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OSCE > Corporate Insolvency > Flashcards

Corporate Insolvency Flashcards

1
Q

What is liquidation

A

Same as winding up - to dissolve

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2
Q

Types of liquidation

A
  1. Compulsory - court

2. Voluntary - 1 Creditors Voluntary liquidation (when insolvent) - 2 Members Voluntary liquidation (when solvent)

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3
Q

What are the rescue procedures

A
  1. Administration

2. Administrative receivership - someone appointed to enforce a floating charge pre 13.9.03

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4
Q

If you continue to trade whilst insolvent - implications

A

Directors can become personally liable

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5
Q

How are insolvency practicioners paid?

A
  1. On account - NB could be challenged

2. Personal guarantee from a director

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6
Q

What conduct issues arise in insolvency?

A

Conflict - directors liability

Be careful with undertakings

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7
Q

When is a company insolvent?

A
  1. Cash Flow Test - if proved to court that company is unable to pay its debts as they fall due ie. being able to pay debts in the future as they fall due
  2. Balance Sheet Test - do its liabilities outweigh its assets. Doesn’t include contingent or prospective debts. Does include uncalled capital - shares issued but unpaid
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8
Q

How does compulsory liquidation work

A
  1. Petition to the court - could be the company, directors, creditors
  2. May be wound up if unable to pay its debts
    - proof - failure to pay a statutory demand for 750 within 3 weeks. Prescribed form.
    Can be dealt with by agreement - ‘compounding the debt’
  3. Unsuccessful attempt to enforce judgment
  4. Cash Flow Test
  5. Balance Sheet Test
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9
Q

When might compulsory liquidation be refused?

A

If there is no real difficulty in paying off, because liabilities are far off in the future - cash flow test is better - likely to be refused

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10
Q

Procedure for compulsory liquidation

A

Check no other procedures
Cost-benefit procedure - what will you get back
1. Present petition to court
2. Serve copy on company registered office
3. Must advertise in the Gazette
4. Hearing

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11
Q

When does liquidation begin?

A

At the time of presentation to the court- so is backdated if granted

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12
Q

What is the effect of the winding up order

A

Official Receiver becomes liquidator; creditors tend to vote in liquidator. Appointments are advertised. Advertised in gazette and on register.
Limited power to dispose of property
Company control goes to liquidator
Papers must state ‘in liquidation’
All employees are automatically dismissed
All court actions are automatically stayed

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13
Q

What happens for a voluntary liquidation

A

Starts in meeting - is the time of the passing of the resolution (special)
Directors make a declaration of solvency + auditors report.
If cannot pay debts within 12 months, report to creditors and becomes a creditors winding up
Creditors voluntary liquidation - also special resolution, but no declaration of solvency

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14
Q

How does CVL work

A

Creditors choose the liquidator and control the process

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15
Q

What are the functions of a liquidator

A

Liquidator collects in and realises the companies assets

Pays any creditors and pays surplus to the members (ie if members voluntary liquidation)

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16
Q

Powers of the liquidator

A

Wide powers to achieve functions
If compulsory - more expensive, reports to court
Can compromise creditors - ie. reduce debt
Can carry on business
Can sell assets
What is necessary
Can force return of company property - inc. by litigation
Can apply to court to set aside transactions
Can disclaim an unprofitable contract - eg. unused leases, commercial contracts; other party becomes an unsecured creditor
Retention of title clauses are still effective eg. leased property
Trusts still protect property

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17
Q

In what order are creditors paid

A
  1. Fixed charges will have been paid already by receiver
  2. Expenses of the winding up - solicitors get paid
  3. Preferential debts: employees salaries, low limits
  4. Floating charges save for some ring-fenced for unsecured creditors
  5. Unsecured creditors
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18
Q

What about transactions at undervalue?

A
  1. Applies when a company enters administration/liquidation
  2. Is it a transaction at undervalue - disposal less than market value
  3. Good faith exemption - if entered into in good faith for purpose of carrying on business, and reasonable grounds to believe would benefit company, won’t be set aside
  4. Does the transaction take place within the relevant time - if the company was unable to pay its debts at the time or as a result of the transaction, presumed if it is undervalue with a connected person eg. director/shadow director, AND 2 years, ending with commencement of liquidation (presentation of petition, or resolution to wind up)
  5. Effect: liquidator/administrator can apply to court for order restoring position as if the transaction had not taken place
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19
Q

What are preferences?

A

When a creditor is deliberately put in a position that they shouldn’t be, or give them a security/charge
Has the section kicked in
Was there a desire to prefer the creditor/guarantor? Presumed if a connected person
Relevant time - within 6 months of commencement of liquidation, but extended to 2 years if creditor is a connected person, and insolvent at time of preference or as a result (no presumption)
Order: restoring as if hadn’t happened

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20
Q

What if deliberate moves assets out of reach of creditors

A

Must prove - can be made by a a creditor, no time limit, no need to show was insolvent

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21
Q

What is fraudulent trading?

A

Allowing a business to continue trading, whilst intending to defraud creditors. Civil and criminal liability.
Court has discretion to make person contribute to company assets. Hard to prove.

