Corporate insolvency

Question 1

What are the four situations/tests for when a company is deemed to be insolvent?

Answer 1

1.Company is unable to pay its debts as they fall due known as the cash flow test

2. Company has liabilities that are greater than its assets known as the balance sheet test
3. Company does not comply with a statutory demand for a debt of over £750
4. Company has failed to pay a creditor to satisfy enforcement of a judgment debt

Question 2

What is the main advantage of a formal insolvency arrangement?

Answer 2

If the requisite majorities of creditors vote in favour of it, it is legally binding on all creditors.

Question 3

What are the two possible types of formal insolvency arrangement?

Answer 3

-CVA (company voluntary agreement)

-Restructuring Plan

Question 4

What is a CVA and what is its purpose?

Answer 4

A CVA is a compromise between a company and its creditors. CVAs are defined in s1(1) IA 1986:

“a composition in satisfaction of its debts or a scheme of arrangement of its affairs”.

The essence of a CVA is that the creditors agree to part payment of the debts owed to them and/or to a new extended timetable for repayment.

Question 5

Who can initiate a CVA and who must it be supervised by?

Answer 5

Directors, liquidator or administrator can initiate a CVA.

It must be supervised by a Nominee (a licensed insolvency practitioner).

Question 6

Outline the procedure for setting up a CVA.

Answer 6

1. Directors draft a CVA proposal and appoint a Nominee
2. Directors submit CVA proposal and a statement of the company’s affairs to the Nominee
3. Nominee considers the proposal and within 28 days must report to the Court whether the company’s creditors and shareholders should be asked to vote
4. Nominee must allow at least 14 days for creditors to vote on the CVA proposal.
5. Meeting of shareholders must take place within 5 days of creditor’s decision.
6. CVA proposal will be approved if at least 75% in debt value of those voting vote in favour of it

Question 7

When will a CVA proposal be approved?

Answer 7

Creditors vote: At least 75% of creditors who vote on the proposal agree to it, by value of debt.

Unconnected creditors vote: No more than 50% of unconnected creditors vote against the proposal.

Shareholders vote: Over 50% of shareholders vote to approve the proposal.

Question 8

Who does a CVA bind?

Answer 8

Only unsecured creditors. Secured/preferential creditors are not bound unless they unanimously consent-s4 IA 1986. CVAs are commonly used within the retail sector.

Question 9

What is administration?

Answer 9

Administration is a ‘collective’ insolvency procedure. This means that the administrators are required to perform their duties in the interests of the creditors as a whole rather than in the interests of a particular creditors.

Question 10

What are the principal aims of administration?

Answer 10

-Rescue the company

-Achieve a better result for the creditors

-Realise company property in order to make a distribution to one or more secure/preferential creditors

Question 11

Who can apply for administration?

Answer 11

The company, the directors, a creditor, Nominee or a liquidator.

Question 12

Outline the Court procedure for the appointment of an administrator.

Answer 12

-Company, directors, creditor, Nominee or a liquidator applies to Court

-Interim Period begins and an interim moratorium temporarily freezing creditor action comes into effect

-Court conducts a hearing and makes the appropriate order appointing the administrators

Question 13

Outline the out of Court procedure for the appointment of an administrator by the company/directors under Sch B1 Para 22 IA 1986.

Answer 13

-Directors/company file Notice of Intention to appoint at Court

-Not less than 10 business days after, file a Notice of Appointment at Court

-Administrator appointed

Question 14

What is A qualifying floating charge (QFC)?

Answer 14

A floating charge which:

(i) together with any other security that the holder of the floating charge holds relates to the whole or substantially the whole of the company’s property; and

(ii) the document that creates it provides that either Sch 1 para 14 IA 1986 applies to the charge or that the holder has the power appoint an administrator or an administrative receiver.

Question 15

Outline the out of Court procedure for the appointment of an administrator by a QFCH.

Answer 15

-Directors/company file Notice of Intention to appoint at Court and serve on any QFCH

-QFCH has 5 business days to appoint its own choice of administrator

-If not, directors can file the Notice of Appointment in the usual way and their choice is appointed

Question 16

How long does an administrator have to prepare a report setting out proposals for the conduct of the administration and what happens if this is rejected?

Answer 16

8 weeks.

If the proposal is rejected by the creditor, the company will usually be placed into liquidation.

Question 17

What is the fixed time limit for the completion of administration?

Answer 17

12 months

Question 18

During the administrative moratorium, what steps can be taken against a company to enforce debts?

Answer 18

None, except with consent of the Court or administrator.

Question 19

Can administrators dispose of property subject to a fixed or floating charge?

Answer 19

Floating charge, yes.

Fixed charge, only with Court’s consent.

Question 20

What is fixed asset receivership?

Answer 20

This the most common type of receivership and the receiver does not have to be a licensed insolvency practitioner.

They are appointed by the holders of a fixed charge and are able to enforce the security, manage and sell the secured assets and out of the sale proceeds, repay the debt that is owed.

Question 21

What is liquidation and what is the liquidator’s function ?

Answer 21

The most common type of insolvency procedure, it is the process by which a company’s commercial life comes to an end.

The liquidator’s function is to realise the company’s assets for cash and pay a proportionate dividend to creditors relative to the size of their determined claims.

Question 22

What does pari passu mean?

Answer 22

Creditors of the same rank are said to rank “pari passu” with each other, that is sharing on an equal and proportionate basis in relation to the assets available for distribution to them.

