Corporate Insolvency Flashcards
1
Q
What is the meaning of insolvency?
A
When a company is unable to pay its debts (and a court may make a winding up order in respect of the company)
2
Q
What are the 4 situations in which a company may be deemed unable to pay its debts?
I.e. insolvent
A
- Unable to pay debts as they fall due (cash flow insolvent)
- Liabilities greater than assets (balance sheet insolvent)
- Does not comply with statutory demand for debt of over £750
- Has failed to pay creditor to satisfy enforcement of a judgement debt
3
Q
What are directors’ obligations towards companies in financial difficulties?
A
- Must continually review financial performance of company and recognise when facing financial difficulty (e.g. unpaid creditors putting pressure on, bank refusing to increase overdraft facility etc.)
- Need to decide what action to take on behalf of company
4
Q
What are the options a director has for a company facing financial difficulties?
A
- Do nothing (risk of personal liability and breach of directors’ duties)
- Do a deal - informal/formal arrangement with some/all of company’s creditors (less/more time to pay)
- Appoint administrator - collective formal insolvency procedure
- Request appointment of receiver - secured creditor enforces security by appointing receiver who sells secured assets with a view to paying sale proceeds to secured creditor
- Place company into liquidation
5
Q
What is the difference between an informal and formal arrangement?
A
- Informal = not governed by statute (but contractually binding)
- Formal = governed by statute (and can bind creditors even if they did not vote against)
6
Q
Why would a company use an informal arrangement?
A
Avoid time/cost of formal insolvency arrangements and consequences (i.e. bringing company to end)
7
Q
What is a creditor agreement and what are the benefits?
A
Informally negotiating with creditors to avoid the time and cost of formal insolvency arrangements or proceedings or the consequences where they might bring the life of the company to an end
8
Q
What may a company have to do to obtain a creditor agreement?
A
- Grant new/additional security
- Replace directors/senior employees
- Sell failing businesses/subsidiaries or profitable ones to raise cash
- Reduce costs (redundancy, closing unprofitable business)
- Issue new shares to creditors (debt for equity swap)
9
Q
What is a moratorium?
A
A period in which creditors cannot exercise their usual rights/remedies:
- No creditor can enforce proceedings
- Stay of all legal proceedings and no new proceedings can be brought
- No winding up/administrative procedures can be commenced
Creates breathing space for company to resolve situation
10
Q
What types of companies are excluded from applying for statutory moratoriums?
A
Financial service firms (banks and insurance companies), and companies which are party to capital markets arrangements of over £10m
11
Q
When would a pre-insolvency moratorium be used?
A
For struggling companies not yet in an insolvency process
Buys time to reach informal/formal arrangement with creditors
12
Q
What two statements must a company file at court to obtain a pre-insolvency moratorium?
A
Filing documents at court inc:
- Statment that a company is (likely to become) unable to pay debts as they fall due
- Statement from a Monitor (licensed insolvency practicioner - usually accountant) that a moratorium will result in the rescue of the company in their view
13
Q
What does a Monitor do re application and during pre-insolvency moratorium?
A
- In application: submits statement that a moratorium in their view will result in rescue of company
- During: supervises moratorium
14
Q
How long will a pre-insolvency moratorium last? How is it further extended and by who?
A
- For 20 business days - can be extended by directors for further 20
- Further extension possible with consent of requisite majority of creditors or a court order
15
Q
What is the maximum period for a pre-insolvency moratorium?
A
One year (subject to a court order to extend further)
16
Q
When will a moratorium automatically terminate?
A
- Company enters liquidation/administration; or
- When CVA approved or court sanctions restructuring plan
17
Q
What is the difference between pre-moratorium and moratorium debts?
A
- Pre-moratorium debt = debts which have fallen due before/during moratorium from obligation incurred before it started
- Moratorium debt = debts which fall due during or after moratirum from obligation incurred during
Moratorium debt usually relate to payments for goods/services ordered by company during moratorium period
18
Q
Must both pre-moratorium and moratorium debts be repaid during mortatorium?
A
- Pre-moratorium debts = do not have to be paid (‘statutory repayment holiday’)
- Moratorium debts = must be paid (so company must be ‘cash flow solvent’ to pay its way through moratorium period)
19
Q
What does the statutory repayment holiday not apply to?
