Corporate Insolvency Flashcards
(248 cards)
1
Q
List the options available to individuals facing financial difficulty.
A
Individuals facing financial difficulty have three options: do nothing, do a deal, or declare bankruptcy.
2
Q
How does an IVA differ from bankruptcy in terms of creditor binding?
A
An IVA can bind all creditors except secured creditors, while bankruptcy affects all creditors.
3
Q
Explain the typical nature of the debt in a creditor’s bankruptcy petition.
A
The debt is generally unsecured.
4
Q
What is an Individual Voluntary Arrangement (IVA)?
A
An Individual Voluntary Arrangement (IVA) is a collective procedure often used as an alternative to bankruptcy, allowing individuals to make arrangements with creditors to pay back debts over time.
5
Q
Identify the formal insolvency procedures for insolvent individuals.
A
The two formal insolvency procedures for insolvent individuals are bankruptcy and Individual Voluntary Arrangements (IVAs).
6
Q
Describe the purpose of an IVA.
A
An IVA, or Individual Voluntary Arrangement, is a contractual arrangement that allows a debtor to settle their debts by paying a proportion of what they owe to their creditors.
7
Q
Define the role of an Insolvency Practitioner in an IVA.
A
An Insolvency Practitioner supervises the debtor’s implementation and compliance with the terms of the IVA.
8
Q
What is required for an IVA to be binding on creditors?
A
An IVA becomes binding on creditors if it is approved by the requisite percentage of them.
9
Q
How long does an IVA typically last?
A
An IVA can last any length of time, but it commonly lasts between three to five years.
10
Q
Describe the role of the nominee in the process of setting up an IVA.
A
The nominee assists the debtor in drafting proposals that outline a statement of their affairs, including full details of assets and liabilities, and submits a report to the court regarding the arrangement’s prospects.
11
Q
How does a debtor initiate a moratorium during the IVA process?
A
A debtor can apply to the court for an interim order, which, if granted, imposes a moratorium that freezes existing or proposed bankruptcy proceedings and other legal processes against the debtor.
12
Q
Define the duration of the interim order in the IVA process.
A
The interim order (moratorium) lasts for 14 days, but the court has the authority to extend this period.
13
Q
What is required for the terms of the IVA to be approved by creditors?
A
Creditors holding more than 75% (by value) of the debt must vote in favor of the terms of the IVA for it to be approved.
14
Q
What happens if the court grants the interim order during the IVA process?
A
If granted, the interim order creates a moratorium that prevents any bankruptcy proceedings and legal actions against the debtor without the court’s permission.
15
Q
What is the purpose of calling a creditors’ meeting in the IVA process?
A
The creditors’ meeting is called to allow creditors to vote on the approval of the IVA terms proposed by the debtor.
16
Q
Describe the effect of an approved IVA on the debtor and creditors.
A
An approved IVA binds the debtor and all of their creditors, except secured creditors unless they consent to the IVA.
17
Q
Who supervises the implementation of an IVA?
A
The nominee becomes the supervisor of the IVA and its implementation.
18
Q
What actions can the supervisor of an IVA take if the debtor fails to comply with its terms?
A
The supervisor can usually petition for the debtor’s bankruptcy.
19
Q
List some advantages of an IVA.
A
Advantages of an IVA include being an alternative to bankruptcy, binding all creditors (except secured creditors), and the availability of a moratorium if an interim order is made.
20
Q
Identify some disadvantages of an IVA.
A
Disadvantages of an IVA include potentially lasting longer than bankruptcy and being an expensive process.
21
Q
Who can bring a bankruptcy petition?
A
A bankruptcy petition is usually brought by a creditor but may also be made by the debtor.
22
Q
Define the grounds for a creditor’s bankruptcy petition.
A
A ground for the petition is that the debtor is unable or has no reasonable prospect to pay its petition debts.
23
Q
What is the only ground for a debtor’s bankruptcy petition?
A
The only ground for this petition is that the debtor is unable to pay its debts.
24
Q
What is the minimum debt amount required for a creditor’s bankruptcy petition?
A
The debt must be for a liquidated sum exceeding £5,000.
25
What must accompany a debtor's bankruptcy petition?
The petition must be accompanied by a statement of affairs setting out the debtor's assets and liabilities.
26
What happens upon the making of a bankruptcy order?
Upon the making of a bankruptcy order, a trustee in bankruptcy is appointed, or the court passes the bankruptcy file to the Official Receiver, who will act as the Trustee until an alternative is appointed by the creditors.
27
What are the restrictions placed on a bankrupt individual?
A bankrupt individual is prohibited from acting as a director, managing a company, obtaining credit over £500 without disclosing their bankruptcy, giving gifts, and practicing in certain professions.
28
Define the role of the Official Receiver in bankruptcy cases.
The Official Receiver is a government body that becomes the Trustee in bankruptcy cases until an alternative trustee is appointed by the creditors.
29
What property rights does a bankrupt individual retain?
A bankrupt individual retains ownership of property only to the extent necessary for their reasonable domestic needs.
30
What is the consequence of having insufficient assets in a bankruptcy case?
If there are insufficient assets, it may be difficult to persuade anyone other than the Official Receiver to become the Trustee.
31
How long does a debtor have to satisfy a statutory demand before it can be used as evidence of bankruptcy?
A debtor has three weeks/21 days to satisfy a statutory demand before it can be used as evidence of their inability to pay debts.
