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BLP > Corporate insolvency and Bankruptcy > Flashcards

Corporate insolvency and Bankruptcy Flashcards

1
Q

What are the 4 ways a company can be proven to be insolvent (inability to pay debts)?

A

(i) It’s unable to pay its debts as they fall due (Cash flow test);

(ii) Liabilities greater than debts (balance sheet test);

(iii) Cannot comply with statutory demand of £750+;

(iv) has failed to satisfy a judgement debt

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2
Q

How does a company obtain a pre-insolvency moratorium?

A

(i) Statement to court that the company will/is likely to become insolvent; and

(ii) a licensed insolvency practitioner states that the moratorium will help as a going concern.

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3
Q

What happens in a pre-insolvency moratorium?

A

Creditors unable to enforce a security;

Legal proceedings are stayed;

No legal proceedings can be started;

No winding up/administration

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4
Q

How long does a moratorium last for?

A

20 business days but can be extended by a further 20 business days with the consent of a requisite majority of creditors.

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5
Q

What is a company required to pay in a moratorium?

A
  • Payment for any goods/services;
  • rent;
  • wages; and
  • loans from banks, even from before the moratorium.
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6
Q

What is a CVA/IVA?

A

Unsecured creditors agree to vary their debt timetables for the benefit of the company and to ensure they will be paid more than they would be in the event of an insolvency.

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7
Q

What is the procedure for a CVA?

A

Insolvency practitioner receives CVA proposal from directors, has 28 days to report to court whether this should be voted on.

14 days for creditors to vote; SHs must meet within 5 days of creditor decision.

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8
Q

What percentage of unsecured debts must vote in favour of a CVA for it to be valid?

A

75% of the debt must be accounted for in the votes in favour of the CVA.

(OR is needed from SH but can be overridden)

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9
Q

Say a CVA is voted on with the requisite majority. What could make it invalid?

A

If those voting against the CVA include more than half of the total value of creditors unconnected with the company.

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10
Q

Who does a CVA bind?

A

Binds all unsecured creditors, even if they voted against it.

However, does not bind secured or preferential creditors unless they unanimously consent to the CVA.

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11
Q

How can a CVA be challenged after a vote and when?

A

Can be challenged if there was unfair prejudice or a material irregularity in the procedure.

A creditor has 28 days to vote against the proposal.

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12
Q

What are the three aims of administration (and of the administrators)?

A

(a) to rescue the company as a going concern; then

(b) to achieve a better result for the company’s creditors as a whole; then

(c) to realise the company’s property for the benefit of one or more secure/preferential creditors.

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13
Q

What is the most likely objective to be attained on an administration?

A

Objective 2: To achieve a better result for the creditors as a whole.

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14
Q

When is the court likely to appoint an administrator?

A

Where the company is unlikely/is unable to pay its debts.

Must be able to achieve a statutory purpose of administration.

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15
Q

Who applies for a companies’ administration?

A

Company;
Directors;
Creditors;
Supervisor of CVA; or
Liquidator

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16
Q

What happens in the interim period between the court considering the administration application?

A

An interim moratorium freezing creditor action until the administration order is made or the court dismisses the application.

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17
Q

Under the out of court procedure for administration (the more common one), which two parties may appoint an administrator?

A

The directors of the company; or

a qualifying floating charge holder.

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18
Q

What is a qualifying floating charge?

A

A floating charge which:

(i) relates to the whole or substantially the whole of the company’s property; and

(ii) the document that creates it provides the power to appoint an administrator or administrative receiver

19
Q

How long does:

(i) a QFCH have to appoint an administrator after NOI is served?

(ii) a director have to file a second NOI after their first?

A

(i) 5 BD;

(ii) 10 BD.

20
Q

What is an administrators’ overarching duty?

A

They are an officer of the court and have a duty to the creditors to achieve the purposes of the administration.

21
Q

What is included in an administrators powers?

A

Power to:

  • carry on the business of the company;
  • take possession and sell the property of the company;
  • borrow money;
  • execute documents in the company’s name; and
  • remove and appoint directors.
22
Q

What are the time limits for:

(i) an administrator producing a report for the administration; and

(ii) to complete the administration?

A

(i) 8 weeks;

(ii) 1 year (can be extended)

23
Q

What is fixed charge receivership?

A

Receivers appointed by the holders of a fixed charge pursuant to the terms of the document.

24
Q

What does a fixed charge receiver do?

A

They become the receiver and manager of the assets secured by the security document.

25
Q

What is liquidation (winding-up) and what is the role of a liquidator?

A

Where a company’s commercial life comes to an end .

