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Company Law > Corporate Insolvency I > Flashcards

Corporate Insolvency I Flashcards

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1
Q

Principal statute dealing with corporate insolvency

A

the Insolvency Act 1986

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2
Q

Legislation that has amended the IA 1986

A
  • Small Business Enterprise and Employment Act 2015
  • Insolvency (England and Wales) Rules 2016
  • Corporate Insolvency and Governance Act 2020 (CIGA 2020) - commenced 26 June 2020
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3
Q

Insolvency procedures

A
  • IA 1986 introduced two key insolvency procedures: company voluntary arrangements (CVAs) and administration.
  • CIGA 2020 introduced the pre-insolvency moratorium and the restructuring plan aimed at rescuing the company.
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4
Q

Meaning of ‘insolvency’

A

s 122(1)(f) IA 1986: a company may be wound up ‘if it is unable to pay its debts.’

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5
Q

Four tests of insolvency

A

1) The Cash Flow Test: An inability to pay debts as they fall due (s 123(1)(e))
2) The Balance Sheet Test: The company’s liabilities are greater than its assets (s 123(2))
3) Failure to comply with a statutory demand for a debt of over £750
4) Failure to satisfy enforcement of a judgment debt (s 123(1)(b)

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6
Q

Directors obligations towards companies in financial difficulty

A
  • Directors must review financial performance of a company and recognise when it is facing financial difficulties e.g.:
  • The company has unpaid creditors putting pressure on the company to pay its bills
  • The company has an overdraft facility that is fully drawn and the bank is refusing to provide further credit
  • The company has loans and other liabilities that exceed the value of its assets
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7
Q

Options for a company facing financial difficulties

A

(1) Do nothing - the directors risk personal liability under IA 1986 and breach of directors duties under the CA 2006
(2) Apply for a pre-insolvency moratorium - gives the company breathing space
(3) Do a deal - reaching either an informal or formal agreement with the company’s creditors with a view to rescheduling debts
(4) Appoint an administrator - a collective formal insolvency procedure (which considers the interests of all creditors) which aims to rescue the company
(5) Put the company into liquidation - a collective insolvency procedure under which a company’s business is wound up and its assets transferred to creditors and (if there is a surplus of assets over liabilities) to its members.

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8
Q

Corporate Insolvency Procedures

A
  • Informal arrangements (with a pre-insolvency moratorium)
  • Formal agreements:
    (a) Company Voluntary Arrangement
    (b) Restructuring Plan
    (c) Scheme of Arrangement
    (d) Administration
    (e) Liquidation
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9
Q

Informal agreements

A
  • avoids the time and cost of formal insolvency proceedings
  • difficulty is getting all the creditors to agree
  • if a company needs to persuade a bank to keep lending money, the company or its directors could offer to:
  • make additional payments or offer the bank additional security;
  • reschedule outstanding debts;
  • reduce or hold over employees’ salaries for a set period
  • creditors, including banks, could enter into Standstill Agreements where they agree not to take enforcement action for a certain period of time. However, it is anticipated they will decline with the introduction of the pre-insolvency moratorium under CIGA 2020.
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10
Q

Pre-insolvency moratorium

A
  • for struggling companies not yet in a formal insolvency process
  • a ‘moratorium’ is a period during which creditors are unable to take action to enforce their debts, any existing court proceedings are stayed and the company may not be wound up.
  • the pre-insolvency moratorium lasts for 20 business days but can be extended by the directors for a further 20 business days. Further extensions are possible with the consent of a requisite majority of creditors and/or court order. The maximum period is 1 year subject to a court order to extend further.
  • the moratorium automatically comes to an end when the company enters into a formal insolvency procedure
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11
Q