32
Describe the role of the Trustee in a bankruptcy case.
The Trustee is responsible for managing the bankrupt's estate, which includes collecting and selling assets, dealing with the bankrupt's business, and distributing proceeds to creditors according to statutory provisions.
33
How does the bankrupt's estate vest in the Trustee?
The bankrupt's estate vests in the Trustee immediately upon their appointment or the appointment of the Official Receiver.
34
Define the powers of the Trustee regarding the bankrupt's assets.
The Trustee has wide statutory powers to sell, mortgage, or otherwise deal with the assets in the estate, as well as to carry on the bankrupt's business.
35
What is the final step in the Trustee's duties after selling the assets?
The final distribution occurs when the Trustee has sold all possible assets and distributed the proceeds in the order of priority.
36
What can the Trustee do with onerous property or contracts?
The Trustee may disclaim any onerous property or contracts.
37
How can the Trustee increase the estate's value?
The Trustee can challenge certain fraudulent or undervalue transactions or preferences to potentially swell the estate.
38
Explain the treatment of debts owed to a spouse in bankruptcy.
Debts of a spouse must be provable but are postponed to other creditors, ranking seventh in the order of priority.
39
Define the obligations of a bankrupt under section 333(1) IA86.
Under section 333(1) IA86, a bankrupt is obligated to give the Trustee information about their affairs, attend meetings at the Trustee's request, and perform any other reasonable tasks required by the Trustee.
40
What is the potential legal outcome for a bankrupt who does not fulfill their duties
A bankrupt who does not fulfill their duties may face criminal charges, including imprisonment and fines, and may also risk suspension of their automatic discharge.
41
Describe the process of discharge from bankruptcy.
A bankrupt is generally automatically discharged from bankruptcy after a maximum period of one year, meaning they are released from most bankruptcy debts and personal restrictions. However, The Official Receiver or Trustee may apply for an order suspending the automatic discharge.
42
How can a bankrupt be discharged in less than a year?
A bankrupt may be discharged in less than a year if the Official Receiver or Trustee files a notice stating that the bankruptcy does not require investigation or that they have concluded any such investigation within the one year period.
43
Describe the role of the Secretary of State in relation to Bankruptcy Restriction Orders (BROs).
The Secretary of State, or the Official Receiver acting on their direction, may apply to the court for a Bankruptcy Restriction Order if deemed appropriate based on the conduct of the bankrupt.
44
How long can a Bankruptcy Restriction Order (BRO) last?
A Bankruptcy Restriction Order can last for a period of between two and 15 years.
45
What are the consequences for a bankrupt under a Bankruptcy Restriction Order (BRO)?
During the duration of a BRO, the bankrupt cannot act as a director or obtain credit of more than £500 without disclosing their status.
46
What behaviors can lead to the application of a Bankruptcy Restriction Order (BRO)?
Behaviors include failure to keep records, entering into preferences or transactions at an undervalue, fraud, and incurring debt without reasonable expectation of repayment.
47
When must an application for a Bankruptcy Restriction Order (BRO) be made?
Generally, the application for a BRO must be made within a year of the start of the bankruptcy.
48
What is the purpose of challenging voidable transactions?
The purpose of challenging voidable transactions is to increase the assets available to creditors in a bankruptcy case.
49
Define Transaction at an Undervalue (TUV).
A Transaction at an Undervalue (TUV) refers to a transaction where the consideration received is significantly less than the consideration provided by the bankrupt.
50
Describe the conditions under which a Trustee can bring a claim for TUV.
A Trustee can bring a claim for TUV if the transaction is a gift, in consideration of marriage or civil partnership, or for a consideration that is significantly less in value than what the bankrupt provided.
51
How long before the bankruptcy petition must a TUV transaction occur?
The transaction must take place within 5 years preceding the day of the presentation of the bankruptcy petition.
52
What must be proved if a TUV transaction occurred between 2 to 5 years before the bankruptcy petition?
It must be proved that the individual was insolvent.
53
Explain the presumption of insolvency in relation to TUV transactions with associates.
Insolvency of the bankrupt is presumed (subject to rebuttal) when a transaction at an undervalue is entered into with an 'associate' of the bankrupt.
54
Identify the time frame for presuming insolvency in TUV cases.
Insolvency is presumed if the transaction at an undervalue occurred within 2 to 5 years before the bankruptcy petition.
55
Define a preference in the context of insolvency.
A preference occurs when an individual does something that puts a creditor in a better position than they would have been in if the individual were made bankrupt.
56
Describe the time frame relevant to a preference claim.
A preference claim can be made within 6 months preceding the petition presentation if to an unconnected person, or within 2 years if to an associate.
57
How must insolvency be proven in relation to a preference claim?
It must be proved that the individual was insolvent at the time of the preference or became insolvent as a result of it.
58
What influence must be shown regarding the individual's actions in a preference claim?
It must be shown that the individual was influenced by the desire to prefer the creditor.
59
Explain the rebuttable presumption related to preferences to associates.
There is a rebuttable presumption that the bankrupt individual was influenced by the desire to prefer the creditor when the preference is to an associate.
60
What is the role of a Trustee in a preference claim?
A Trustee can bring a claim for a preference if the individual has acted in a way that benefits a creditor.
61
What must be shown to bring a claim for TDC?
It must be shown that the transaction was a transaction at an undervalue with an intent to defraud creditors, which imposes a high evidential burden.
62
Is there a time limit for bringing a TDC claim?