I.e. what pre-moratorium debts do still have to be paid?
A
- Loans under a contract involving financial services (company remains liable to pay back sums to a bank which made a loan to it before moratorium)
- Monitor’s remuneration/expenses
- Goods and services supplied during moratorium
- Rent re period during moratorium
- Wages/salary/redundancies
20
Q
What is the main advantage of a formal agreement?
A
Will be legally binding if requisite majorities of creditors/shareholders vote in favour even if some of those creditors:
- Voted against
- Did not vote at all
- Did not receive notice of relevant procedure
21
Q
What are the 2 types of formal arrangement and what is the difference between them?
A
- Company Voluntary Agreement (CVA) - creditors agree to part payment of debt and/or a new extended timetable for repayment
- Restructuring Plan - compromises company’s creditors and shareholders and restructures liabilities so company can return to solvency
22
Q
How is the court involved in a CVA?
A
No requirement for court approval - but CVA proposal must be reported to court
23
Q
Who implements and supervises a CVA? What happens to the company directors?
A
- The supervisor (an insolvency practicioner) supervises/implements
- The company directors remain in office and run affairs subject to CVA’s terms
24
Q
What can a CVA be used together with?
A
Administration or liquidation
E.g. agree reduction in rent for retail brand as they attempt to continue trading
25
How is a CVA set up?
## Footnote
What will directors do? What will nominee do? How will voting happen?
1. Directors draft CVA proposal and submit it to **nominee** they have appointed
2. **Nominee reports to court** on whether company's creditors and shareholders should be asked to vote on CVA proposal
3. **Creditors vote** on proposal and **meeting of shareholders** takes place after
4. Nominee reports to court that **CVA has been approved** and becomes **supervisor**
26
How long must a nominee give to creditors to vote on CVA proposal?
At least 14 days
27
When must a meeting of the shareholders take place after the creditor's decision?
Within 5 days of the creditors' decision
28
How is a CVA approved (voted on)?
| 3 requirements
CVA will be approved if:
1. At least 75% in value of debts owed of those voting on proposal vote in favour
2. 50% of unconnected creditors **don't** vote against; and
3. A simple majority of shareholders vote in favour
| Creditors' votes always prevail even if members vote against
## Footnote
Unconnected creditor = not a shareholder or director of company proposing CVA or a related company
29
Is the CVA binding on all creditors?
* Binds on all **unsecured creditors** (whether voted for or against)
* Secured and preferential creditors **not bound** unless unanimously consent
| Major disadvantage of CVA
30
Until when can a creditor challenge a CVA and on what grounds?
Can challenge within 28 days of CVA approval on grounds of unfair prejudice
| I.e. CVA treats one creditor unfairly, material procedural irregularity
31
When does a CVA become binding?
At the end of the 28 day challenge period
32
What is the supervisor's role during CVA?
* Agree creditors' claims
* Collect in unsecured funds to pay dividends (sums/proportions of sums owed)
* Ensure company complies with CVA obligations
33
What will a supervisor do once a CVA has been completed?
Send a final report on implementation of proposal to all shareholders/members and creditors who are bound by the CVA
34
What is the main advantage and disadvantage from the company's POV of a CVA?
* **Advantage** = directors remain in control, company can continue to trade subject to CVA proposal terms
* **Disadvantage** = cannot bind secured or preferential creditors without consent
35
Why would trade creditors or landlords prefer a CVA?
* Trade creditors likely to recover more than if company goes ito administration/liquidation
* Landlords may prefer to received reduced rent than have empty properties generating no income at all
36
Does a restructuring plan require court approval?
Yes - will only then become binding
37
Who will a restructuring plan bind?
All creditors including secured creditors
38
How is a restructuring plan voted on?
* Creditors and members split into classes
* Each class votes on plan
* Plan must be approved by at least 75% on value of those voting in each class
39
Who is a court able to **exclude from voting** on a restructuring plan?
Creditors and shareholders if they have no genuine economic interest in the company even if they are affected by the plan
40
What is a cross class cram down?
Where one rank of creditor can force the plan on another class of creditor who voted against the plan
41
Can a court sanction a cross class cram down even if one or more classes do not vote to approve the plan?