Procedure for obtaining the pre-insolvency moratorium

A
  • Directors of the company must apply to court (s A3 IA 1986) The application must be accompanied by (s A6):
  • 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 (usually an accountant) known as a Monitor, stating that:
  • the company is an eligible company and
  • it is likely that the moratorium will result in the rescue of the company.
  • the moratorium comes into force at the time that the documents are filed at the court (s A7(1)(a)
  • the monitor has the responsibility to notify the registrar of companies and all the creditors that it has come into force
  • the monitor has a supervisory function during the moratorium.
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12
Q

Company Voluntary Arrangement (CVA)

A
  • a compromise between the company and its creditors
  • defined in s 1(1) IA 1986 as ‘a composition in satisfaction of its debts or a scheme of arrangement of its affairs.’
  • the creditors agree to part payment of the debts or a new timetable for repayment.
  • the agreement must be reported to court but there is no requirement for the court to approve (s 4(6))
  • the CVA is supervised and implemented by an Insolvency Practitioner but the company’s directors remain in post and are involved in the implementation
  • CVAs can be used together with administration or liquidation
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13
Q

Setting up a CVA

A
  • the directors draft the written proposals and appoint a nominee (an insolvency practitioner)
  • if the company is in liquidation/administration, the administrator/liquidator drafts the proposals.
  • the director submits the proposals and a statement of the company’s affairs to the nominee.
  • the nominee considers the proposals and within 28 days, must report to the court on whether to call a meeting of the company and creditors s 2(1) and s 2(2)
  • nominee must give 14 days notice of the meeting to the creditors. A meeting of the members must take place within 5 days of the creditors’ decision.
  • the proposals must be approved by: 75% in value of creditors (excluding secured creditors), and a majority in value of unconnected creditors, a simple majority of members
  • nominee reports to court on approval.
  • nominee becomes supervisor and implements proposals
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14
Q

Effect of CVA

A
  • binding on all unsecured creditors
  • secured or preferential creditors are not bound unless they unanimously consent to the CVA (s 4 IA 1986) - this is a major disadvantage
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15
Q

How are CVAs used?

A
  • frequently used either alone or within administration in order to attempt to reach a compromise with creditors, particularly landlords to agree a reduction in rent; particularly common in retail business
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16
Q

CVA - Advantages

A
  • The directors remain in control of the company

- The company can in theory continue to trade

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17
Q

CVA - Disadvantages

A
  • Cannot bind secured or preferential creditors
  • Procedure is complex
  • Likely to decline further and be replaced by the Restructuring Plan introduced by CIGA 2020
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18
Q

Scheme of arrangement

A
  • must be sanctioned by the court as well as the majority in number representing 75% in value of members and creditors
  • dealt with in Part 26 CA 2006
  • must be a genuine and effective arrangement or compromise
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19
Q

Parties that can apply to the court for the sanction of a Scheme under s 896(2) CA 2006

A
  • the company itself
  • any creditor of the company
  • any member of the company
  • if the company is being wound up, the liquidator
  • if the company is in administration, the administrator
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20
Q

Advantages of Scheme of arrangement

A
  • binds all dissenting creditors including secured creditors, unlike CVAs (s 899(3) CA 2006)
  • widely used in practice
  • used where a debtor wants to compromise secured debt (as CVAs can’t do this) and when foreign companies want to compromise debt governed by an English law loan agreement
  • may be used for business reorganisations of solvent businesses - there is no need for the company to be insolvent
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21
Q

Disadvantages of a Scheme

A
  • no moratorium

- complex and cumbersome procedure

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22
Q

Restructuring plan

A
  • introduced by CIGA 2020
  • purpose is to compromise a company’s creditors and shareholders and restructure its liabilities
  • a hybrid of CVAs and Schemes.
  • creditors and members must be divided into classes and each class which votes on the Plan must be asked to approve it. The Plan must be approved by at least 75% in value of each class voting
  • the court must sanction the Plan and it will then bind all creditors
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23
Q

Who can apply for Restructuring Plan

A
  • the company
  • any creditor
  • any member
  • the liquidator (if the company is in liquidation)
  • the administrator (if the company is in administration)
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24
Q

