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(FLK1) Business Law and Practice > Corporate Insolvency > Flashcards

Corporate Insolvency Flashcards

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1
Q

What is the Relevant Date?

A

15/09/2003 (the “Relevant Date”).

This is the date the Enterprise Act (“EA”) 2002 came into force.

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2
Q

What is Insolvency?

A

The inability to repay Debts.

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3
Q

What is the Cashflow Test for Insolvency?

A

The Firm is unable to repay its Debts as they fall due.

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4
Q

What is the Balance Sheet Test for Insolvency?

A

The Firm’s Liabilities (Present, Contingent, and Prospective) exceed its Assets.

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5
Q

What are the Options for Directors if the Firm is in Financial Difficulty?

A
  • Do Nothing.
  • Liquidate the Firm.
  • Appoint an Administrator.
  • Execute an Intercreditor Agreement.
  • Request the Appointment of a Receiver.
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6
Q

What are the Advantages of Intercreditor Agreements?

A

They permit Direct Negotiation without Statutory Regulation.

This is an Informal Insolvency Arrangement.

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7
Q

What are the Tactics for Securing an Intercreditor Agreement?

A
  • Reduce Costs.
  • Sell Assets and Businesses.
  • Grant New or Additional Security.
  • Replace Directors or Senior Employees.
  • Issue New Shares to Creditors (Debt-for-Equity Swap).
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8
Q

What is a Standstill Agreement?

A

An Agreement wherein Creditors consent to temporarily withhold from Enforcement.

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9
Q

What is a Pre-Insolvency Moratorium?

A

A Statutory Grace Period during which Creditors are prohibited from Enforcement.

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10
Q

What is the Scope of a Pre-Insolvency Moratorium?

A
  • Enforcement of Security: Creditors cannot Enforce any Security over Firm Assets.
  • Legal Proceedings: New Proceedings cannot be initiated and Existing Proceedings are Stayed.
  • Administration Procedures: Creditors cannot initiate Administration; only the Directors can.
  • Winding-Up Procedures: Creditors cannot initiate Winding-Up; only the Directors can, and no Shareholder to do so will pass without Director Approval.
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11
Q

What is the Procedure for Obtaining a Pre-Insolvency Moratorium?

A

Grounds for Application:

  • Statement of Financial Difficulty: Directors must declare the Firm is, or is likely to become, Insolvent.
  • Monitor’s Statement: A Licensed Insolvency Practitioner (the “Monitor”) must confirm the Moratorium will likely result in the Firm’s rescue.

Duration and Extension:

  • The Moratorium initially lasts for 20 business days.
  • It can then be extended for another 20 business days without Creditor consent.
  • It can then be extended for up to one year from Commencement with Creditor consent or a Court Order.

Termination:

  • The Moratorium automatically ends if:
    • The Firm enters Liquidation or Administration; or
    • The Court sanctions a CVA, SOA, or Restructuring Plan.
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12
Q

Under what Conditions must a Firm Repay a Pre-Moratorium Debt?

A
  • Rent During Moratorium.
  • Monitor’s Remuneration and Expenses.
  • Loans under Financial Services Contracts.
  • Goods and Services Supplied During Moratorium.
  • Employee Wages, Salaries, and Redundancy Payments.
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13
Q

What are the Two Formal Insolvency Arranagements?

A
  • Company Voluntary Arrangement (“CVA”).
  • Restructuring Plan.
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14
Q

What are the Key Features of a Company Voluntary Arrangement?

A
  • Supervision by an Insolvency Practitioner.
  • Combination with Other Procedures: CVAs can be used alongside other Procedures.
  • No Court Approval Required: Must be reported to Court, but does not require its sanction.
  • Director Control: Directors remain in office and continue running the Firm, subject to the CVA’s Terms.
  • Compromise with Creditors: Creditors may agree to accept part payment or extended payment schedules.
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15
Q

What is the Procedure for Executing a Company Voluntary Arrangement?

A

Proposal Drafting:

  • The Board, or if applicable the Liquidator or Administrator, drafts the Proposal and appoints a Nominee (an Insolvency Practitioner).
  • The Board submit the Proposal and a Statement of Affairs, assisted in drafting by the Nominee.

Nominee’s Report to Court:

  • The Nominee considers whether the Proposal has a resasonable propsect of approval and implementation.
  • Within 28 days, the Nominee must report to the Court on whether Creditors and Shareholder Meetings sould be convened.