Yes if it is just and equitable to do so
42
What is a cram down of shareholders?
Forcing shareholders to accept a debt for equity swap in which creditors are able to hold new shares in company in place of their debt claims
43
Why might a restructuring plan be used over a CVA?
* Can compromise rights/claims of secured creditors and shareholders (CVA cannot)
* Can be sanctioned by the court to bind all creditors even if requisite majority approval is not obtained in every voting class
| Restructuring advantage!
44
What can the restructuring plan be used alongside?
* Pre-insolvency moratorium
* Administration/liquidation
45
Why would a CVA be used over a restructuring plan?
No court sanction required so can be quicker and cheaper to implement
| CVA advantage!
46
What is the difference between a CVA and restructuring plan in terms of who they bind?
| Advantage and disadvanatage
* CVA binds **all unsecured creditors**
* Restructuring plan binds **all creditors and shareholders**
47
What is the difference between a CVA and restructuring plan in terms of who can initiate?
* CVA = directors, liquidator or administrator
* Restructuring plan = company, creditor, member, liquidator or administrator
48
Advantages and disadvantages of CVA and restructuring plan?
CVA
+ Advantage: No court sanction (quicker and easier)
- Disadvantage: Only binds unsecured creditors
Restructuring plan
+ Advantage: Binds all creditors and shareholders even if some classes do not approve
- Disadvantage: Court process can be costly and time-consuming
49
What is administration?
| In whose interests does the administrator act?
A collective procedure whereby administrator acts in interests of creditors as a whole rather than interest of particular creditor
50
What are administrators officers of and to whom do they owe duties?
The court - owe duties to court and creditors even if they are appointed out of court
| Must be licensed insolvency practicioners
51
What are the three (descending) statutory objectives of administration?
1. **Rescue** company as a going concern, if not achieveable then...
2. Achieve a **better result** for company's creditors as a whole than would be likely if company wound up, it not reasonably achieveable...
3. **Realise company's property** to make a distribution to one or more secure or preferential creditors
| 2nd one most likely to be achieved
52
What are the 2 different procedures for the appointment of an administrator and what is the main difference?
1. Court procedure (appointed by court)
2. Out of court procedure (not appointed by court, but still filed)
53
Where the company is/is likely to become unable to pay its debts, who can **apply** for the **court procedure** for appointment of administrator?
The company, directors, creditor, supervisor of CVA or liquidator
54
What must court consider when deciding to make administration order?
If that appointment is reasonably likely to achieve the purpose of administration
55
When does an **interim moratorium** come into effect and last until in context of a **court procedure** administrator appointment?
* Comes into effect = on application to court
* Lasts = until administration order made/court dismisses application
56
When would the **out of court procedure** be unavailable to directors (and so the **court procedure** would have to be used)?
| As court procedure fairly uncommon
* Where creditor has begun winding up proceedings against company and directors wish to appoint administrators before court makes winding up order
* If court makes administration order = pending winding up proceedings are automatically dismissed
57
For the **out of court procedure** for appointment of an administrator, which two persons can appoint?
1. Directors/company
2. Holder of a qualifying floating charge (QFC)
58
What 2 features make a qualifying floating charge (QFC)?
A floating charge which:
1. Together with any other security holder of floating charge holds relates to **the whole/substantially the whole of company's property**; and
2. The document creating it provides that the holder has the **power to aappoint an administrator**
## Footnote
Most floating charge held by creditors will be QFCs e.g. if a bank lends to a company, it will usually request a QFC to secure the loan
59
How would the directors/company appoint an administrator out of court if they have **not granted a QFC**? When would administrator's appointment take effect?
* File a notice of intention (NOI) at court
* Not less than 10 business days later, file a notice of appointment at court (**appointment takes effect**)
60
How would the directors/company appoint an administrator out of court if they **have granted a QFC**? When would administrator's appointment take effect?
* Directors must send NOI to holder of QFC at same time as court
* QFC has 5 business days to appoint own choice of administrator
* If they do not = directors can file notice of appointment in usual way and director's choice of administrator appointed
61
What two steps must a holder of a QFC take to appoint an administrator out of court?