Advantages of a Restructuring Plan

A
  • the court can sanction a plan if it is just and equitable to do so even if one or more classes do not vote to approve the plan
  • cross class cramdown: in many cases a higher rank of creditor can force the Plan on a lower class of creditor who voted against the Plan
  • cramdown of shareholders: forcing shareholders to accept the Plan, diluting equity, creating debt for equity swaps.
  • likely to be used by directors alongside the pre-insolvency moratorium but can also be used by administrators and liquidators
  • may be better than a CVA because it can compromise the rights and claims of secured creditors and shareholders
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25
Q

Objectives of the administrator

A
  • administration aims to rescue a company which is insolvent if at all possible, or to achieve a better result for creditors if not
  • a “collective” procedure, meaning the administrator acts in the interests of the creditors as a whole rather than on behalf of a particular creditor
  • owes duties to both the court and creditors collectively
26
Q

Statutory objectives of administration

A

Section 8 and Schedule B1 IA 1986 set out the objectives of the administration, stating that an administrator:
“…must perform his functions with the objective of:
(a) rescuing the company as a going concern, or
(b) achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up…,
(c) realising the property in order to make a distribution to one or more secure or preferential creditors.”

27
Q

Appointment of administrator - court procedure

A
  • court may appoint an administrator where the company is or is likely to become unable to pay its debts (Sch B1 para 11(1)) on the application of:
  • the company
  • the directors
  • one or more creditors
  • the appointment can only be made where the order is reasonably likely to achieve the purpose of administration (Sch B1 para 11(b))
  • AA Mutual International Insurance Co Ltd: court found it was probable the applicant would be unable to pay its debts as it had no income. The administration was also held to be reasonably likely to achieve better results for the creditors as a whole than winding up so the application was granted
28
Q

Appointment of administrator - out of court procedure

A
  • Following parties may appoint an administrator using the out of court procedure:
  • the company or directors (Sch B1 para 22 IA 1986)
  • a qualifying floating charge holder (the holder of a floating charge created after 15 September 2003 relating to the whole or substantially the whole of the company’s property) (Sch B1 para 14 IA 1986) This is often a bank
  • most common method is the directors appointing the administrator
  • directors cannot use the out of court procedure where a creditor has presented a petition for the winding up of the company. In those circumstances, the directors can apply to court for an administration order or the qualifying floating charge holder can use the out of court procedure
29
Q

Role of the administrator

A

The administrator is an officer of the court and owes its duty to all of the company’s creditors to achieve the purposes of the administration.
The directors are unable to exercise any of their management powers without the consent of the administrator. The administrator takes on the running of the business with the aim of achieving the purpose of the administration.
Once appointed, the administrator has up to eight weeks to produce a report setting out proposals for the future of the company’s business.
This must be put to all creditors for their approval. If the administrator’s proposals are rejected, the company will usually be put into liquidation. However, if the administrator’s proposals are accepted, the administrator has several options including restructuring the creditors’ rights under a scheme of arrangement or implementing a CVA so that the company exits administration.
There is a 12-month fixed time limit for the completion of administrations, although it is possible to obtain extensions.
The administrator must report the outcome of the administration to the court.

30
Q

Moratorium

A
  • During administration, the company has benefit of a moratorium (Sch B1 para 42-44 IA 1986)
  • During this time, all business documents and the website must state the company is in administration
  • During the moratorium (except with consent of the court or the administrator in each case):
    No order or resolution to wind up the company can be made or passed;
    No administrative receiver of the company can be appointed;
    No steps can be taken to enforce any security over the company’s property or to repossess goods subject to security, hire purchase and retention of title;
    No legal proceedings, execution or other process can be commenced or continued against the company or its property, and
    A landlord cannot forfeit a lease of the company’s premises by means of peaceable re-entry.
31
Q

