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Business Law and Practice > Corporate Insolvency Procedures > Flashcards

Corporate Insolvency Procedures Flashcards

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1
Q

What were the aims of the corporate insolvency reforms in the Enterprise Act 2002?

A
  • promote the rescue culture
  • to remove the stigma associated with insolvency and therefore encourage an entrepreneurial culture
  • give prominence to collective insolvency procedures (which are conducted for the benefit of creditors as a whole) over enforcement procedures (which generally only benefit a creditor holding security over the company’s assets)
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2
Q

When will a company be insolvent?

A
  • it is unable to pay its debts as they fall due (the cash flow test)
  • has liabilities that are greater than its assets (the balance sheet test)
  • does not comply with a statutory demand for a debt over £750 - this provides evidence that the company is cash flow insolvent
  • fails to pay a creditor to satisfy enforcement of a judgment debt
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3
Q

What must directors do when a company is in financial difficulty?

A

They must continually review the financial performance of a company and recognise when it is facing financial difficulties

They must decide what course of action to take

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4
Q

What options do directors have when a company is in financial difficulties?

A
  • do nothing - (risks personal liability and breaching directors’ duties)
  • do a deal - reach an informal or formal arrangement with some or all of the company’s creditors with a view to rescheduling its debts so that the company has less to pay and/or more time to pay
  • appoint an administrator - this is a collective formal insolvency procedure which considers the interests of all creditors
  • request the appointment of a receiver
  • put the company into liquidation
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5
Q

What is the difficulty with entering an informal agreement with creditors?

A

Not all creditors may want to be bound or agree to such an agreement

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6
Q

What may the company have to do to gain creditor approval of an informal agreement?

A
  • grant new or additional security
  • replace directors or senior employees
  • sell failing businesses/subsidiaries or profitable ones to raise cash
  • reduce costs eg through a redundancy programme or the closure of unprofitable businesses and/or
  • issue new shares to the creditors
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7
Q

What is a Standstill Agreement?

A

Creditors agree not to enforce their rights or remedies for a specified time period to give the company and the creditors some time in which to negotiate a contractual arrangement to resolve the company’s financial problems

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8
Q

What is the effect of pre-insolvency moratorium?

A

The company enters a period whereby creditors are unable to take action to exercise their usual rights and remedies, thereby creating breathing space for the company to resolve the situation

  • no creditor can enforce its security against the company’s assets
  • there is a stay of legal proceedings against the company and a bar on bringing new proceedings against it
  • no winding up procedures can be commenced in respect of the company (unless commenced by the directors) and no shareholder resolution can be passed to wind up the company unless approved by the directors
  • no administration procedure can be commenced in respect of the company (other than by directors)
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9
Q

What is the procedure for obtaining a pre-insolvency moratorium?

A

Company files at court:

  • a statement that the company is or is likely to become unable to pay its debts as they fall due
  • statement from a licensed insolvency practitioner, known as a Monitor for these purposes, stating that in their view, it is likely that a moratorium will result in the rescue of the company as a going concern. The monitor has a supervisory function during the pre-insolvency moratorium
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10
Q

Can a company enter a pre-insolvency moratorium if they are in a formal insolvency?

A

No - can only enter one if they are not in a formal insolvency

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11
Q

How long does a pre-insolvency moratorium last for?

A

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 up to maximum period of one year.

Court order is required to extend period beyond a year

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12
Q

What will happen to the moratorium if a company enters liquidation or administration or at the point that a CVA is approved or court sanctions a restructuring plan or a scheme of arrangement?

A

The moratorium will automatically end

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13
Q

What pre-moratorium debts do a company have to still pay during the moratorium period?

A
  • the monitor’s remuneration or expenses
  • goods and 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 ie company remains liable for all sums due to a bank which made a loan to it before it obtained the moratorium
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14
Q

What pre-moratorium debts does a company not have to pay during a moratorium period?

A

Debts which have fallen due before or during the moratorium by reason of an obligation incurred before the moratorium aside from exempt debts

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15
Q

Must a company pay debts that fall due during or after the moratorium by reason of an obligation incurred during the moratorium?

A

Yes - company must be capable of paying its way through the moratorium period

Effect of this being that a company must be ‘cash flow’ solvent ie able to pay its debts as and when they fall due

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16
Q

What are the two types of formal arrangements a company can enter into with its creditors?