There is no relevant time limit for bringing a TDC claim, allowing Trustees to bring a claim even when outside the time limits for a transaction at an undervalue claim.
63
Is it necessary to prove that the debtor is or was insolvent to bring a TDC claim?
No, there is no need to prove that the debtor is or was insolvent when bringing a TDC claim.
64
Define Transactions Defrauding Creditors (TDC) in the context of corporate insolvency.
Transactions Defrauding Creditors (TDC) refer to transactions that are conducted with the intent to defraud creditors, which can be challenged under the Insolvency Act 1986.
65
Describe a transaction at an undervalue according to section 339.
A transaction at an undervalue occurs when an individual makes a transaction for less than its value within 5 years preceding the presentation of a bankruptcy petition, and the individual is presumed to be insolvent at that time or as a result of the transaction.
66
What is the significance of the presumption of insolvency in transactions at an undervalue?
The presumption of insolvency indicates that if an individual engages in a transaction at an undervalue, it is assumed they were insolvent at that time or as a result of the transaction, which can affect the validity of the transaction.
67
Identify the time frame for preferences related to connected persons.
Preferences related to connected persons must occur within 6 months preceding the presentation of the bankruptcy petition.
68
Describe the main statute that deals with corporate insolvency in the UK.
The main statute is the Insolvency Act 1986 (IA 1986).
69
Define the purpose of the Enterprise Act 2002 in relation to corporate insolvency.
The Enterprise Act 2002 aimed to promote the rescue of companies.
70
Describe the significance of the Relevant Date in the context of the EA 2002.
The Relevant Date, which is 15 September 2003, marks the enforcement of the EA 2002 and is important for understanding the reforms in corporate insolvency.
71
What new insolvency procedures were introduced by CIGA 2020?
CIGA 2020 introduced two new insolvency procedures: the pre-insolvency moratorium and the restructuring plan (Plan) for companies.
72
Explain the purpose of the new procedures introduced by CIGA 2020.
The purpose of the new procedures is to make restructurings that avoid administration or liquidation more likely.
73
Describe the cash flow test for insolvency.
The cash flow test for insolvency assesses whether a company is unable to pay its debts as they fall due, as outlined in s 123(1)(e).
74
Explain the balance sheet test for insolvency.
The balance sheet test determines insolvency by evaluating if a company's liabilities exceed its assets, as specified in s 123(2).
75
List the four tests for insolvency.
The four tests for insolvency are: 1. Cash flow test, 2. Balance sheet test, 3. Failure to comply with a statutory demand for a debt over £750, 4. Failure to satisfy enforcement of a judgment debt.
76
Identify examples of financial difficulties a company may face.
Examples include having many unpaid creditors pressuring the company to pay its bills, a fully drawn overdraft facility with the bank refusing further credit, and having loans and liabilities that exceed the value of its assets.
77
Explain the role of a receiver in the context of financial difficulties for a company.
A receiver is appointed as an enforcement procedure where a creditor or a small group of creditors act to pursue their rights and recover their debt.
78
Define a Standstill Agreement in the context of informal negotiations with creditors.
A Standstill Agreement is a preliminary step where creditors agree not to enforce their rights or remedies for a specified period, allowing the company time to negotiate a financial arrangement.
79
Define the obligations a company has regarding debts incurred during the moratorium.
A company is required to pay all debts incurred during the moratorium, which typically relate to goods or services ordered during that time.
80
Explain the term 'debt for equity swap' in informal creditor negotiations.
A debt for equity swap is when a company issues new shares to creditors in exchange for reducing or eliminating their debt.
81
What is the significance of informal agreements in the context of insolvency?
Informal agreements can provide a flexible alternative to formal insolvency proceedings, allowing companies to negotiate terms directly with creditors.
82
Define the term 'moratorium' in the context of CIGA 2020.
A moratorium is a designated period during which creditors cannot exercise their usual rights and remedies against a company, providing the company with a breathing space to resolve its financial difficulties.
83
What preliminary steps can a company take during a pre-insolvency moratorium?
During a pre-insolvency moratorium, a company can negotiate informal agreements with creditors or prepare to propose a Company Voluntary Arrangement (CVA), restructuring plan, or scheme of arrangement.
84
What is the impact of a moratorium on legal proceedings against a company?
The impact is that there is a stay on legal proceedings, meaning no new proceedings can be brought against the company, and existing proceedings are halted.
85
Describe the process for obtaining a pre-insolvency moratorium.
A company must file documents at court, including a statement of its inability to pay debts and a statement from a licensed insolvency practitioner (Monitor) indicating that a moratorium is likely to rescue the company.
86
How long does a pre-insolvency moratorium last initially?
The pre-insolvency moratorium lasts for 20 business days.
87
What can extend the duration of a pre-insolvency moratorium?
The directors can extend it for a further 20 business days, and further extensions are possible with the consent of a requisite majority of creditors or a court order.
88
Define the maximum duration of a pre-insolvency moratorium.
The maximum period for a pre-insolvency moratorium is one year, subject to a court order for further extension.
89
What happens to the moratorium if the company enters liquidation?
The moratorium will terminate automatically if the company enters liquidation or administration.
90
What role does the Monitor play during the pre-insolvency moratorium?
The Monitor has a supervisory function during the pre-insolvency moratorium.
91
List the conditions under which a pre-insolvency moratorium will terminate.
The moratorium will terminate if the company enters liquidation, administration, if a CVA is approved, or if a court sanctions a restructuring plan or scheme of arrangement.