Question 23

What are the two types of liquidation?

Answer 23

1. Compulsory liquidation
2. Voluntary liquidation

Question 24

Who can apply for a winding up order for compulsory liquidation?

Answer 24

-a creditor
-the company
-the directors
-an administrator/an administrative receiver
-the supervisor of a CVA
-the Secretary of State for Business, Energy and Industrial Strategy

Question 25

What are the key grounds on which the Court can issue a winding up order?

Answer 25

Set out in S123 IA 1986: -is unable to pay its debts as they fall due known as the cash flow test -has liabilities that are greater than its assets known as the balance sheet test -does not comply with a statutory demand for a debt of over £750 -has failed to pay a creditor to satisfy enforcement of a judgment debt

Question 26

What are the consequences of a winding up order?

Answer 26

An automatic stay will be granted on commencing or continuing with proceedings against the company. All employees will be automatically dismissed and the directors lose their powers and are automatically dismissed.

Question 27

What are the two types of voluntary liquidation?

Answer 27

Members' voluntary liquidation (MVL) Creditors voluntary liquidation (CVL)

Question 28

What is members' voluntary liquidation and what must the directors do to enter it?

Answer 28

A method of liquidation for companies which are solvent. The directors must swear a declaration of solvency stating that they have made a full enquiry into the company’s affairs and they have formed the opinion that the company will be able to pay its creditors in full, together with interest, within a period not exceeding 12 months from the commencement of the winding up.

Question 29

What resolutions are required to place a company into members' voluntary liquidation and thereafter appoint a liquidator?

Answer 29

Special resolution to place the company into MVL. Ordinary resolution to appoint a liquidator.

Question 30

What happens if a liquidator considers that the company will be unable to pay its debts after entering into MVL?

Answer 30

The MVL must be changed into a CVL.

Question 31

What is creditors' voluntary liquidation?

Answer 31

It is a form of insolvent liquidation commenced by the resolution of the shareholders, but under the effective control of the creditors who can choose the liquidator. Where a directors’ declaration of solvency has not been made, the liquidation will be a creditors’ voluntary liquidation.

Question 32

What resolution is required to place a company in to creditors' voluntary liquidation and thereafter appoint a liquidator?

Answer 32

Special resolution to place the company into CVL. Ordinary resolution to appoint a liquidator.

Question 33

What is the statutory order of priority?

Answer 33

1. Liquidator's fees and expenses of preserving and realising assets subject to fixed charges 2. Amount due to fixed charge creditor out of the proceeds of selling assets subject to the fixed charge 3. Liquidator's other remuneration, costs and expenses 4. Preferential creditors: Tier 1-employee claims for unpaid remuneration (max £800 per employee), contributions to occupational pension scheme Tier 2-PAYE and employee NI deductions to HMRC, output VAT 5. Creation of the prescribed part fund (if available) for unsecured creditors 6. Amount due to creditors with floating charges 7. Unsecured/trade creditors (including payment of the prescribed part) 8. Interest owed to unsecured creditors 9. Shareholders

Question 34

What is the prescribed part fund?

Answer 34

A fund of money set aside from a company's assets to pay unsecured creditors. It is calculated as a percentage of the value of the company's property subject to a floating charge: 50% of the first £10,000 of net floating charge is ring-fenced and plus 20% of anything thereafter up to a maximum of £800,000 if the first ranking floating charge was created on or after April 6 2020, or £600,000 if created before then.

Question 35

What are the two formal insolvency procedures for insolvent individuals?

Answer 35

Bankruptcy and IVAs (individual voluntary arrangements).

Question 36

What is an IVA and what approval is required?

Answer 36

An alternative to bankruptcy and allows individuals to make proposals for repayment and reach a binding agreement with their creditors. It must be approved by at least 75% of the total debt owed to creditors voting, but will not be effective if more than half of the total value of creditors vote against it.

Question 37

Who is an IVA binding on?

Answer 37

The debtor and all unsecured creditors. It only binds secured/preferential creditors with their consent.

Question 38

Outline the procedure for setting up an IVA.

Answer 38

1. Debtor drafts a proposal with the assistance of a Nominee 2. Nominee submits report to Court with their opinion 3. Debtor can apply for interim moratorium order which lasts 14 days 4. Creditors then vote on the proposal. Must be approved by at least 75% of the total debt owed to the creditors voting

Question 39

What are the advantages and disadvantages of an IVA?

Answer 39

They avoid the stigma of bankruptcy, bind all unsecured creditors and can involve a moratorium period. They do last longer than bankruptcy and do not bind secured/preferential creditors.

Question 40

What is bankruptcy?

Answer 40

Bankruptcy is the personal equivalent to liquidation for a company. The bankruptcy process begins by a bankruptcy petition being presented, usually by a creditor but sometimes by the debtor.

Question 41

How must a debtor's inability to pay their debts be evidenced?

Answer 41

By a statutory demand that hasn't been satisfied or an unsatisfied execution of a judgment.

Question 42

What is the statutory order of priority in bankruptcy?

Answer 42

1. Secured creditors 2. Expenses of the bankruptcy including Trustee's remuneration 3. Two tiers of preferential creditors 4. Ordinary unsecured creditors 5. Statutory interest 6. Debts of a spouse 7. Any surplus is payable to the bankrupt

Question 43

When is a bankrupt discharged from bankruptcy?

Answer 43

Upon the filing by the Official Receiver/Trustee of a notice stating the bankruptcy no longer requires investigation.