A
  • a company voluntary arrangement (CVA)
  • a restructuring plan
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17
Q

What is the main advantage of a formal arrangement?

A

Provided the requisite majorities of creditors vote in favour of it, it is legally binding on all creditors even if some of those creditors voted in against it or did not vote or did not receive notice of the relevant procedure

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18
Q

What is a company voluntary arrangement (CVA)?

A

Compromise between the company and its creditors

Creditors agree to part payment of debts owed to them and/or to a new extended timetable for repayment

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19
Q

What must happen once a CVA has been approved?

A

It must be reported to the court - no requirement for the court to approve the CVA though

CVA will be supervised and implemented by a Supervisor who is an insolvency practitioner

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20
Q

What happens to the directors during a CVA?

A

They remain in office and continue to run the company’s affair subject to the terms of the CVA

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21
Q

What is the process for setting up a CVA?

A

1) directors draft a CVA proposal and appoint a nominee who must be an insolvency practitioner. If the company is in liquidation or administration, the administrator or liquidator drafts the CVA proposal and acts as Nominee

2) the directors must submit the CVA proposal and a statement of the company’s affairs to the Nominee

3) the nominee considers the CVA proposal and within 28 days must report to the court on whether in their opinion, the company’s creditors and shareholders should be asked to vote on the CVA proposal

4) the nominee must allow at least 14 days for creditors to vote on the CVA proposal. A meeting of the shareholders must take place within 5 days of the creditors’ decision

5) the CVA must be approved by creditors and shareholders

6) the nominee reports to court the the CVA has been approved

7) the nominee usually becomes the Supervisor and the Supervisor will implement the CVA proposal

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22
Q

What voting requirements are there for approving a CVA proposal?

A
  • at least 75% in value (ie value of debts owed) of those voting on the CVA proposal (excluding secured creditors)
  • if above majority is obtained, the decision of those creditors will be invalid if those voting against the CVA proposal include more than half of the total value of creditors unconnected to the company (eg not related company, shareholder or director of the company proposing the CVA)
  • simple majority of shareholders/members vote in favour
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23
Q

What happens if the creditors vote in favour of a CVA but the shareholders vote against?

A

Then the creditor’s vote prevails

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24
Q

Is a secured or preferential creditor bound by a CVA?

A

No - unless they specifically consent to be bound

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25
Q

Can creditors challenge a CVA?

A

Yes within 28 days of the CVA’s approval by creditors being reported to the court

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26
Q

On what grounds can a creditor challenge a CVA?

A

On grounds of unfair prejudice ie the CVA treats one creditor unfairly compared to another

OR

On grounds of material irregularity relating to the procedure which the company has followed in seeking approval of the CVA eg dispute over the way in which the creditor’s votes were calculated

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27
Q

What is the role of the supervisor of a CVA?

A
  • agree to creditor’s claims
  • collect in the unsecured funds to pay dividends to creditors
  • ensure the company complies with its obligations under a CVA
  • send a report on completion of CVA to all shareholders and creditors
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28
Q

What is the advantages of a CVA from the company’s perspective?

A

The directors remain in control of the company

The company can continue to trade during the CVA

The company has the prospect of surviving as a going concern

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29
Q

What is a Restructuring Plan?

A

Compromise a company’s creditors and shareholders and restructure its liabilities so that a company can return to solvency

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30
Q

When can the plan be used?

A

A company must have or are likely to encounter financial difficulty

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31
Q

Who needs to approve a Restructuring Plan?

A
  • Court approval called a sanction
  • Creditors
  • shareholders
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32
Q

How is shareholder/creditor approval gained?

A
  • Shareholders and creditors must be divided into classes and each class which votes on the Plan must be asked to approve it
  • plan must be approved by at least 75% in value of those voting in each class
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33
Q

Who will be bound by a Restructuring Plan on it being approved by the court?

A

All creditors including secured creditors

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34
Q

On what grounds can the court exclude creditors and shareholders from voting even if they are affected by the Plan?

A

If they have no genuine economic interest in the Company

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35
Q

When can the court sanction a Restructuring Plan which brings about a ‘cross-class cram down’?