92
Describe the concept of pre-moratorium debts.
Pre-moratorium debts are obligations that have fallen due before or during a pre-insolvency moratorium, which the company does not have to pay while the moratorium is in effect.
93
Identify the types of pre-moratorium debts that must still be paid during the moratorium.
The following pre-moratorium debts must still be paid: the Monitor's remuneration or expenses, goods and services supplied during the moratorium, rent for the period during the moratorium, wages or salary or redundancy payments, and loans under financial services contracts.
94
What must a company be during the moratorium?
A company must be cash flow solvent and capable of paying its debts as they fall due during the moratorium period to ensure it can meet its obligations.
95
Define the two types of formal arrangements discussed.
The two types are: 1) Company Voluntary Arrangement under ss 1-7 IA 1986, and 2) Restructuring Plan under CIGA 2020, as outlined in part 26A CA 2006.
96
Describe the main advantage of a formal arrangement in creditor agreements.
The main advantage is that if the requisite majorities of creditors vote in favor, it becomes legally binding on all creditors, regardless of whether they voted against it, did not vote, or did not receive notice.
97
Describe the essence of a CVA.
The essence of a CVA is that creditors agree to part payment of the debts owed to them and/or to a new extended timetable for repayment.
98
How is a CVA proposal approved?
The CVA proposal must be approved in accordance with the Insolvency Act 1986 and reported to court, but there is no requirement for the court to approve the proposal.
99
Who supervises the implementation of a CVA?
The CVA is supervised and implemented by a Supervisor who is an Insolvency Practitioner.
100
What role do the company's directors have during a CVA?
During the CVA, the company's directors remain in office and continue to run the company's affairs subject to the terms of the CVA.
101
Can CVAs be used in conjunction with other processes?
Yes, CVAs can also be used together with administration or liquidation.
102
Describe the role of the Nominee in a CVA proposal.
The Nominee, who must be an insolvency practitioner, considers the CVA proposal and reports to the court on whether creditors and shareholders should vote on it.
103
How is a CVA proposal initiated?
The directors draft a CVA proposal and appoint a Nominee, or if the company is in liquidation or administration, the administrator or liquidator drafts the proposal.
104
What must the directors submit to the Nominee when proposing a CVA?
The directors must submit the CVA proposal along with a statement of the company's affairs.
105
What is the timeframe for the Nominee to report to the court regarding the CVA proposal?
The Nominee must report to the court within 28 days of receiving the CVA proposal.
106
What is the minimum voting period for creditors on a CVA proposal?
The Nominee must allow at least 14 days for creditors to vote on the CVA proposal.
107
When must a meeting of shareholders occur in relation to the CVA proposal?
A meeting of the shareholders must take place within 5 days of the creditors' decision.
108
Define the voting requirements for a CVA proposal to be approved.
The CVA proposal is approved if at least 75% in value of those voting (excluding secured creditors) vote in favor, and a simple majority of shareholders vote in favor.
109
What happens if more than half of the total value of unconnected creditors vote against the CVA proposal?
If more than half of the total value of unconnected creditors vote against the CVA proposal, the decision of those creditors will be invalid even if the 75% majority is obtained.
110
What happens after the CVA proposal is approved by creditors?
The Nominee reports to the court that the CVA has been approved.
111
Define the role of the Nominee in a CVA process.
The Nominee typically becomes the Supervisor after the CVA proposal is approved and is responsible for implementing the CVA proposal.
112
What happens if creditors vote in favour of the CVA and members vote against?
In a CVA proposal, if creditors vote in favor and members vote against, the creditors' vote takes precedence.
113
What is a major disadvantage of the CVA procedure?
A major disadvantage of the CVA procedure is that secured or preferential creditors are not bound unless they unanimously consent.
114
Define the grounds on which a creditor can challenge a CVA.
A creditor can challenge a CVA on the grounds of 'unfair prejudice' or material irregularity relating to the procedure followed in seeking approval.
115
What is the time frame for challenging a CVA after its approval?
A creditor can challenge a CVA within 28 days of the CVA's approval being reported to the court.
116
What happens to a CVA after the 28-day challenge period?
After the 28-day challenge period, the CVA becomes binding on all creditors.
117
Describe the purpose of a Company Voluntary Arrangement (CVA) in the retail sector.
CVAs are used to reach a compromise with creditors, particularly landlords, to agree on a reduction in rent, allowing the company to continue trading.
118
Explain the advantages of CVAs from the company's perspective.
From the company's perspective, CVAs allow directors to remain in control and enable the company to continue trading with the hope of surviving as a going concern.
119
Discuss the implications of CVAs for landlords.
For landlords, a CVA may lead to heavily discounted rents and a loss of income, but they may prefer reduced rents over having empty properties generating no income.
120
Define the term 'going concern' in the context of CVAs.
A 'going concern' refers to the hope that the company can continue its operations and avoid liquidation or administration.
121
Describe the purpose of the Restructuring Plan introduced by CIGA 2020.
The purpose of the Restructuring Plan is to compromise a company’s creditors and shareholders and restructure its liabilities so that a company can return to solvency.
122
How does the Restructuring Plan differ from other restructuring mechanisms?
The Restructuring Plan can only be used by companies that have or are likely to encounter financial difficulty.
123
What is required for a Restructuring Plan to be approved?