1. Must first enforce its security in accordance with QFC terms
2. Appointment will take effect when it has filed notice at court
62
What happens if there is more than one QFC holder?
The lower ranking priority QFC must give 2 business days' notice to higher ranking QFC holders - can only proceed with appointment if higher ranking holders consent to it
63
When an administrator is in office, what **management powers** do directors have?
None without the consent of the administrator
64
What is the role of the administrator?
As an officer of the court, has a duty to act in best interests of all the creditors to achieve purpose of administration
65
What are the powers of an administrator?
* To carry on the business of the company
* Take possession and sell the property of the company (only with consent of fixed charge holder/court if property subject to fixed charge)
* Borrow money and execute documents in the company's name
66
Do administrators have the power to pay a dividend to unsecured creditors?
Not without obtaining the court's permission
67
What does an administrator have 8 weeks to do once appointed?
Produce a report setting out proposals for the conduct of the administration and send to all creditors for approval
| E.g. restructure liabiities w scheme of arran, restructuring plan. CVA
68
What happens if the report is rejected or accepted?
* **Rejected** = company usually placed into liquidation
* **Accepted** = administrator proceeds with their proposals
69
How long is there for the completion of administrations and what happens once the proposals are achived?
* Time limit of 12 months for completion (but can obtain extensions)
* Once proposals achieved, company will exit administration
70
Does the company benefit from a moratorium during administration?
Yes - company has benefit of a **full administrative moratorium** - all business documents and website must state that company is in administration
71
What cannot happen during moratorium (except with consent of court/administrator)?
| Because of administrative moratorium
* No order/resolution to wind up company
* No administrative receiver of company can be appointed
* No steps can be taken to enforce security
* No legal proceedings can be commenced or continued
* A landlord cannot forfeit a lease
72
Is there a moratorium following a court application to appoint an administrator? What will it not prevent?
Yes an **interim moratorium** - same rules as full moratorium but does not prevent QFC holder from appointing an administrator
73
What are the powers of the administrator re the what they can do with/to directors and property subject to charges?
* Can remove and appoint directors
* Can bring proceedings against directors for fraudulent and wrongful trading
* Can dispose of property subject to floating charge and fixed charge (with court's consent for fixed)
74
What is a pre-packaged administration and what does an administrator do with it?
* **Pre packaged administration** = where business/assets of insolvent company is prepared for sale to a selected buyer **prior** to the company's entry into administration
* Administrator will complete sale with buyer immediately following appointment
75
What are the advantages of a pre-packaged sale?
* Goodwill and continuity of business is not damaged by administration
* Certainty of result is achieved for creditors
76
Why are pre-packaged sales controversial especially if sale is to existing shareholders/directors?
Concern that sale does not take place at proper price and creditors are given insufficient information to determine whether sale was in their best interests
77
How do the Administration Regulations restrict the ability of an administrator to enter into a pre-packaged sale with the company's directors or shareholders?
Restricts ability unless sale has been approved in advance by creditors or buyer has obtained an evaluator's qualifying report
78
What is a receivership and how does it differ to administration?
Is a procedure conducted in the interests of secured creditor
| Cf administration which is a collective procedure
79
What are the 3 types of receivers?
1. Administrative receivers (rare and usually prohibited)
2. Fixed charge receivers (most common)
3. Court-appointed receivers (relatively rare)
80
How is an administrative receiver appointed and what do they do?
| RARE AND PROHIBITED IN MOST CASES
* Appointed by secured creditor with fixed and floating charges over all company's assets
* Will take control of secured assets, sell them, and use proceeds to repay debt owed to secured creditor
| Must be a licensed insolvency practicioner
## Footnote
`
81
When can administrative receivers be appointed by QFC holders?
1. Where floating charge created before 15 Sep 2003
2. Where one of the statutory exceptions applies
82
How is a fixed charge receiver appointed and what do they do?
* Appointed by holders of a fixed charge pursuant to terms of relevant security document to enforce security
* Will manage and sell secured assets and repay debt owed to their appointer out of sale proceeds
| Do not have to be an insolvency practicioner
83
Does a fixed charge receiver owe a duty to the debtor or just appointor?
