Corporate Insolvency Flashcards
List the options available to individuals facing financial difficulty.
Individuals facing financial difficulty have three options: do nothing, do a deal, or declare bankruptcy.
How does an IVA differ from bankruptcy in terms of creditor binding?
An IVA can bind all creditors except secured creditors, while bankruptcy affects all creditors.
Explain the typical nature of the debt in a creditor’s bankruptcy petition.
The debt is generally unsecured.
What is an Individual Voluntary Arrangement (IVA)?
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.
Identify the formal insolvency procedures for insolvent individuals.
The two formal insolvency procedures for insolvent individuals are bankruptcy and Individual Voluntary Arrangements (IVAs).
Describe the purpose of an IVA.
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.
Define the role of an Insolvency Practitioner in an IVA.
An Insolvency Practitioner supervises the debtor’s implementation and compliance with the terms of the IVA.
What is required for an IVA to be binding on creditors?
An IVA becomes binding on creditors if it is approved by the requisite percentage of them.
How long does an IVA typically last?
An IVA can last any length of time, but it commonly lasts between three to five years.
Describe the role of the nominee in the process of setting up an IVA.
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.
How does a debtor initiate a moratorium during the IVA process?
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.
Define the duration of the interim order in the IVA process.
The interim order (moratorium) lasts for 14 days, but the court has the authority to extend this period.
What is required for the terms of the IVA to be approved by creditors?
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.
What happens if the court grants the interim order during the IVA process?
If granted, the interim order creates a moratorium that prevents any bankruptcy proceedings and legal actions against the debtor without the court’s permission.
What is the purpose of calling a creditors’ meeting in the IVA process?
The creditors’ meeting is called to allow creditors to vote on the approval of the IVA terms proposed by the debtor.
Describe the effect of an approved IVA on the debtor and creditors.
An approved IVA binds the debtor and all of their creditors, except secured creditors unless they consent to the IVA.
Who supervises the implementation of an IVA?
The nominee becomes the supervisor of the IVA and its implementation.
What actions can the supervisor of an IVA take if the debtor fails to comply with its terms?
The supervisor can usually petition for the debtor’s bankruptcy.
List some advantages of an IVA.
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.
Identify some disadvantages of an IVA.
Disadvantages of an IVA include potentially lasting longer than bankruptcy and being an expensive process.
Who can bring a bankruptcy petition?
A bankruptcy petition is usually brought by a creditor but may also be made by the debtor.
Define the grounds for a creditor’s bankruptcy petition.
A ground for the petition is that the debtor is unable or has no reasonable prospect to pay its petition debts.
What is the only ground for a debtor’s bankruptcy petition?
The only ground for this petition is that the debtor is unable to pay its debts.
What is the minimum debt amount required for a creditor’s bankruptcy petition?
The debt must be for a liquidated sum exceeding £5,000.
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.
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.
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.
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.
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.
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.
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 to satisfy a statutory demand before it can be used as evidence of their inability to pay debts.
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.
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.
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.
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.
What can the Trustee do with onerous property or contracts?
The Trustee may disclaim any onerous property or contracts.
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.
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.
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.
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.
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.
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.
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.
How long can a Bankruptcy Restriction Order (BRO) last?
A Bankruptcy Restriction Order can last for a period of between two and 15 years.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Describe the main statute that deals with corporate insolvency in the UK.
The main statute is the Insolvency Act 1986 (IA 1986).
Define the purpose of the Enterprise Act 2002 in relation to corporate insolvency.
The Enterprise Act 2002 aimed to promote the rescue of companies.
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.
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.
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.
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).
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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
How long does a pre-insolvency moratorium last initially?
The pre-insolvency moratorium lasts for 20 business days.
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.
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.
What happens to the moratorium if the company enters liquidation?
The moratorium will terminate automatically if the company enters liquidation or administration.
What role does the Monitor play during the pre-insolvency moratorium?
The Monitor has a supervisory function during the pre-insolvency moratorium.
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.
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.
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.
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.
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.
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.
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.
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.
Who supervises the implementation of a CVA?
The CVA is supervised and implemented by a Supervisor who is an Insolvency Practitioner.