A Restructuring Plan requires court approval, known as 'sanction', and must be approved by at least 75% in value of those voting in each class of creditors and members.
124
Explain the voting process for the Restructuring Plan.
Creditors and members must be divided into classes, and each class that votes on the Plan must approve it, with a minimum of 75% in value required for approval.
125
What happens if the court sanctions the Restructuring Plan?
If the court sanctions the Restructuring Plan, it becomes binding on all creditors, including secured creditors.
126
What is the significance of the term 'sanction' in the context of the Restructuring Plan?
The term 'sanction' refers to the court approval required for the Restructuring Plan to become binding.
127
Describe the court's ability to exclude creditors and shareholders from voting on a 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.
128
Define a cross-class cram down in the context of a restructuring plan.
A cross-class cram down means that one rank of creditor can force the Plan on another class of creditor who has voted against the Plan.
129
How can a court sanction a restructuring plan involving a cross-class cram down?
The court can sanction a plan if the dissenting class would not be worse off than if the cram down were not approved, and if at least one class of creditors or members with a genuine economic interest has approved the plan.
130
Explain the implications of a cram down of shareholders.
A cram down of shareholders means forcing shareholders to accept a debt for equity swap, allowing creditors to hold new shares in the company in place of their debt claims.
131
Define the role of the Plan in the context of restructuring.
The Plan serves as a tool for restructuring that allows for the compromise of creditor rights and can be enforced even without unanimous approval.
132
How does a Company Voluntary Arrangement (CVA) differ in terms of approval compared to a Restructuring Plan?
A CVA binds all unsecured creditors and does not require court sanction, making it quicker and less costly to implement.
133
Discuss the implications of dissenting creditors in a Restructuring Plan.
Dissenting creditors can still be bound by the Restructuring Plan if the court sanctions it, even if they do not approve.
134
How does the voting process differ between a Restructuring Plan and a CVA?
A Restructuring Plan requires consideration of whether creditors are in separate classes for voting, while a CVA has a simpler voting requirement.
135
Describe the role of administrators in the insolvency procedure.
Administrators are required to perform their duties in the interests of all creditors collectively, rather than favoring any particular creditor.
136
In what capacity did Cath Kidston continue to operate after the closure of its UK stores?
The company continued to trade in UK as an online-only retailer.
137
What is the primary objective of an administrator during the administration process?
The primary objective of an administrator is to manage the company's affairs in a way that maximizes returns for creditors.
138
Explain the third objective of administrators according to Sch B1.
The third objective is to realise the company's property in order to make a distribution to one or more secure or preferential creditors.
139
What legal actions can administrators initiate against directors?
Administrators may bring proceedings against directors for fraudulent and wrongful trading.
140
Define the term 'moratorium' in the context of company administration.
A moratorium in company administration is a period during which certain legal actions against the company are suspended, providing it with protection to restructure or resolve its financial issues.
141
Describe the benefit of a full moratorium during administration.
The full moratorium during administration provides protection for the company, preventing any orders to wind up the company, the appointment of an administrative receiver, enforcement of security over the company's property, legal proceedings against the company, and lease forfeiture by landlords.
142
Who can be appointed as administrators in an insolvency case?
Individuals appointed as administrators must be licensed insolvency practitioners.
143
Explain the duties of administrators towards the court.
Administrators owe duties to the courts as well as to the creditors of the company, acting as officers of the court.
144
List the three objectives that administrators must aim to achieve under Sch B1.
1. Rescue the company as a going concern. 2. Achieve a better result for the company's creditors as a whole. 3. Realise the company's property for distribution to secure or preferential creditors.
145
Describe the two procedures for the appointment of an administrator.
The two procedures for the appointment of an administrator are the court procedure and the out of court procedure.
146
What happens when an application for an administration order is made to the court?
An interim moratorium temporarily freezing creditor action comes into effect and lasts until the administration order is made or the court dismisses the application.
147
In what situation is the court procedure for appointing an administrator typically used?
The court procedure is typically used when a creditor has begun winding up proceedings against the company and the directors wish to appoint administrators before a winding up order is made.
148
What is the usual outcome when directors wish to appoint administrators during winding up proceedings?
The directors must apply to court for an order to appoint administrators, as the out-of-court appointment procedure is not available in this situation.
149
Define a qualifying floating charge (QFC).
A QFC is a floating charge that relates to the whole or substantially the whole of a company's property and allows the holder to appoint an administrator or administrative receiver.
150
What is the first step for directors when appointing an administrator out of court?
The first step is to file a notice of intention to appoint ('NOI') at court.
151
Explain the significance of the notice of appointment in the administrator appointment process and when it needs to be filed at court
The notice of appointment must be filed at court not less than 10 business days after the NOI, and the appointment takes effect when this second notice is filed.
152
What is the effect of the administrators' appointment in the context of the court procedure?
The administrators' appointment takes effect when the notice of appointment is filed at court.
153
Describe the process when a company has granted a QFC and the directors file the NOI at court.
The directors must send the NOI to the holder of the QFC, who then has 5 business days to appoint their own choice of administrator. If the QFC holder does not appoint one, the directors can file the notice of appointment in the usual way.
154
How does a QFC holder appoint an administrator out of court?
The QFC holder must first enforce its security according to the terms of the QFC, and the appointment takes effect once it has filed a notice of appointment at court.
155
Define the role of priority agreements among QFC holders.
Priority agreements determine the ranking of QFC holders. A holder of a QFC that ranks below another must give two business days’ notice to higher-ranking holders and can only proceed with the appointment if they consent.