Powers of the administrator

A

Administrators have wide powers under IA 1986 to “do all such things as may be necessary for the management of the affairs, business and property of the company” (s 14(1) IA 1986). These include the powers to:
Remove and appoint directors (s 14, Sch 1 and para 61 Sch B1);
Dispose of property subject to a floating charge (para 70 Sch B1);
Dispose of property subject to a fixed charge (with the court’s consent) (Para 71 Sch B1)
In addition, the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015) granted additional powers to administrators to allow them to bring proceedings against directors for fraudulent and wrongful trading

32
Q

Approach of the court to administration process

A

Re T & D Industries Ltd: Commercial decisions are for the administrator and not the court and an application for directions should only be made where there is a point of principle in issue or a dispute as to the appropriate course of action to be taken. Where an administrator needs to make an urgent decision they should consult the creditors to the extent possible.

33
Q

Pre-packaged sales in administration

A
  • the business of an insolvent company is prepared for sale to a selected buyer prior to the company’s entry into administration. The agreed sale is carried out by an insolvency practitioner shortly after their appointment.
  • Often the pre-pack purchaser will be one or more of the existing owners or directors of the insolvent company.
  • controversial, particularly where the sale is to existing members or management. The concern is that often creditors are given insufficient information to determine whether the sale was in their best interests.
34
Q

Administrative receivership

A
  • a procedure which allows a secured creditor to appoint an administrative receiver to seek repayment of the secured debt. It is an individual procedure (benefitting only the appointing creditor) rather than a collective procedure which looks to benefit all creditors such as administration.
  • There is no statutory moratorium with administrative receivership which means that the procedure often leads into liquidation.
  • has been restricted in use since 15 September 2003 when the Enterprise Act 2002 came into force. Administrative receivers can only be appointed by qualifying floating charge holders:
    Where the charge was created prior to 15 September 2003 or
    Where one of the statutory exceptions applies.
35
Q

Liquidation

A
  • the most common type of insolvency procedure
  • Liquidation is the process by which a company’s business is wound up and its assets transferred to creditors and (if there is a surplus of assets over liabilities) to its members.
  • company will then be removed from the register of companies and dissolved.
  • It is not only insolvent companies which are wound up or liquidated. Solvent companies may also be wound up
36
Q

Liquidator’s function

A
  • The liquidator’s function is 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 (creditors of the same rank are said to rank “pari passu”).
  • The ranking of creditors’ claims (that is, the order in which they must be repaid) is set out in the IA 1986, the IR 2016 and by general law.
  • Liquidation is not a rescue mechanism and a liquidator has only very limited powers to carry on the business of a company. They will usually close a company’s business and dismiss employees very soon after their appointment. They will usually sell assets on a piece-meal basis rather than selling the assets and business as a going concern.
37
Q

Types of liquidation

A
  1. Compulsory liquidation
  2. Voluntary liquidation – which is further subdivided into:
  3. (a) Members’ voluntary liquidation
  4. (b) Creditors’ voluntary liquidation.
38
Q

What happens after liquidation?

A
  • Following liquidation, the company’s life is generally brought to an end automatically by dissolution.
  • In the case of a compulsory liquidation, this will be three months after notice by the liquidator to the Registrar of Companies that the winding up of the company has been completed.
  • In the case of voluntary liquidation, dissolution will occur three months from the filing by the liquidator of the final accounts and return.
39
Q

Compulsory liquidation

A
  • a court-based process for placing a company into liquidation.
  • an applicant presents a winding up petition to the court under which the applicant requests the court to make a winding up order against the company on a number of statutory grounds.
  • When the court grants a petition for compulsory liquidation, the order operates in favour of all the creditors and contributories (members and some former members) of the company.
  • The Official Receiver will become the liquidator and continue in office until another person is appointed (s 136(2) IA 1986).
  • The Official Receiver will notify Companies House and all known creditors of the liquidation.
  • The Official Receiver has the power to summon separate meetings of the company’s creditors and contributories for the purpose of choosing a person to become the liquidator of the company in his place (s 136(4)).
40
Q

Who can apply for a winding up order?