Creditor Meeting:

  • Creditors are given at least 14 days’ Notice to vote on the Proposal.
  • It must be approved by at least 75% in value of Voting Creditors, excluding Secured Creditors; and
  • Cannot be opposed by more than 50% of Unconnected Creditors by Value (Independent from the Firm).

Shareholder Meeting:

  • The Shareholder Meeting is held within 5 days of the Creditors’ decision.
  • It must be approved by a Simple Majority, but Creditor Assent always trumpts Shareholder Dissent.

Reporting and Implementation:

  • The Nominee reports the outcome to the Court, after which, the Nominee becomes the Supervisor and oversees the Arrangement.
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16
Q

To what Extent is a Company Voluntary Arrangement Binding?

A
  • It Binds all Unsecured Sreditors, including those who abstained or dissented.
  • It only Binds Secured and Preferntial Creditors if they unanimously agree.
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17
Q

Can Creditors challenge a Company Voluntary Arrangement?

A

Yes, within 28 days of Approval on Grounds of Unfair Prejudice or Material Irregularity.

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18
Q

What is the Supervisor’s Role?

A
  • Ensure compliance.
  • Validate Creditor Claims.
  • Manage payments and distributions.
  • Issue a Final Report upon completion.
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19
Q

What is a Restucturing Plan?

A

An Agreement to Restructure a Firm’s Liabilities by compromising Creditor and Shareholder Claims.

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20
Q

What is the Procedure for Executing a Restructuring Plan?

A

Class Division:

  • Creditors and Shareholders divided into Classes based on their rights and interests.

Voting Requirements:

  • The Plan must be approval by at least 75% in value of those voting in each Class.

Court Sanction:

  • The Court must approve the Plan, after which it becomes Binding, sometimes even on Dissenting Classes.
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21
Q

What are the Court’s Powers during the Process of Executing a Restructuring Plan?

A

Exclusion from Voting:

  • The Court can exclude Parties with no genuine economic interest from voting.

Cross-Class Cram Down:

  • The Court can enforce the Plan across Dissenting Classes if:
    • Dissenting Class members would not be worse off than under the most likely alternative; and
    • The Plan has been approved by at least one Class with a genuine economic interest.

Debt for Equity Swap:

  • The Court can facilitate a Debt-to-Equity swap by forcing Dissenting Classes to acquiesce.
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22
Q

To what Extent is a Restructuring Plan Binding?

A

Completely. It Binds Unsecured, Preferential, and Secured Creditors.

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23
Q

To whom does an Administrator Owe Duties?

A

The Firm’s Creditors:

  • It must act in the Best Interests of all Creditors.

The Court, as an Officer Thereof:

  • It must act impartially and in accordance with the Statutory Objectives.
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24
Q

What are the Statutory Objectives an Administrator must work toward?

A

Primary Objective — Rescue the Firm:

  • Rehabilitate the Firm so that it may proceed as a Going Concern.

Secondary Objective —Achieve a Better Result for Creditors as a Whole:

  • Achieve a better result for Creditors relative to Liquidation without Administration.
  • Conditional on the Primary being unachievable.

Tertiary Objective — Realise Assets to Distribute to Secured or Preferential Creditors:

  • Liquidate Firm Assets to make whole Secured and Preferential Creditors.
  • Conditional on the Primary and Secondary Objectives being unachievable.
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25
Q

Who can Apply for the In-Court Procedure for Appointing an Administrator?

A
  • The Firm.
  • The Board.
  • The Creditors.
  • The Liquidator.
  • The Supervisor under the CVA.
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26
Q

What is the In-Court Procedure for Appointing an Administrator?

A

Petition:

  • A Qualified Applicant submit a Petition and Serve Notice on any QFCHs within 2 Business Days.
  • Application triggers an Interim Moratorium, which lasts until it is decided.

Conditions for Court’s Assent:

  • The Firm is, or is likely to become, Insolvent.
  • The Court believes the Appointment will likely achieve the Administration’s Objectives.
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27
Q

Who can Apply for the Out-of-Court Procedure for Appointing an Administrator?

A
  • The Board.
  • Qualifying Floating Charge Holders (“QFCHs”).
28
Q

What is a Qualified Floating Charge?

A

A Floating Charge:

  • That covers all, or substantially all, of the Firm’s Property; and
  • Whose Terms allows the Chargee to Appoint an Administrator or Administrative Receiver.
29
Q

What is the Out-of-Court Procedure for Appointing an Administrator?