156
How do the powers of an administrator affect company directors during administration?
When an administrator is in office, directors cannot exercise their management powers without the administrator's consent, although they remain in office.
157
What happens to employees of a company when an administrator is appointed?
Employees remain employed by the company even when an administrator is appointed.
158
What is required for an administrator to pay dividends to unsecured creditors?
Administrators generally need to obtain court permission to pay dividends to unsecured creditors.
159
How long does an administrator have to produce a report after being appointed?
An administrator has up to eight weeks to produce a report outlining proposals for the conduct of the administration.
160
What options may be included in the administrator's proposals for restructuring?
Proposals may include a scheme of arrangement, a restructuring plan, or a Company Voluntary Arrangement (CVA).
161
What is the fixed time limit for the completion of administrations?
There is a 12-month fixed time limit for the completion of administrations, although extensions can be obtained.
162
How must a company in administration communicate its status?
The company must state that it is in administration on all business documents and its website.
163
How can administrators manage the company's directors according to IA 1986?
Administrators can remove and appoint directors as part of their powers under IA 1986.
164
What is required for administrators to dispose of property subject to a fixed charge?
Administrators need the court's consent to dispose of property subject to a fixed charge.
165
What actions can administrators take regarding property subject to a floating charge?
Administrators can dispose of property subject to a floating charge without needing court consent.
166
What is pre-packaged administration?
A pre-packaged administration is where the business and assets of an insolvent company is prepared for sale to a selected buyer prior to the company's entry into administration.
167
What regulations restrict pre-packaged sales to connected persons?
The Administration (Restrictions on Disposal to Connected Persons) Regulations 2021 restrict administrators from entering into pre-packaged sales with the company's directors or shareholders unless approved by creditors or accompanied by an evaluator's qualifying report.
168
What must be done with the evaluator's qualifying report in a pre-packaged sale?
The evaluator's qualifying report must be sent to Companies House and all creditors.
169
Describe the difference between administration and receivership.
Administration is a collective procedure aimed at addressing the interests of all creditors, while receivership is an enforcement procedure focused on the interests of a secured creditor.
170
List the three types of receivers discussed in the content.
The three types of receivers are: 1. Administrative receivers, 2. Fixed charge receivers, 3. Court-appointed receivers.
171
Explain why administrative receivership is now considered a rare procedure.
Administrative receivership is now considered rare and is prohibited in most cases due to changes in insolvency laws and practices.
172
What is an administrative receiver
Administrative receivership is now a rare procedure and is prohibited in most cases. When applicable, a secured creditor with fixed and floating charges over all of the company's assets may appoint an AR.
173
Who can be appointed as an administrative receiver
Only a licensed insolvency practitioner can be appointed as an AR.
174
Describe the role of court-appointed receivers.
Court-appointed receivers are responsible for managing a business until a dispute is resolved, as outlined in a court order.
175
Describe the role of a fixed charge receiver in receivership.
A fixed charge receiver is appointed by the holders of a fixed charge to enforce security, manage, and sell secured assets, primarily land and buildings, to repay the debt owed to their appointor.
176
Does the fixed charge receiver have to be a licensed insolvency practitioner.
No
177
How are court-appointed receivers typically appointed?
They are appointed by the court, often in situations where shareholders are in dispute.
178
Define the circumstances under which a court may appoint a receiver.
A court may appoint a receiver in cases of shareholder disputes or under the Proceeds of Crime Act 2002 and related legislation.
179
Do fixed charge receivers need to be licensed insolvency practitioners?
No, fixed charge receivers do not have to be licensed insolvency practitioners.
180
In what situations might receivership become more common?
Receivership may become more common as criminal sanctions for corporate misconduct are increasingly imposed.
181
How are the terms 'liquidation' and 'winding up' related?
The terms 'liquidation' and 'winding up' are used interchangeably to refer to the process of closing a company and distributing its assets.
182
Describe the creditors' voluntary liquidation (CVL) process.
CVL is a common insolvency procedure where shareholders pass a special resolution to liquidate the company, but the process is controlled by creditors who can choose the liquidator. If no directors' declaration of solvency is made, it is classified as a CVL.
183
What resolutions must members pass to initiate a Members' Voluntary Winding Up?
Members must pass a special resolution to place the company into MVL and an ordinary resolution to appoint a liquidator.
184
Define the declaration of solvency in the context of MVL.
The declaration of solvency is a statement by directors confirming that the company can pay its debts in full within 12 months, along with a statement of assets and liabilities.
185
What legal effect does a winding-up order have on ongoing legal proceedings against a company?
It grants an automatic stay on commencing or continuing with proceedings against the company.
186
Define the term 'winding-up order' in the context of company insolvency.
A winding-up order is a court order that initiates the process of dissolving a company, leading to the liquidation of its assets to pay creditors.
187
What happens automatically when a court issues a compulsory winding-up order?
An automatic stay is granted on commencing or continuing proceedings against the company.
188
What does it mean for a company to be wound up on just and equitable grounds?
Winding up on just and equitable grounds means that the court finds it fair and reasonable to dissolve the company, often due to circumstances that make its continuation untenable.
189
Define creditors' voluntary liquidation.
Creditors' voluntary liquidation is a type of liquidation where the company's directors decide to liquidate the company due to insolvency, and the creditors are involved in the process.
190
Define the term 'pari passu' in the context of creditor claims.