* Owe duties primarily and exclusively to appointor (chargee)
* Owe limited duty to debtor (chargor) to act in good faith in course of employment
| But acts as an agent for chargor (legal anomaly)
84
Can a fixed charge receiver deal with all assets of the company?
No - only those secured by security document
85
When can a fixed charge receiver not be appointed?
While a pre-insolvency moratorium subsists or company is in administration
86
How and when is a court-appointed receiver appointed? What is their duty?
| (Rare)
* Appointed by court (who sets out their powers in court order)
* Usually made when shareholders are locked in dispute
* Duty is typically to run the business until dispute determined
87
What is liquidation?
Company's business is wound up and its assets transferred to creditors and (if surplus) to its members
88
What does a liquidator do?
* Collects in and sells company assets
* Identifies creditors and amounts owed to them and pays a 'dividend' out of funds obtained from sale
* Pays surplus to company's shareholders in accordance with rights under Articles
89
What happens at the end of liquidation?
Company is removed from the register and dissolved
90
Will solvent companies ever be wound up?
Yes - where business opportunity at end, internal disputes, or members wish to move on
91
Will liquidator try to keep a business going like an administrator?
No
* Will close company's business and dismiss employees very soon after appointment
* Will sell assets on piecemeal basis rather than going concern
* Stay on proceedings which applies is very limited
| Represents **end of commercial life**
92
How will administration and liquidation be used for the same company?
1. Common to go into administration first and effect a sale as a going concern
2. Will go into liquidation if they fail to find a buyer
93
What are the two types of liquidation?
1. Compulsory liquidation
2. Voluntary liquidation
2a. Members' voluntary liquidation
2b. Creditors' voluntary liquidation
94
When is a company's life brought to an end for each type of liquidation?
* Compulsory = 3 months after notice by liquidator to Registrar that winding up completed
* Voluntary = 3 months from filing by the liquidator of final accounts and return
95
How does compulsory liquidation begin?
An applicant presents winding up petition to court requesting a winding up order on a number of statutory grounds
96
Who does a court order for compulsory liquidation operate in favour of?
All creditors and contributories (members and some former members)
97
Who is the Official Receiver and what do they do?
* Becomes liquidator until another person appointed
* Notifies CH and all known creditors of liquidation
* Can summon separate meetings of creditors and contributories for purpose of choosing a person to become liquidator in his place
98
Who can apply for a winding up order?
1. Creditor
2. Company (acting by shareholders)
3. Directors (board resolution)
4. Administrator
5. Administrative receiver
6. Supervisor of a CVA
7. Sec of State for Business
99
Why would a company or directors apply for a compulsory winding up order?
Where not enough assets to fund a voluntary liquidation
100
What are the 2 key grounds on which the court can order a company to be wound up?
1. The company is unable to pay its debts; and
2. It is just and equitable for company to be wound up
101
What are the 4 ways an inability to pay debts can be evidenced?
1. Failure by company to comply with a creditor's statutory demand
2. A creditor fails an attempt to execute judgement debt it has obtained against company
3. The cash-flow test
4. The balance sheet test
102
What is a statutory demand and when can it be used?
* **Statutory demand** = written demand requiring company to pay specific debt
* Only can be used if debt exceeds £750 and is not disputed on substantial grounds
103
How long does a company have to pay a statutory debt and what is the consequence of failing?
21 days - failing which the creditor has the right to petition the court to wind up the company
104
What are the cash-flow and balance sheet tests?
* **Cash-flow test** = proof to the satisfaction of the court that the company is unable to pay its debts as they fall due
* **Balance sheet test** = proof to the satisfaction of the court that the value of company's assets is less than the amount of its liabilities
| Cash flow test can be satisfied by statutory demand process
105
What are the consequences of a compulsory winding up order from the court on employees, proceedings and directors?
| I.e. compulsory liquidation
* Automatic stay granted on commencing/continunig with proceedings
* Employees automatically dismissed
* All directors lose powers and are dismissed from office
106
How are insolvent companies prevented from transferring their assets to TPs at the expense of creditors when **anticipating liquidation**?