A

For the Board:

  • The Board must File a Notice of Intention to Appoint, and in any case, File a Notice of Appointment within 10 Business Days thereof.
  • If there are QFCHs, the Board must Serve the Notice of Intention thereon and wait 5 Business Days.
  • If the QFCHs take no action within 5 Business Days, the Board must File a Notice of Appointment within 5 Business Days.

For Qualifying Floating Charge Holders:

  • Enforce the Charge as per its Terms.
  • Give Higher-Ranking QFCHs 2 Business Days’ Notice before Filing a Notice of Apponitment.
    • Higher-Ranking QFCHs can consent or make their own Appointment.
  • If Higher-Ranking QFCHs do not cause issues, File a Notice of Appointment, at which point, the Appointment is effective.
30
Q

What is the Effect of Administration on Firm Management?

A

Directors:

  • The Board remains in place, but cannot exercise managerial powers without the Administrator’s consent.

Employees:

  • Employees continue ordinarily, subject to the Administrator’s decisions.
31
Q

What are the Powers of the Administrator?

A

Broadly, the Administrator can manage the Firm and its Property. This includes:

  • Borrowing.
  • Execution of Documents.
  • Initiation of Legal Action.
  • Alteration of the Board’s composition.
  • Disposal of Assets, but if Secured by:
    • A Fixed Charge, then with the Court’s consent.
32
Q

What is an Administration Proposal?

A

A Plan for achieving the Administration’s Objectives.

  • This must be submitted to the Firm’s Creditors within 8 weeks of Appointment.
    * If **rejected**, the Firm **enters Liquidation**.
33
Q

What is the Duration of Administration?

A

An initial period of 12 months, with possible extensions from Creditors or the Court.

34
Q

What is an Administrative Moratorium?

A

A Grace Period lasting the Administration, during which the Firm’s Creditors are prohibited from Enforcement.

35
Q

What are the Restrictions Imposed during an Administrative Moratorium?

A

Creditors cannot:

  • Enforce Security.
  • Initiate Winding-Up.
  • Appoint Administrative Receivers.
  • Initiate or Continue Legal Proceedings.

Landlords cannot Forefeit Leases of Firm Premises.

36
Q

What are the Effective Differences between an Administrative and Interim Moratorium?

A
  • Secured Creditors can Appoint an Administrative Receiver during an Interim Moratorium; but
  • Only with the Court’s consent.
37
Q

What is a Pre-Packaged Administration?

A
  • The sale of the Firm’s Assets and Business is negotiated before Administration; and
  • Completed immediately after Appointment.
38
Q

What are the Procedural Safeguards for Pre-Packaged Administration?

A

Administrators cannot sell Assets to Connected Persons within the first 8 weeks of Administration without:

  • Creditor consent; or
  • An Independent Evaluator’s Qualifying Report, which must be:
    • Filed at Companies House; and
    • Shared with all Creditors.
39
Q

What is Receivership?

A

An Enforcement Procedure whereby the Receiver, on a Secured Creditor’s behalf, appropriates Firm Assets in satisfaction of a Secured Debt.

40
Q

What are the Three Types of Receivers?

A
  • Administrative Receivers.
  • Fixed-Charge Receivers.
  • Court-Appointed Receivers.
41
Q

What is the Scope of Administrative Receivership?

A
  • Floating Charges created before the Relevant Date.
  • Floating Charges created after the Relevant Date as part of:
    • A Utility Project.
    • A Public-Private-Partnership.
    • A Project Finance Transaction.
    • A Capital Markets Transaction (min. £50m).
    • Certain Transactions on Regulated Financial Markets.
42
Q

What are the Differences between Administrative and Fixed-Charge Receivers?

A

Licencing:

  • Administrative Receivers must be Licenced Insolvency Practitioners; whereas
  • Fixed-Charge Receivers do not.

Duties Owed:

  • Administrative Receivers owe a Duty exclusively to the Creditor; whereas
  • Fixed-Charge Receivers owe a limited Duty of Good Faith to the Debtor.
43
Q

What is Liquidation?

This is also known as ‘Winding Up’.

A

The Termination of a Business and Sale of its Assets to satisfy its Creditors, with any surplus returning to Shareholders.

44
Q

What are the Different Types of Liquidation?

A
  • Compulsory Liquidation.
  • Voluntary Liquidation.
45
Q

Who can Apply for a Winding-Up Order?