'Pari passu' refers to the principle that creditors of the same rank are to be repaid proportionately and equally, without preference.
191
What typically happens to a company's business and employees during liquidation?
During liquidation, the liquidator usually closes the company's business and dismisses employees shortly after their appointment.
192
Define compulsory liquidation.
Compulsory liquidation is a type of liquidation that occurs when a company is forced to wind up its affairs, typically initiated by a court order.
193
What are the subdivisions of voluntary liquidation?
Voluntary liquidation is further subdivided into members' voluntary liquidation and creditors' voluntary liquidation.
194
Explain the timeline for dissolution in compulsory liquidation.
In compulsory liquidation, dissolution occurs three months after the liquidator notifies the Registrar of Companies that the winding up has been completed.
195
Explain the timeline for dissolution in voluntary liquidation.
In voluntary liquidation, dissolution occurs three months after the liquidator files the final accounts and return.
196
Differentiate between members' voluntary liquidation and creditors' voluntary liquidation.
Members' voluntary liquidation is initiated by the members of the company, while creditors' voluntary liquidation is initiated by the creditors.
197
Who becomes the liquidator in a compulsory liquidation process?
The Official Receiver becomes the liquidator in a compulsory liquidation process and remains in office until another person is appointed.
198
What is the role of the winding up petition in compulsory liquidation?
The winding up petition is a formal request presented to the court by an applicant to initiate the compulsory liquidation process against a company.
199
How long does the Official Receiver remain in office during compulsory liquidation?
The Official Receiver remains in office until another person is appointed as the liquidator.
200
Describe who can apply to the court for a winding up petition.
The following persons can apply: a creditor, the company (acting by shareholders), the directors (by board resolution), an administrator, an administrative receiver, the supervisor of a CVA, and the Secretary of State for Business, Energy & Industrial Strategy.
201
Define the key grounds for a company to be wound up according to s 122(1) IA 1986.
The key grounds include: (1) the company is unable to pay its debts; and (2) it is just and equitable for the company to be wound up.
202
How can a company initiate a winding up petition if it has insufficient assets?
A company can initiate a winding up petition by having its shareholders apply or by the directors passing a board resolution.
203
What role does the Secretary of State for Business, Energy & Industrial Strategy play in winding up petitions?
The Secretary of State can apply for a winding up petition on public policy grounds.
204
Explain the circumstances under which directors may apply for a winding up petition.
Directors may apply for a winding up petition when there are insufficient assets in the company to fund a voluntary liquidation.
205
How does the inability to pay debts relate to winding up a company?
Inability to pay debts is a key ground for the court to order a company to be wound up, indicating financial distress.
206
Define a statutory demand in the context of winding up petitions.
A statutory demand is a written demand in a prescribed form requiring a company to pay a specific debt, which can only be used if the debt exceeds £750 and is not disputed on substantial grounds.
207
How long does a company have to respond to a statutory demand before a creditor can petition for winding up?
A company has 21 days to pay the debt after receiving a statutory demand, failing which the creditor can petition the court to wind up the company.
208
What happens if a creditor sues a company and obtains judgment but fails to execute the judgment debt?
If a creditor sues a company, obtains judgment, and fails to execute the judgment debt, this can serve as grounds for a winding up petition.
209
List the four ways a company's inability to pay debts can be evidenced under section 123 IA 1986.
1. Failure to comply with a creditor’s statutory demand. 2. Creditor suing the company and failing to execute the judgment debt. 3. Proof of inability to pay debts as they fall due (cash flow test). 4. Proof that the company's assets are less than its liabilities (balance sheet test).
210
How does a winding-up petition affect a company's asset dispositions?
If dispositions are made during the period between the presentation of the winding-up petition and the winding-up order being made, they will be void.
211
What happens to the directors of a company once a winding-up order is issued?
The directors lose their powers and are automatically dismissed from office.
212
Describe the situations under which a company can be wound up without a court order according to Section 84(1) IA 1986.
A company can be wound up without a court order in three situations: 1. When the company's purpose according to the articles has expired and a resolution of the shareholders is made. 2. When the company resolves by special resolution to wind up and is solvent. 3. When the company resolves that it is advisable to wind up due to its inability to carry on business, indicating insolvency.
213
What is the significance of a special resolution in the context of voluntary winding up?
A special resolution is significant because it is a formal decision made by the shareholders that allows the company to proceed with voluntary winding up, provided the company is solvent.
214
Explain the difference between solvent and insolvent winding up.
Solvent winding up occurs when a company is able to pay its debts and can wind up voluntarily through a special resolution. Insolvent winding up happens when a company is unable to carry on its business due to financial difficulties, leading to a resolution to wind up.
215
Describe the conditions under which a Members' Voluntary Winding Up (MVL) can be initiated.
MVL can only be used for solvent companies, where directors must declare solvency and believe the company can pay its creditors in full within 12 months.
216
What is required from directors before initiating a Members' Voluntary Winding Up?
Directors must swear a declaration of solvency, stating they have made a full enquiry into the company's affairs and believe it can pay its creditors in full.
217
How can directors be penalized if they make a false declaration of solvency?
Directors can face fines or imprisonment if they do not have reasonable grounds for their opinion in the declaration of solvency.
218
How is a liquidator appointed in a CVL?
In a CVL, the shareholders must pass an ordinary resolution to appoint a nominated liquidator, but within 14 days, creditors can approve this liquidator or nominate their own.