22
Q

When is it Wrongful trading

A

Fact of carrying on business:
1. company must be in insolvent liquidation
2. director/shadow director/de facto director
3. director knew or ought to have known no reasonable prospect of company avoiding insolvent liquidation. Combined subjective/objective test.
Defence: if Director took every step to minimise step to creditors.
Effect: can be ordered to contribute to companys assets - will look to how much depletion by allowing to continue to trade

23
Q

Avoidance of floating charges

A

Automatically void if did not receive due consideration when it was created in relevant time - 12 months prior to onset of insolvency. 2 years if connected parties.

24
Q

What are the rescue procedures

A
  1. Negotiation
  2. Administration
  3. Company Voluntary Arrangements (CVA)
25
Q

When does administration begin

A

On appointment of administrator

26
Q

What happens in administration?

A

Moritorium: prevents voluntary/compulsory liquidation and third parties enforcing their rights
Administrator takes over running of company

27
Q

How is administrator appointed?

A

Court
Holder of a qualified floating charge
Shareholders
Directors

28
Q

What happens if a holder of qualified floating charge wants to appoint a receiver

A
  1. 2 days notice to holders of prior qualifying floating charges - or written consent
  2. NO if administrative receiver in place, or company is in administration/liquidation
29
Q

Procedure if company appoints administrator

A
  1. notice of intention to floating charge holders
  2. notice to anyone who could appoint a receiver
  3. 5 business days notice
  4. file at court
  5. interim moritorium at this point - when filed at court
  6. statutory declaration unable to pay debts
  7. no other administrator/liquidator
30
Q

Administrator powers

A

Can sell charged as if not charged
Can sell leased (retention of title) property with permission of court
Can run business

31
Q

Company voluntary arrangements - need unanimity?

A

Bound by vote of majority

32
Q

CVA procedure

A
  1. proposal of directors
  2. nominee - insolvency practicioner
  3. court agrees
  4. creditors sent documents
  5. meeting of members and creditors, proposal approved by all. Members ordinary resolution - creditors, 75% in value of unsecured, and more than 50% of creditors discounting those connected with the company. No vote for secured/preferential creditors, but not bound by CVA.
    Any winding up is stayed by the court.
    No automatic moritorium
    Small companies can ask for 28 days moratorium. Larger: put into administration first then do this.
33
Q

Transactions at an undervalue

A

Insolvency Act 1986 - received consideration which was considerably less than provided, 2 years of onset of insolvency, and insolvent at the time

34
Q

Insolvency = preference

A

Company prefers a creditor if it puts it in a position better than it would have been
Liable to be set aside
six months onset of insolvency, 2 years if connected person

35
Q

Transactions at an undervalue

A

Where a company is undervalue at a relevant time, court must order restoration. Defence of good faith - reasonable grounds would otherwise benefit the company. Within 2 years of onset of insolvency ie. before insolvency

36
Q

When is onset of insolvency

A

Presentation of winding up petition

37
Q

What if you prefer a creditor without good reason?

A

Will be set aside if within 2 years of onset of insolvency ie. before.

38
Q

Are floating charges made within 12 months of insolvency valid?

A

No, if before insolvency, but only for old debt (as it’s a preference) - works for new debt, but must be registered

39
Q

What type of interest is a charge

A

Equitable - ie property doesn’t pass as per a mortgage

40
Q

Difference between fixed and floating

A

Fixed is immediate proprietary interest; takes effect on execution; can fail if it’s sold to bona fide for value; floating - also proprietary interest, but over shifting class including future assets; doesn’t attach until crystalisation. Cannot sell fixed without consent

41
Q

Priority of fixed and floating charges

A

A later fixed charge is better than a floating charge, unless the floating charge has crystalised and later has notice before later was created; or floating charge has a provision prohibition of future charge ranking in priority AND later chargee has notice

42
Q

Priority of securities

A
  1. First in tame
  2. Legal over equitable, as long as good faith and no notice of equitable and value, and not inequitable eg. due to conduct. Later fixed charges over earlier floating unless the floating charge contains a negative pledge. Generally, registered interests by date of registration.
43
Q

How does a company enter into a loan agreement

A
  1. Board resolution of directors
  2. If to be done by way of deed, needs signature or seal (model articles: director plus witness), signature is 1 x authorised signatories (directors or Co Sec) or Director + witness. Se
44
Q

Registration requirements debenture

A

CH within 21 days. If not registered, valid against company but not liquidator/administrator or other creditor. Also register at LR

45
Q

What is a mortgage

A

Security where title is transferred to lender with obligation to transfer back if loan repaid.

46
Q

Can a fixed charge be over future property

A

Yes - future property cannot be subject to mortgage. Fixed charge is not title.

47
Q

How can a floating charge take priority

A

If there is a negative pledge ie. preventing company from granting later priority securities + binds 3rd parties if they have notice. Negative pledge has to be registered at CH therefore should be seen by later lenders

48
Q

Solution to large loans and negative pledges/priority

A

Use the same bank. Or deed of priority between lenders.

49
Q

Appointment of enforcement receiver

A

Not for floating charges after 2003 by creditor - enforced by way of administration

50
Q

Priority of debts

A
  1. receivers costs
  2. fixed charge holder
  3. preferential creditors - enterprise act, ie. employee wages
  4. floating charger
51
Q

Consequence of charge registration failure (21 days)

A

Void as against administrator/liquidator if not registered. Can be late, unless will prejudice (ie. if searches done in 21 days thereafter)

52
Q

Letter structure

A
  1. Intro
  2. Law
  3. Options
  4. Advice

OSCE (11 decks)

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