The liquidator collects in the company’s assets and sells them. They have vast powers to manage the company to achieve the best result for the creditors.

26
Q

What is compulsory liquidation?

A

Court-based process, applicant (e.g. creditor, directors, administrator etc) presents the petition to the court for the company to be liquidated.

27
Q

What are the key grounds on which a court can order a company to be wound up?

A

(i) company is unable to pay its debts; and

(ii) it is just and equitable for the company to be wound up.

28
Q

What are the two common voluntary liquidation procedures?

A

(i) Members voluntary liquidation; and

(ii) Creditor’s voluntary liquidation.

29
Q

What is the difference between an MVL and CVL?

A

MVL: Company is solvent, members decide via SR to liquidate;

CVL: Company is insolvent, are advised by creditors to liquidate due to inability to carry on as a business. SR to liquidate; OR to appoint a liquidator.

30
Q

What is the statutory order of priority?

A

(i) Liquidator’s fees of realising fixed charge assets;

(ii) fixed charge creditor;

(iii) liquidator’s other fees;

(iv) preferential creditors (employee’s for 4 months pay and the crown for all debt except for corporation tax);

(v) pool for unsecured creditors;

(vi) floating charge holders;

(vii) unsecured creditors;

(viii) interest to unsecured creditors;

(ix) payments to shareholders.

31
Q

What are the four ‘voidable transactions’?

A

TUV: Gift or transaction with significant inequality between asset and consideration;

TDC: TUV with the intention of defrauding creditors;

Preferences: Company preferred one creditor over the other;

Avoidance of floating charge: Floating charge created within the relevant period and for no good reason

32
Q

What are the ‘relevant periods’ for voidable transactions?

A

TUV: 2 years;

TDC: No relevant period;

Preferences: 6 months if unconnected, 2 years if connected;

Avoidance of floating charge: 1 year if unconnected, 2 years if connected

33
Q

How can a TUV be avoided?

A

If made within the relevant period and:

(i) If unconnected party, it is proven the company was insolvent/became insolvent because of the transaction; or

(ii) if connected party, the party cannot rebut the presumption that the company was insolvent/became insolvent because of the transaction.

34
Q

What is the defence to a TUV claim?

A

(i) company entered into the transaction in good faith and for the purpose of carrying on the business; and

(ii) there were reasonable grounds for believing the transaction would benefit the company.

35
Q

When does a company give preference to a person?

A

(i) person is a creditor of the company; and

(ii) company does anything that puts that person in a better position in the event of liquidation.

36
Q

What is the burden of proof when setting aside preferences?

A

Must prove that the company was insolvent/became insolvent because of the preference (no assumption), and:

Connected: Company was influenced by the desire to prefer the creditor;

Unconnected: Liquidator must prove the company was influenced by a desire to prefer.

If a preference is set aside, a restoration order may be ordered to put the company in the position they would have been in had it not been for the preference.

37
Q

What must be proven to set aside a floating charge?

A

That the company was insolvent at the time of the charge’s creation or became insolvent as a result of the transaction.

This is assumed if the party was connected.

Remember that only the floating charge itself will be set aside, not the debt it provides security for.

38
Q

When are new floating charges valid?

A

They are valid to the extent that new money, or fresh consideration, is provided to the company in return for the grant of the floating charge.

39
Q

How does a bankruptcy process begin?

A

(i) Creditors’ Petition - Debtor is unable to pay or has no reasonable prospect of paying their debt;

  • Amount owed exceeds £5,000

(ii) Debtor’s Petition - Debtor is unable to pay their debts.

40
Q

How is an inability to pay debt proven to the court?

A

(i) Statutory demand not satisfied within 3 weeks of service; or

(ii) unsatisfied execution of a judgement.

41
Q

What is the order of priority on a bankruptcy?

A

(i) Secured creditors;
(ii) expenses of the bankruptcy;
(iii) preferential creditors;
(iv) unsecured creditors;
(v) statutory interest;
(vi) debts of a spouse.

42
Q

When is a bankrupt discharged from bankruptcy?

A

Automatically released after one year, but they may be discharged in less than a year.

43
Q

What is a bankruptcy restriction order? What are the repercussions?

A

When someone declares bankruptcy and appropriate regard is had of their behaviour in the lead up to their bankruptcy, an order may be placed for a period for 2-15 years.

This would result in a bankrupt being unable to act as a director or being unable to obtain credit of more than £500.

44
Q

What is the relevant period for TUV in personal bankruptcy?

A

5 years.

Insolvency is only required if the transaction took place between 2-5 years before the petition, any petition brought within the 2 years does not need to prove this burden.

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