219
What happens if creditors and shareholders choose different liquidators in a CVL?
If creditors' choice of liquidator differs from that of the shareholders, the creditors' nomination will take precedence.
220
What document must directors prepare and send to creditors during a CVL?
Directors must prepare a statement of the company’s affairs, detailing the company’s assets and liabilities, and send it to the creditors.
221
What is required from shareholders to initiate a CVL?
Shareholders must pass a special resolution to place the company into a CVL.
222
How is a liquidator appointed in a company liquidation process?
A liquidator must be either a qualified Insolvency Practitioner or the Official Receiver, who is appointed by the court in the short term.
223
Explain the role of the liquidator in a company liquidation.
The liquidator acts as an officer of the court, managing the liquidation process, securing assets, and ensuring proper distribution to creditors.
224
What is the extent to which a liquidator can carry on the business of a company?
A liquidator can carry on the business of the company only to the extent that is necessary for the beneficial winding up of the company.
225
How does a liquidator handle court proceedings for a company?
A liquidator can commence or defend court proceedings in the name of the company to recover debts owed or dispute debts alleged to be owed.
226
List some necessary actions a liquidator must take to wind up a company's affairs.
A liquidator must do all things necessary to wind up the company's affairs and distribute its assets.
227
What is the purpose of applying to court to set aside a transaction at an undervalue?
The purpose is to recover assets that were transferred for less than their worth, thereby maximizing the amount available for creditors.
228
What powers do liquidators share with administrators?
Many of the powers liquidators have to avoid certain transactions also apply to administrators.
229
How has the status of Crown debts changed since the EA 2002 reforms?
Crown debts were removed from the list of preferential debts by the EA 2002 reforms, but the Government has since restored their preferential status.
230
How do preferential shareholders differ from ordinary shareholders during liquidation?
Preferential shareholders may have rights to a return of their capital in priority to ordinary shareholders during liquidation, meaning they are more likely to receive some value before ordinary shareholders.
231
What happens to secured creditors who have not been fully paid from asset realizations?
Secured creditors who have not been fully paid can only claim as unsecured creditors against realizations from unsecured assets and are not eligible for payment from the prescribed part fund.
232
What happens to a floating charge holder who suffers a shortfall on floating charge realisations?
A floating charge holder who suffers a shortfall does not share in the prescribed part fund, but the shortfall constitutes an unsecured claim against the company.
233
Explain the term 'ring-fenced' in relation to the prescribed part fund.
'Ring-fenced' refers to the portion of money set aside in the prescribed part fund specifically for distribution to unsecured creditors, ensuring it does not go to floating charge holders.
234
How does the prescribed part fund change for floating charges created on or after 6 April 2020?
For floating charges created on or after 6 April 2020, the maximum amount for the prescribed part fund increases to £800,000.
235
What percentage of the first £10,000 of net property is reserved in the prescribed part fund?
50% of the first £10,000 of net property is reserved in the prescribed part fund.
236
Describe the purpose of the prescribed part fund introduced by the Enterprise Act 2002.
The prescribed part fund was introduced to increase the likelihood that unsecured creditors would receive some payment in a liquidation by reserving a portion of money that does not go to floating charge holders.
237
What types of contributions are included in the first tier of preferential creditors aside from employee remuneration?
The first tier includes certain contributions owed to an occupational pension scheme.
238
List the components of the secondary tier of preferential creditors.
The secondary tier consists of Crown debts, which include PAYE and employee national insurance deductions made by companies and VAT that companies have received on supplies they made and are due to account to HMRC.
239
Define the term 'qualifying floating charge' (QFC).
A qualifying floating charge (QFC) is a type of security interest that allows a creditor to claim against the assets of a company that may change over time, granted on or after the Relevant Date (15 September 2003).
240
Define the main category of creditors in the first tier of preferential debts.
The main category of creditors in the first tier is employees who are owed remuneration due in the four months before the relevant date, subject to a maximum of £800 per employee plus accrued holiday pay.
241
What happens to assets subject to a floating charge during liquidation?
All assets subject to a floating charge are realized and their proceeds are used to cover liquidation costs and expenses.
242
Define the types of costs included in the liquidation process.
Costs include expenses related to selling assets secured by a floating charge and costs incurred in pursuing litigation, such as wrongful trading or voidable transactions.
243
What happens if the proceeds from fixed charge assets are insufficient to cover the secured debt?
If the proceeds are insufficient to discharge the secured debt in full, the creditor may recover the remaining balance lower down the order of priority, depending on whether the debt is secured by a floating charge or is unsecured.
244
Define fixed charge assets in the context of liquidation.
Fixed charge assets are those assets that are secured by a fixed charge or mortgage, which must be realized to pay off the associated debt during liquidation.
245
How are proceeds from selling fixed charge assets distributed?
Proceeds from selling fixed charge assets are distributed first to cover the liquidator's costs and then to pay off the debt secured by the fixed charge.
246
Summarize the statutory order of priority in payment to creditors.
The statutory order of priority in payment to creditors is a cumulative effect of various rules and is structured to ensure that creditors are paid in a specific order.
247
What impact do priority or subordination agreements have on the statutory order of distribution?
Priority or subordination agreements can affect the statutory order of distribution by allowing one class of creditor to agree to rank behind another class.
248
Explain how administrators can pay dividends to unsecured creditors.
Administrators may pay dividends to unsecured creditors if they obtain court permission, and the same rules of priority apply to them.
