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Business Law & Practice (FLK1) > Corporate insolvency > Flashcards

Corporate insolvency Flashcards

1
Q

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

A

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

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

What is a pre-insolvency moratorium?

A

A period during which creditors are unable to take action to exercise their usual rights and remedies, thereby creating a breathing space for the company to attempt to resolve the situation.

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3
Q

What documents can a company file at Court to obtain a pre-insolvency moratorim?

A

-Statement that the company is, or likely to become, unable to pay its debts as they fall due

-A statement from a licensed insolvency practitioner stating that in their view a moratorium will likely result in the rescue of a company

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4
Q

How long does the pre-insolvency moratorium period last for?

A

20 business days, can be extended by the directors for a further 20 business days with consent of the requisite majority of creditors and/or Court order.

Maximum period is one year.

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5
Q

Does a company have to pay pre-moratorium debts whilst the pre-insolvency moratorium subsists?

A

No, they do not. This is known as the statutory repayment holiday.

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6
Q

What pre-moratorium debts does the statutory repayment holiday not apply to?

A

-The Monitor’s remuneration/expenses

-Good/services supplied during the Moratorium

-Rent in respect of a period during the moratorium

-Wages or salary or redundancy payments

-Loans under a contract involving financial services

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7
Q

Do moratorium debts need to be paid?

A

Yes, these are debts that fall due during or after the moratorium by reason of an obligation incurred during the moratorium.

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8
Q

What is the main advantage of a formal insolvency arrangement?

A

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

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9
Q

What are the two possible types of formal insolvency arrangement?

A

-CVA (company voluntary agreement)

-Restructuring Plan

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10
Q

What is a CVA and what is its purpose?

A

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.

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11
Q

Who can initiate a CVA?

A

Directors, liquidator or administrator.

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12
Q

Who must a CVA be supervised by?

A

A Nominee (a licensed insolvency practitioner)

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13
Q

Outline the procedure for setting up a CVA.

A
  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
  7. Nominee reports to Court that the CVA has been approved and will implement it and become Supervisor
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14
Q

When will a CVA proposal be approved?

A

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.

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15
Q

Who does a CVA bind?

A

Only unsecured creditors.

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16
Q

How long does a creditor have to challenge a CVA?

A

28 days starting from the date of the CVA’s approval.

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17
Q

What is a Restructuring Plan and what is its purpose?

A

A Plan is a hybrid of a CVA and a ‘scheme of arrangement’. It can only be used by companies which have or are likely to encounter financial difficulty.

The purpose of the Plan is to compromise a company’s creditors and shareholders and restructure its liabilities so that a company can return to solvency.

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18
Q

Who can initiate a Restructuring Plan?

A

Company, creditor, member, liquidator or administrator.

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19
Q

When will a Restructuring Plan be approved?

A

-Sanctioned by the Court

-At least 75% in value of each affected class of creditors/shareholders vote in favour

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20
Q

Who does a Restructuring Plan bind?

A

Binds all creditors and shareholders.

21
Q

What is a cross class cram down?

A

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.

22
Q

What is administration?

A

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.

23
Q

Outline the Court procedure for the appointment of an administrator.

A

-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

24
Q

Outline the out of Court procedure for the appointment of an administrator by the company/directors.

A

-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

25
Q

What is qualifying floating charge (QFC)?

A

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.

26
Q

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

A

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

27
Q

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?

A

8 weeks.

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

28
Q

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

A

12 months

29
Q

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

A

None, except with consent of the Court or administrator.

30
Q

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

A

Floating charge, yes.

Fixed charge, only with Court’s consent.

31
Q

What is receivership?

A

Receivership is an enforcement procedure which is conducted in the interests of a secured creditor.

32
Q

Describe fixed charge receivers.

A

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.

33
Q

Can a fixed charge receiver be appointed whilst a pre-insolvency moratorium subsists or if the company is in administration?

A

No.

34
Q

What is liquidation?

A

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

35
Q

What is a liquidator’s function?

A

To realise the company’s assets for cash, determine the identity of the company’s creditors and the amount owed to each of them and then pay a dividend to the creditors on a proportionate basis relative to the size of their determined claims.

36
Q

What does pari passu mean?

A

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.

37
Q

What are the two types of liquidation?

A
  1. Compulsory liquidation
  2. Voluntary liquidation
38
Q

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

A

-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

39
Q

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

A

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

40
Q

What are the consequences of a winding up order?

A

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.

41
Q

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

A

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.

42
Q

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

A

Special resolution to place the company into MVL.

Ordinary resolution to appoint a liquidator.

43
Q

When does the winding up commence in members’ voluntary liquidation?

A

When the special resolution is passed.

44
Q

What is creditors’ voluntary liquidation?

A

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.

45
Q

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

A

Special resolution to place the company into CVL.

Ordinary resolution to appoint a liquidator.

46
Q

What is the statutory order of priority?

A
  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 (first then secondary tier)
  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
47
Q

What does Tier 1 preferential debts consist of?

A

-Employee claims for unpaid remuneration due in the 4 months before the date of the winding up petition but subject to a maximum of £800 per employee

-Certain contributions owing to an occupational pension scheme

48
Q

What does Tier 2 preferential debts consist of?

A

-The PAYE and employee NI deductions not paid over to HMRC

-The VAT the company has received on supplies it has made not paid over to the HMRC

49
Q

What is the prescribed part fund?

A

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.

Business Law & Practice (FLK1) (11 decks)

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