A
  • a creditor
  • the company (acting by the shareholders; this would happen where there are insufficient assets in the company to fund a voluntary liquidation)
  • the directors (by board resolution); again, this would happen where there are insufficient assets to fund a voluntary liquidation;
  • an administrator
  • an administrative receiver
  • the supervisor of a CVA; and
  • the Secretary of State for Business, Energy & Industrial Strategy (on public policy grounds).
41
Q

Grounds for compulsory winding-up petition

A

seven grounds on which the court can order a company to be wound up, which are set out in s 122(1) IA 1986:

(1) The company is unable to pay its debts.
(2) It is just and equitable for the company to be wound up.
(3) The company has passed a special resolution that it is to be wound up by the court.
(4) The company is a public company and has not issued the requisite share capital and more than a year has passed since its registration as a public company.
(5) The company is an old public company within the meaning of the Consequential Provisions Act.
(6) The company does not commence its business within a year from its incorporation or suspends its business for a whole year.
(7) There has been a moratorium for the company under s. 1A IA1986 which has come to an end and no voluntary arrangement has been approved in relation to the company.

42
Q

Inability to pay debts — s 123 IA 1986

A
  1. Failure by the company to comply with a creditor’s statutory demand. A statutory demand is a written demand in a prescribed form requiring the company to pay a specific debt. The statutory demand can only be used if the debt exceeds £750 and is not disputed on substantial grounds. The company has 21 days in which to pay the debt, failing which the creditor has the right to petition the court to wind up the company.
  2. The creditor sues the company, obtains judgment and fails in an attempt to execute the judgment debt.
  3. Proof to the satisfaction of the court that the company is unable to pay its debts as they fall due (the “cash-flow test”). The cash flow test is usually satisfied by going through the statutory demand process in 1 above but that is not essential.
  4. Proof to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account contingent and prospective liabilities(the “balance sheet test”) (Re Cheyne Finance plc)
    - burden of proof must be on the party asserting balance-sheet insolvency (BNY Corporate Trustee Services v Eurosail)
43
Q

Consequences of winding up order

A
  • To prevent an insolvent company from transferring its assets to third parties at the expense of its creditors, under s 127 IA 1986 certain dispositions of a company’s property, transfers of its shares and changes to its members will be void if made after the commencement of the winding up.
  • This means if these dispositions etc were made during the period between the presentation of the winding up petition and a winding up order being made, then they will be void. This includes:
  • Disposition of the company’s property;
  • Transfer of the company’s shares;
  • Altering the status of the company’s members.
  • 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 they are automatically dismissed from office.
44
Q

Voluntary winding up

A

Section 84(1) IA 1986 allows for the company to be wound up without a court order in 3 situations:

(1) Where the company’s purpose according to the articles has expired and resolution of the shareholders (rare)
(2) Where the company resolves by special resolution to wind up the company. The company must be solvent. (MVL)
(3) Where the company resolves that it is advisable to wind up the company due to its inability to carry on its business. Here the company is insolvent. (CVL)

45
Q

Members’ voluntary winding up (MVL)

A
  • may only be used for companies which are solvent.
  • The directors are required to 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 at the official rate, within a period not exceeding 12 months from the commencement of the winding up (s 89(1) IA 1986).
  • declaration must also contain a statement of the company’s assets and liabilities as at the latest practicable date before making the declaration.
  • Any director making a declaration of solvency who does not have reasonable grounds for their opinion is liable to a fine or imprisonment (s 89(4) IA 1986). If the debts are not actually paid in full within the specified period it will be presumed that the director did not have reasonable grounds for his opinion.
  • The members must then pass a special resolution to place the company into MVL and an ordinary resolution to appoint a liquidator. The winding up commences when the special resolution is passed (s 84(1) and s 86 IA 1986).
46
Q