Dispositions made during period between presentation of winding up **petition** and winding up **order** being made = **void**
107
What are the 3 situations of a voluntary winding up?
| I.e. a winding up without a court order
1. Company's purpose according to articles has expired/resolution of shareholders (**rare**)
2. A company resolves by special resolution to wind up (**members' voluntary winding up; MVL**)
3. An company resolves it is advisable to wind up company due to inability to carry on business (**creditors' voluntary winding up; CVL**)
108
Does a company have to be solvent for both an MVL and CVL?
* MVL only for solvent companies
* CVL only for insolvent companies
109
What must directors swear for an MVL?
Swear a declaration of solvency
110
What 2 things are stated by the declaration of solvency?
* The company's assets and liabilities at latest practicable date before making declaration
* That the company can pay creditors in full, together with interest at the official rate, within no longer than 12 months from commencement of winding up
111
What is a director liable to should they not have reasonable grounds for their opinion (on declaration) and how is this presumed?
* Liable to fine/imprisonment
* Presumed if debts not actually paid within specified time period
112
What is the process for members in commencing MVL?
* SR to place company into MVL
* OR to appoint liquidator
113
What happens if the liquidator - appointed by members - considers that the company will be unable to pay its debts?
Must change members' winding up into a CVL
114
Who commences and controls a CVL?
* Commenced by **shareholders** who pass resolution
* Controlled (effecitvely) by **creditors** who choose liquidator
| Directors' declaration of solvency not made
115
What is the proceure for a CVL?
* SR passed to place company into a CVL
* OR passed to appoint nominated liquidator
* Within 14 days of SR directors ask company creditors to a) approve nominated liquidator or b) put forward own choice
116
Whose choice of liquidator takes precedence?
| Directors approve nominated liquidator, creditors put forward own choice
The creditors' choice of liquidator will take precedence
117
For a CVL, is a declaration of solvency needed (like an MVL)?
* Declaration of solvency not needed (will not be made)
* But directors must still draw up a statement of company's affairs and send it to creditors
118
What happens to the management powers of company directors when a liquidator is appointed?
Management powers of directors terminated and transferred to liquidator together with FDs
| So liquidator must act in good faith etc.
119
What must the liquidator be?
A qualified Insolvency Practicioner or official Receiver (appointed by the court)
120
What are the principal functions of a liquidator in a winding up by the court?
| As officer of the court
* Secure/realise assets of company and distribute property to creditors
* Take into custody/control of all property of company
121
What are the liquidator's power of management over the company?
* Sell property and pay debts
* Execute deed/documents in name of company
* Raise money on security of company's assets
* Do all things necessary to wind up comany's affairs and distribute assets
* Commence/defend court proceedings for company
122
Can the liquidator carry on the business of the company?
Only to extent necessary for beneifical winding up of company
123
What antecedent transactions can liquidator avoid to maximise assets available for distribution?
* Disclaim onerous property
* Apply to court to set aside undervalue transaction
* Apply to court to set aside/vary terms of extortionate credit transaction
* Claim a floating charge to be invalid if created for no new/inadequate consideration
* Apply to court to set aside transaction that will defraud creditors
| **Many will also apply to administrators**
124
What is a dividend in the context of liquidation?
A payment made out to creditors (in distributing property according to the specified order of priority)
125
Can administrators pay dividends?
If they have court permission to do so
126
Summary of all options for a company in financial trouble
* Informal arrangement (creditor agreement, pre-insolvency moratorium)
* Formal arrangement (CVA, restructuring plan)
* Administration (court procedure, out of court procedure)
* Receivership (administrative, fixed charge, court appointed)
* Liquidation (compulsory, voluntary [MVL, CVL])
127
Can the statutory order of distribution be affected?
Yes - by priority or subordination agreements entered into by creditors
| One class of creditor agrees to rank behind another
128
What is the statutory order of priority?
1. Liquidator's fees/expenses in preserving and realising assets subject to fixed charges
2. Amount due to fixed charge creditor (from proceeds of selling fixed charge assets - **paid net** out liquidator's costs of selling)
3. Liquidator's other remnueration, costs and expenses
4. Preferential creditors (1st and 2nd tier)
5. Creation of prescribed part fund (if available) for unsecured creditors
6. Amount due to creditors with floating charges
7. Unsecured/trade creditors (inc payment of prescribed part)
8. Interest owed to unsecured creditors
9. Shareholders
129
What happens if the proceeds from assets with a fixed charge over them are insufficient to discharge debt in full?
