vote in favour.
- Nominee reports to court that CVA has been approved.
- Nominee usually becomes the Supervisor, and the Supervisor will implement the CVA proposal.
What is the effect of a CVA?
It is binding on all unsecured creditors, but not on secured or preferential creditors unless they unanimously consent to the CVA.
How can a creditor challenge a CVA and in what time limit?
A creditor can challenge a CVA within 28 days of the CVA’s approval by creditors by reporting to the court on the grounds of unfair prejudice or material irregularity in procedure.
What is the Supervisors role in a CVA?
The supervisors role is to agree creditors claims, collect unsecured funds to pay dividends to the creditors, and generally ensure the company complies with its obligations under the CVA. Once the CVA is completed, the supervisor will send a final report on the implementation of the proposal to all shareholders and creditors.
What is the advantage of a CVA to a company?
CVAs are advantageous as the directors remain in control of the company, and the company can continue to trade subject to the terms of the CVA proposal with hope of the company surviving.
What is a major disadvantage of the CVA for companies?
A CVA cannot bind secured or preferential creditors without their consent.
What is a restructuring plan?
A hybrid of a CVA and a scheme of arrangement which compromises a company’s creditors and shareholders, and restructures its liabilities so that a company can return to solvency.
How does a restructuring plan become binding?
A plan must be approved by at least 75% in value of those voting in each class, and requires court approval by way of sanction to become binding on all creditors.
What are two novel features of the restructuring plan?
- The court can exclude creditors and shareholders from voting even if they are affected by the plan if they have no genuine economic interest in the company.
- The court can sanction a plan which brings about cross-class cram down if it is just and equitable to do so, even if one or more classes do not vote to approve the plan.
What is a cross-class cram down?
It means that one rank of creditor can force the plan on another class of creditor who has voted against the plan. A cram down of shareholders means forcing shareholders to accept a debt for equity swap in which creditors are able to hold new shares in the company in place of their debt claims.
Who can initiate a CVA?
Directors, liquidator, or administrator.
Who can initiate a restructuring plan?
Company, creditor, member, liquidator, or administrator.
What is a disadvantage of a restructuring plan?
That the court process can be costly and time consuming.
What are the three statutory objectives of administration?
(A) first, to rescue the company as a going concern, or if that’s not reasonably achievable,
(B) secondly, to achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up…, or if that’s not reasonably achievable,
(C) thirdly, to realise the company,s property in order to make a distribution to one or more secure or preferential creditors.
What are the three statutory objectives of administration?
(A) first, to rescue the company as a going concern, or if that’s not reasonably achievable,
(B) secondly, to achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up…, or if that’s not reasonably achievable,
(C) thirdly, to realise the company,s property in order to make a distribution to one or more secure or preferential creditors.
How many procedures are there for appointing an administrator and what are they?
There are two different procedures for the appointment of an administrator: the court procedure and the out of court procedure.