A

When it is just and equitable to do so even if one or more classes do not vote to approve the plan

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36
Q

What is a cross cram down in relation to restructuring plans on creditors?

A

It means that one rank of creditor can force the Plan on another class of creditor who has voted against the Plan

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37
Q

What is a cross cram down in relation to restructuring plans on shareholders?

A

Shareholders are forced to accept a debt for equity swap in which creditors are able to hold new shares in the company in place of their debt claims

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38
Q

Who does an administrator owe duties to during administration?

A

They owe duties to creditors as a whole rather than interests of particular creditor

The owe duties to the court as an officer of the court

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39
Q

Who can be appointed an administrator?

A

A licensed insolvency practitioner

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40
Q

What are the statutory objectives of administration?

A

Administrators must perform the objectives in the following order:

1) Rescue to the company as a going concern, or if that is not reasonably achievable

2) achieve a better result for the company’s creditors as a whole than would be likely is the company were wound up

3) realise the company’s property in order to make a distribution to one or more secured or preferential creditors

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41
Q

What are the two different ways an administrator can be appointed?

A
  • court procedure
  • out of court procedure
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42
Q

Who can apply to the court for appointing an administrator?

A
  • company
  • directors
  • creditors
  • supervisor of a CVA
  • liquidator
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43
Q

When may the court appoint an administrator?

A

Where the company is likely to become unable to pay its debts

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44
Q

What will the court consider in deciding whether to appoint an administrator or not?

A

The court must consider whether the appointment is reasonably likely to achieve the purpose of the administration

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45
Q

What will happen on application to the court for appointment of administrator whilst the court considers the application?

A

There will be an interim moratorium, freezing any creditor action during the period

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46
Q

What effect will the court ordering an administration order have on any pending winding up proceedings?

A

They will be automatically dismissed

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47
Q

What are the two different methods for appointing an administrator out of court?

A
  • directors of the company may appoint an administrator
  • holder of a qualifying floating charge may appoint an administrator out of court
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48
Q

Who is a qualifying floating charge holder?

A
  • they have a floating charge which together with any other security they hold relates to the whole or substantially hole of the company’s property and
  • the document that creates it provides that either such B1 para 14 IA 1986 applies to the charge or that holder that has the power to appoint an administrator or an administrator receiver
49
Q

If an administrator is appointed by the directors and there is no qualifying floating charge holder, what must happen?

A

They must file a notice of intention to appoint (NOI) at court and not less than 10 business days later file a notice of appointment at court

Administrator’s appointment will take effect on the filing of the second notice

50
Q

If an administrator is appointed by the directors and there is a qualifying floating charge holder, what must happen?

A

When the directors file the notice of intention to appoint at court, they must also send notice to the holder of a QFC.

Holder of QFC has five business days to appoint its own choice of administrator

If QFC holder does not do this, directors can file the notice of appointment in usual way and directors’ choice of administrator is appointed at court

51
Q

How can a holder of QFC appoint an administrator?

A

They must first enforce their security with the terms of the QFC and the appointment of administrator will take effect when it is has filed its notice of appointment at court

52
Q

What happens in relation to appointment of administrator where there is more than one QFC and a lower ranking QFC wishes to appoint an administrator?

A

The lower ranking QFC holder must give two business days’ notice to the holders of a QFC which has priority and can only proceed with appointment if higher ranking QFC holder consents to its appointment

53
Q

What happens to directors when an administrator is appointed?

A

They are unable to exercise any of their management powers without the consent of the administrator

54
Q

What powers do administrators have on being appointed?

A
  • power to carry on the business of the company
  • take possession and sell the company’s property (if subject to fixed charge, then consent of fixed charge holder or court is required)
  • borrow money
  • execute documents in the company’s name
55
Q

What must the administrators do within 8 weeks of their appointment?

A

They must produce a report setting out their proposals for administration such as restructuring liabilities

This is then sent to creditors for approval

56
Q

What happens if the creditors no not approve of the administrators plans for administration?

A

The company is placed into liquidation

57
Q

What happens if the administrators plans for administration are approved by creditors?

A

Administrator will proceed with their proposals and if achieved the company will exit from administration

58
Q

What time limit is there on administration?

A

12 months for completion (although possible to obtain extensions)

59
Q

What are the benefits of the full moratorium during administration?