A
  • The Creditors.
  • The Administrator.
  • The Administrative Receiver.
  • The Supervisor under the CVA.
  • The Firm, through its Shareholders.
  • The Board, through a Board Resolution.
  • The Secretary of State for Business, Energy & Industrial Strategy, on Public Policy Grounds.
46
Q

What are the Grounds for Winding-Up?

A
  • Inability to Repay Debts.
  • Justice and Equity.
47
Q

What constitues Evidence of Inability to Repay Debts?

A
  • The Cashflow Test.
  • The Balance Sheet Test.
  • Failure to Satisfy a Court Judgment.
  • Failure to Repay or Secure an Undisputed Debt exceeding £750 within 21 Days of Statutory Demand.
48
Q

What is the Procedure for Compulsory Liquidation?

A

Petition:

  • The Applicant Files a Winding-Up Petition at the High Court, requesting the Firm’s Liquidation on Statutory Grounds.

Advertisement:

  • The Filed Petition must be advertised in the London Gazette at least 7 Business Days before the Hearing.

Outcome and Appointment:

  • If successful, the Court will appoint an Official Receiver to act as Liquidator, who then Notifies Companies House and Creditors of itself.
  • The Official Receiver can call a Creditors’ Meeting to appoint a Licenced Insolvency Practitioner in its stead.

Dissolution:

  • The Firm is Dissolved 3 Months after the Liquidator Notifies the Registrar of Companies of the Liquidation’s conclusion.
49
Q

What are the Consequences of Initiating Winding-Up?

A

The Firm cannot use the Out-of-Court Procedure to Appoint an Administrator.

50
Q

What are the Consequences of a Winding-Up Order?

A

Voiding of Post-Order Transactions:

  • Any Asset Disposition, Share Transfer, or Change in Membership after Commencement is Void.

Automatic Stay:

  • All Legal Proceedings involving the Firm are Stayed.

Automatic Dismissal of Directors and Employees:

  • All Directors and Employees are Dismissed.
51
Q

Regarding Winding Up, when is ‘Commencement’?

A

The earlier of:

  • The date the Petition was Filed at Court; or
  • In Voluntary Liquidations, the date the relevant Resolution was passed.

In either case, the Liquidation is backdated, which may jeopardise Transactions previously thought safe.

52
Q

What are the Two Types of Voluntary Liquidation?

A
  • Members’ Voluntary Liquidation (“MVL”).
  • Creditors’ Voluntary Liquidation (“CVL”).

There is a Third Type, namely Expiry of the Firm’s Purpose under its Articles and subsequent Shareholder Resolution, but it is very rare.

53
Q

What is the Prerequisite for using Members’ Voluntary Liquidation that is absent from Creditors’ Voluntary Liquidation?

A

The Firm must be Solvent, which must be supported by a Declaration of Solvency from the Board, stating that:

  • The Board has made a full inquiry into the Firm’s affairs; and
  • Reasonably concluded the Firm can fully satisfy its Debts within 12 Months of Commencement.

It must also include the Firm’s Latest Accounts.

54
Q

What is the Procedure for a Members’ Voluntary Liquidation?

A

Special Resolution to Enter Liquidation:

  • The Firm must pass a Special Resolution to formally Commence Liquidation.

Ordinary Resolution to Appoint a Liquidator:

  • The Firm must pass an Ordinary Resolution to Appoint its Liquidator.

Conversion to a Creditors’ Voluntary Liquidation:

  • If the Liquidator concludes the Firm will be unable to fully Satisfy its Debts, it must convert the Winding Up to a Creditors’ Voluntary Liquidation.

Dissolution:

  • The Firm is Dissolved 3 Months after the Liquidator Files the Final Accounts and Return.
55
Q

What is the Procedure for a Creditors’ Voluntary Liquidation?

A

Special Resolution to Enter Liquidation:

  • The Firm must pass a Special Resolution to formally Commence Liquidation.

Ordinary Resolution to Appoint a Liquidator:

  • Within 14 Days of the Special Resolution, the Board must seek the Creditors’ input on who should be Appointed as Liquidator.
    • Outreach must include a copy of the Firm’s Latest Accounts.
  • The Firm must pass an Ordinary Resolution to Appoint the Creditors’ preferred Liquidator.

Dissolution:

  • The Firm is Dissolved 3 Months after the Liquidator Files the Final Accounts and Return.
56
Q

To whom does the Liquidator owe Duties?

A

The Firm’s Creditors:

  • It must act in the Best Interests of all Creditors.