Conversion of MVL to creditors’ voluntary liquidation

A
  • if the liquidator considers that the company will be unable to pay its debts they must change the members’ winding up into a creditors’ winding up by going through the procedural conditions in s 95. This involves the liquidator preparing and sending a statement of the company’s affairs to the company’s creditors.
  • The company’s creditors may nominate a person to be liquidator. In most cases this will be the insolvency practitioner who was appointed to deal with the MVL.The creditors’ voluntary liquidation takes effect from the date of nomination of the liquidator.
47
Q

Creditors’ voluntary winding up (CVL)

A
  • a form of insolvent liquidation commenced by 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.
  • procedure is for the shareholders to pass a special resolution to place the company into a CVL.
  • The shareholders may also nominate a person to be liquidator, but in any event within 14 days of the special resolution being passed the directors of the company must ask the company’s creditors to either approve the nominated liquidator or put forward their own choice of liquidator. Where the creditors’ choice of liquidator differs from that of the company’s shareholders, the creditors’ nomination will take precedence.
  • The directors must also draw up a statement of the company’s affairs (setting out the company’s assets and liabilities) and send it to the company’s creditors.
48
Q

Role of the liquidator

A
  • The appointment of a liquidator terminates the management powers of the company’s directors, and these powers are transferred to the liquidator together with their fiduciary duties, meaning that liquidators must act in good faith, avoid conflicts of interest and not make a secret profit (Silkstone and Haigh Moore Coal Co v Edey)
  • liquidator must be either a qualified Insolvency Practitioner (s 230 IA 1986) or the Official Receiver (appointed by the court in the short term) and acts as an officer of the court.
  • liquidator in both a CVL and a compulsory liquidation have extensive statutory powers. The principal functions of a liquidator in a winding up by the court are:
  • To secure and realise the assets of the company then distribute to the company’s creditors (s 143 IA 1986); and
  • To take into his custody or under his control all the property of the company (s 144 IA 1986).
49
Q

Liquidator’s powers to manage the company

A

The liquidator’s powers to manage the company are set out in Part I to III Sch 4 IA 1986 and include the ability to:

  • Sell any of the company’s property;
  • Execute deeds and other documents in the name of the company;
  • Raise money on the security of the company’s assets;
  • Make or draw a bill of exchange or promissory note in the name of the company;
  • Appoint an agent to do any business that the liquidator himself is unable to do;
  • Do all other things that may be necessary to wind up the company’s affairs and to distribute its assets.
  • Carry on the business of the company, but only to the extent that is necessary for the beneficial winding up of the company
  • Commence or defend court proceedings in the name of the company, for example to recover debts owed to it or dispute debts alleged to be owed by the company.
  • Pay debts and compromise claims.
50
Q

Liquidator’s powers to avoid certain transactions

A
  • Liquidators have a duty to preserve the company’s property and to maximise the value of the company’s assets available for distribution. They are empowered to avoid certain antecedent transactions in order to maximise the amount of assets available for distribution to creditors as follows:
  • Disclaim onerous property (s178 IA 1986);
  • Apply to court to set aside a transaction at an undervalue (s238 IA 1986);
  • Apply to court to set aside a preference (s 239 IA 1986);
  • Apply to court to set aside, or vary the terms of, an extortionate credit transaction (s 244 IA 1986);
  • Claim that a floating charge created for no new, or inadequate, consideration is invalid (s 245 IA 1986);
  • Apply to court to set aside a transaction that will defraud creditors (s 423 IA 1986).
51
Q

The statutory order of priority

A
  • A liquidator will (and an administrator may) be required to distribute the assets of the company to its creditors by way of a dividend. This must be done in a specified order of priority
  • these rules have no single source: they are found piecemeal in different parts of the IA 1986, the IR 2016 and general law.
  • statutory order of distribution can be affected by priority or subordination agreements entered into by creditors under which one class of creditor agrees to rank behind another.
52
Q

Summary of 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) Other costs and expenses of the liquidation.
(4) Preferential creditors.
(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.