A

During the moratorium, except with consent of the court or the administrator:

  • no order or resolution to winder up the company may be made or passed
  • no administration receiver of the company may be appointed
  • no steps may be taken to enforce any security over the company’s property or to repossess goods subject to security, hire purchaser or retention of title
  • no legal proceedings, execution or other process may be commenced or continued against the company or its property
  • a landlord may not forfeit a lease of the company’s premises
60
Q

What protections are afforded by an interim moratorium on application to the court for an administrator?

A
  • a landlord may not forfeit a lease of the company’s premises
  • no order or resolution to winder up the company may be made or passed
  • no steps may be taken to enforce any security over the company’s property or to repossess goods subject to security, hire purchaser or retention of title
  • court consent needed by creditor too to bring enforcement against company
61
Q

Does an interim moratorium prevent a QFC holder from appointing an administrator?

A

No

62
Q

What power do administrators have?

A

They have power to do all such things as may be necessary for the management of the affairs, business and property of the company including:

  • removal and appointment of directors
  • disposing of property subject tot floating charge
  • disposal of property subject to a fixed charge
  • bringing proceeding against directors for fraudulent and wrongful trading
63
Q

What is a pre-packaged sales in administration?

A

Where business and assets of a company are prepared for sale to a selected buyer prior to the company’s entry into administration

Terms of sales agreement are negotiated and agreed before the administrators’ appointment and the administrators complete sale with buyer immediately following appointment

64
Q

What is receivership?

A

Enforcement procedure which is conducted in the interests of a secured creditor

65
Q

What are the three types of receivership?

A
  • administrative receivership
  • fixed charge receivership
  • court-appointed receivership
66
Q

What is administrative receivership?

A

A secured creditor with fixed and floating charges over all of the company’s assets may appoint an administrative receiver (AR)

AR will take control of the secured assets, sell them and use the proceeds to repay the debt owed to the secured creditor

67
Q

Where there is administrative receivership, whose interests does the administrative receiver act in?

A

The administrative receiver acts in the interests of the secured creditor which appointed the AR rather than a collective procedure such as administration or liquidation which is conducted in the interests of the creditors as a whole

68
Q

Who can be appointed as an administrative receiver?

A

A licensed insolvency practitioner

69
Q

Who is able to appoint an administrative receiver?

A

QFC holder where the floating charge was created pre-2003 or where a statutory exceptions applies

70
Q

What is fixed charge receivership?

A

Holder of a fixed charge pursuant to the terms of the relevant security document can appoint a receiver to enforce the security, manage and sell the secured assets, and repay the debt secured

71
Q

Who can be a fixed charge receiver?

A

Anyone - it does not have to be a licensed insolvency practitioner

72
Q

Who does a fixed charge receiver owe their duties to?

A

The owe their duties primarily and exclusive to their appointer (ie holder of fixed charge)

They owe a limited duty to the debtor to act in good faith in the course of their appointment

73
Q

What rights and powers does a fixed charge receiver have?

A

They only have power over the asset secured by the security document and they are only entitled to deal with that asset

They will normally have the power to sell, mortgage and collect rents from the secured assets

74
Q

When can a fixed charge receiver not be appointed?

A

During pre-insolvency moratorium or administrations

75
Q

What are court-appointed receivers?

A

They are receivers appointed by the court and their powers and duties are set out in a court order

76
Q

What duty does a court-appointed receiver have?

A

Duty to run the business until the dispute is terminated

77
Q

What is liquidation?

A

Process by which a company’s commercial life comes to an end

78
Q

What is the role of a liquidator?

A
  • collect in the company’s assets and sell them
  • identify the creditors of the company and determine amounts owed to them
  • pay creditors a dividend out of funds obtained from the sale of the assets
  • pay any surplus after creditors have been paid in full to shareholders in accordance with their rights in the Articles
79
Q

Can only insolvent companies be wound up?

A

No solvent companies can too

80
Q

Why might a solvent company want to be wound up?

A
  • it has met its specific purpose it was incorporated for
  • because the company’s assets and business have been sold so it is just a cash shell with no purpose
  • corporate group restructuring where that specific company is now redundant
81
Q

Are liquidators more likely to sell the company piece-meal basis or as a going concern?

A

Piece-meal

If company to be sold as a whole administration would be more appropriate

82
Q

What are the different types of liquidation?