The Court, as an Officer Thereof:

  • It must act impartially and in accordance with the Statutory Objectives.
57
Q

What are the Principal Functions of the Liquidator?

A

Appropriation and Realisation of Firm Assets:

  • The Liquidator must identify, appropriate, and realise the value of all Firm Assets.

Identification of Debts and Distribution of Proceeds:

  • The Liquidator must identify all the Firm’s Creditors, how much they are owed, and distribute the Proceeds of Sale appropriately.

To facilitate these functions, the Board’s managerial powers and Fiduciary Duties transfer to the Liquidator on Appointment.

58
Q

What are the Liquidator’s Managerial Powers?

A
  • Power to Dispose of Assets.
  • Power to Execute Documents.
  • Power to Pay Debts and Settle Claims.
  • Power to Enter into Financial Transactions.
  • Power to Appoint Agents to Conduct Business.
  • Power to Initiate and Defend Lawsuits on the Firm’s behalf.
59
Q

What are the Powers of a Liquidator to Avoid Transactions?

A
  • §178: Disclaimer of Onerous Property.
  • §238: Transaction at an Undervalue.
  • §239: Preferential Transactions.
  • §244: Extortionate Credit Transactions.
  • §245: Nullification of Invalid Floating Charges.
  • §423: Transactions Defrauding Creditors.
60
Q

What is the Pari Passu Principle?

A

The payment of Claims equally and in proportion to size.

61
Q

What is the Statutory Order of Priority?

A

1 —Costs of Realising Fixed Charge Assets:

  • All Costs associated with preserving and selling Fixed Charge Assets are deducted from the Proceeds.
  • Examples include: Liquidator’s Fees, Legal Fees, Valuation Fees, Agent Fees, etc.

2 —Fixed Charge Creditors:

  • The Fixed Charge Creditors are paid from the Proceeds of the Fixed Charge Asset Sale.
  • Any Shortfall is deemed an Unsecured Debt.

3 —Liquidation’s General Costs:

  • All Costs associated with the Liquidation are deducted from the Proceeds of all Assets Sales.

4 —Preferential Creditors.

5—Prescribed Part Fund.

6 —Floating Charge Creditors:

  • The Floating Charge Creditors are paid from the Proceeds of the Floating Charge Asset Sale.

7 —Unsecured Creditors.

  • The Unsecured Creditors are paid Pari Passu.

8 —Interest on Unsecured Debts from Commencement.

9 —Shareholders.

62
Q

If the Proceeds of Sale of a Fixed Charge Asset are insufficient to Satisfy the Creditor’s Debt, what happens?

A

The Creditor may Claim under a Floating Charge, if one exists, otherwise it becomes an Unsecured Creditor.

63
Q

Can the Liquidator recover Litigation Costs?

A

Yes, but only if the Litigation was sanctioned by:

  • The Court; or
  • Preferential Creditors and Floating Charge Holders.
64
Q

What are the Two Tiers of Preferential Debts?

A

First Tier — Employee Claims:

  • Accrued Holiday Pay.
  • Certain Pension Contributions.
  • Unpaid Wages of up to £800 per Employee, due up to 4 Months before Commencement.
  • Any Shortfall is deemed an Unsecured Debt.

Second Tier — Crown Debts:

  • Unpaid PAYE Deductions.
  • Unpaid VAT collected but not remitted.
  • Unpaid Employee National Insurance Contributions.
65
Q

What is a Prescribed Part Fund?

A

A segment of the Firm’s Net Property that is sequestered before Floating Charge Holders are paid, for the benefit Unsecured Creditors .

  • This only applies to Floating Charges created after the Relevant Date.

Floating Charges created before the Relevant Date are called ‘Exempt Floating Charges’ for the purposes of Prescribed Part calculations.

66
Q

How is the Prescribed Part Calculated?

A

1 —Calculate Net Property:

  • Net Property = Net Asset Sale Proceeds — (Fixed Charge Sale Proceeds + Liquidation Costs + Exempt Floating Charge Sale Proceeds + Preferential Debts).

2 —Apply the Prescribed Part Formula:

  • Allocate 50% of the first £10K to the Fund.
  • Allocate 20% of everything over £10K to the Fund, up to the Statutory Caps.

2.1 —The Satutory Caps:

  • Before 06/04/2020: £600,000.
  • On or after 06/04/2020: £800,000.

Floating Charges created before the Relevant Date are called ‘Exempt Floating Charges’ for the purposes of Prescribed Part calculations.

(FLK1) Business Law and Practice (13 decks)

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