* **If it has a floating charge** = creditor may be able to recover balance lower down in order
* **If no floating charge** = rank as unsecured debt (and paid with unsecured creditors!)
130
What does the liquidator's 'other remuneration, costs and expenses' refer to?
* Costs of selling asset secured by floating charge
* Costs incurred in pursuing litigation (e.g. wrongful trading, voidable transactions)
131
What does the liquidator need to obtain before it begins litigation?
Approval from the preferential creditors/floating charge holders
| It is these who will pay costs should claim fail
132
What are the two tiers of preferential creditors?
| For insolvencies commencing on or after 1 Dec 2020
1. **First tier**
1a. Employee claims of max £800 for unpaid remuneration due in 4 months before 'relevant date' (generally date of winding up resolution/petition) plus accrued holiday pay
1b. Certain contributions owing to occupational pension scheme
2. **Second tier**
2a. PAYE and NI deductions made by company not paid to HMRC
2b. VAT not paid to HMRC
133
What is the difference between the first and second tier in terms of paying?
| Re preferetial creditors
Tier 1 preferential debts must be **paid in full** before tier 2 debts are paid
134
What happens with the prescribed part fund and at what stage is it created?
| AKA ring-fenced fund
Is reserved after payment of preferential debts and shared rateably among the unsecured creditors when they are paid
## Footnote
To increase chance that unsecured creditors are paid something in liquidation from money that would otherwise flow to floating charge holders
135
How is the prescribed part fund calculated?
* By reference to a **% of company's net property**
* Net property = sale proceeds of non-fixed charge property less liquidator's expenses and preferential debts
| Set aside for distribution to the company's unsecured creditors
136
What is the amount of company's net property that will be ring-fenced?
50% of first £10,000 and 20% thereafter up to a max fund of £800,000 (or £600,000 if made before 6 April 2020)
137
If a holder of a floating charge suffers a shortfall on realisation, do they share in the prescribed part fund?
No
## Footnote
Join the unsecured creditors
138
How is the priority of floating charge holders decided?
Priority determined by agreement between holders usually
139
Who might classify as an unsecured/trade creditor?
* Ordinary trade creditors (who have not been paid)
* Secured creditors to the extent that the security is a) invalid or b) assets subject to security have not realised sufficient funds
140
What is the priority/ranking of unsecured creditors?
| I.e. who is paid first?
Pari passu - all rank and abate equally
## Footnote
E.g. if a company has only two creditors (A and B) and creditor A has a claim against the company of £100 and creditor B has a claim against the company of £50 (making total claims of £150) but the assets available for distribution to the creditors are £75, creditor A will receive £50 and creditor B will receive £25
141
How is ranking between shareholders determined?
By rights attributable to class of share e.g. prefs may have preferential rights to return of their capital on a winding up in priority of ords
142
Is a moratorium available for liquidation?
No - but automatic stay on commencing/continuing with proceedings against company
143
Is a moratorium available for administration?
* **Full** moratorium available from date of appointment of administrators
* **Interim** moratorium comes into force: (1) on application made to court lasting until order made and (2) upon filing of NOI to appoint directors lasting for 10 business days
144
What is the differing effect of administration and liquidation on employees and directors?
* **Administration** = employees remain employed - directors cannot exercise any management powers without consent of administrator
* **Liquidation** = both automatically dismissed
145
Can a business continue trading in an administration and liquidation?
* **Liquidation** = company will generally cease trading
* **Administration** = can carry on trading in order to achieve main objective
146
How does the company exit administration and liquidation?
* **Liquidation** = dissolved 3 months after liquidator gives notice to CH that winding up concluded
* **Administration** = 1) can restructure rights of creditors through restructuring plan, scheme of arrangement, CVA, 2) if company returns to solvency it can be handed back to directors 3) can enter liquidation
147
How are the main objectives of administration and liquidation different?
* **Liquidation** = wind up company by realising assets and distributing to creditors
* **Administration** = rescue company as a going concern
148
Can CVAs and restructuring plans both be used in both administration and liquidation?
Yes