53
Q

(1) Fixed charge assets

A

The assets subject to fixed charges are realised first by the liquidator and the proceeds are applied as follows:

  1. Liquidator’s costs of preserving and realising assets subject to a fixed charge
  2. Fixed charge creditors (in respect of assets subject to a fixed charge)
    - The proceeds of selling assets which are subject to a fixed charge (or mortgage) must first be used to pay off the debt secured by such charge (or mortgage).
    - If the proceeds are not sufficient to discharge the debt in full, then the creditor must await payment of the balance at an appropriate later point in the order of priority – which will depend on whether or not the same debt was also secured by a floating charge.
54
Q
  1. Assets subject to the floating charge (all assets)
A

All remaining assets of the company are subject to this. The remaining assets are therefore realised and the proceeds applied

55
Q
  1. Other costs and expenses of the liquidation
A

This includes all other costs and expenses of the liquidation, including the costs of selling assets secured by a floating charge and the costs and expenses incurred in pursuing litigation (such as actions in respect of wrongful trading or voidable transactions). Such litigation will require prior approval from preferential creditors and floating charge holders, or alternatively from the Court, otherwise the liquidator cannot claim the costs of litigation.

56
Q
  1. Preferential debts (Schedule 6)
A
  • The Enterprise Act 2002 removed the preferential status of certain Crown debts, previously payable ahead of other creditors. In removing that status, unsecured creditors (including many small businesses) are more likely to benefit from the proceeds of sale of assets secured by floating charges.
  • Certain other categories of preferential creditors do, however, retain their preferential status under the IA 1986. The main ones are employees for remuneration due in the four months before the ‘relevant date’ (generally the date of the winding up resolution or petition), but subject to a maximum of £800 per employee, plus accrued holiday pay and certain contributions owing to an occupational pension scheme.
  • If the insolvent company is a bank or building society, certain retail deposits that are insured by the Financial Services Compensation Scheme will also be preferential debts.
57
Q
  1. Prescribed part fund
A
  • The Enterprise Act 2002 introduced the “prescribed part” fund into the IA 1986 to increase the chance that unsecured creditors would get paid something in a liquidation. The idea is that money previously payable preferentially to the Crown is reserved for the unsecured creditors and does not flow into the pocket of floating charge holders. The prescribed part fund is sometimes referred to as the “ring fenced” fund.
  • calculated by reference to a certain percentage (the ‘prescribed part’) of the company’s ‘net property’. This is set aside (ring-fenced) for distribution to the company’s unsecured creditors - s. 176A. ‘Net property’ means the proceeds of selling property other than that which is subject to a fixed charge, after deduction of the liquidator’s expenses and any preferential debts.
58
Q
  1. Floating charge creditors
A

After payment of the general expenses of the liquidation, paying preferential debts and dealing with the prescribed part, the liquidator then pays any remaining realisations from assets subject to floating charges to the floating charge holders themselves (according to the priority of their security, if there is more than one floating charge holder).

59
Q
  1. Unsecured creditors
A
  • ordinary trade creditors who have not been paid;
  • secured creditors to the extent that the security is invalid or assets subject to the security have not realised sufficient funds to pay off the secured debt.
  • All the unsecured creditors rank and abate equally. This is known as the “pari passu” rule.
  • secured creditors who have not been paid in full from the realisation of assets subject to their security can only claim as unsecured creditors against realisations from unsecured assets, so they are not eligible to any payment from the prescribed part fund.
60
Q
  1. Interest on unsecured (including preferential) debts
A

Interest accruing on unsecured debts from the commencement of the winding up.

61
Q
  1. The shareholders
A
  • shareholders who participate in the equity of the company will rank last. However, their rights, as between themselves, will depend on the rights attributable to their particular class or classes of shares.
  • preferential shareholders may have preferential rights to a return of their capital on a winding up in priority to ordinary shareholders.
  • in most insolvent liquidations, the shareholders are unlikely to receive any value from their shares

Company Law (10 decks)

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