A
  • compulsory liquidation
  • voluntary liquidation:

(i) members’ voluntary liquidation

(ii) creditors’ voluntary liquidation

83
Q

What happens when a liquidator completes liquidation?

A

The company’s life as a legal person is brought to an end by dissolution

84
Q

When will dissolution occur with compulsory liquidation?

A

Occurs three months after the liquidator has filed a notice with the Companies Registry stating that the winding up of the company has been completed

85
Q

When will dissolution occur with voluntary liquidation?

A

Occurs three months after the liquidator has filed the final accounts and return with the Registrar of Companies at Companies House

86
Q

What happens if the court makes a winding up order?

A

The Official Receiver (a government employee) will become the first liquidator and continues in office until another person is appointed.

87
Q

What is the role of the Official Receiver?

A

They will notify the Registrar of Companies and all known creditors of the liquidation

They have 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 their place

They can convene a creditors’ meeting for the appointment of a replacement liquidator

88
Q

Who can apply for a winding up order?

A
  • a creditor
  • the company (acting by shareholders)
  • the directors (by board resolution)
  • an administrator
  • an administrative receiver
  • the supervisor of a CVA
  • Secretary of State for Business (on public policy grounds)
89
Q

When will the company or directors themselves apply to the court for compulsory liquidation rather than just do voluntary liquidation?

A

Where there are insufficient assets in the company to fund a creditors’ voluntary liquidation

90
Q

What are the two main grounds whereby a company can be wound up?

A

1) the company is unable to pay its debts

2) it is just and equitable for the company to be wound up

91
Q

When will a company fail to comply with a creditor’s statutory demand?

A
  • creditor makes written demand in prescribed form requiring the company to pay a specific debt
  • debt demanded is in excess of £750 and is not disputed on substantial grounds
  • company fails to pay the debt within 21 days of receipt of the statutory demand
92
Q

Can a company dispose of its property or transfer its shares after a winding up order has been made?

A

No - any such disposition will be void unless it is made with a validation order from the court

  • will apply to any payment of money as that is a disposal of assets
93
Q

What happens on the court making a winding up order?

A
  • there is limited statutory moratorium under which no legal proceedings can be commenced against the company and any proceedings which have commenced are stayed
  • all employees are automatically dismissed
  • the directors lose their powers
94
Q

What are the three situations where a company can be wound up without a court order (ie voluntary winding up)?

A
  • where the company’s purpose according to the articles has expired and resolution of the shareholders
  • where the shareholders of a company resolve made by special resolution to wind up the company after directors have made a declaration of solvency. The company must be solvent (Members’ Voluntary Liquidation MVL)
  • where the shareholders of a company resolve by special resolution to wind up the company because it is unable to pay its debts (Creditors’ Voluntary Liquidation (CVL))
95
Q

What is the declaration of solvency that directors must swear for members’ voluntary winding up?

A

Directors must swear that have made full enquiry into the company’s affair 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

Must also contain a statement of the company’s assets and liabilities as at the latest practicable date before making the declaration

96
Q

What happens if any directors making the declaration of solvency does not have reasonable grounds for their opinion that the company is solvent?

A

Then they will liable for a fine or imprisonment

97
Q

What happens if the debts are not all paid in full within the specified time with members’ voluntary winding up?

A

It will be presumed that the director did not have reasonable grounds for swearing the declaration of solvency

98
Q

What must the shareholders do for members’ voluntary winding up?

A
  • special resolution to place the company into MVL
  • ordinary resolution to appoint a nominated liquidator
99
Q

When will MVL commence?

A

When the shareholders pass a special resolution

100
Q

What happens if on MVL, the liquidator considers that the company is unable to pay its debts?

A

The liquidator must convert the MVL into a creditors’ voluntary liquidation (CVL)

101
Q

What is creditors’ voluntary liquidation?

A

Form of insolent liquidation commenced by shareholders

102
Q

Under CVL, who appoints the liquidator?

A

The shareholders

103
Q

What must shareholders do to place a company into CVL?

A
  • they must pass a special resolution to place the company into CVL
  • they must pass an ordinary resolution to appoint a nominated liquidator
104
Q

What happens after the shareholders pass a special resolution to place the company into CVL?

A

The directors have 14 days to ask the company’s creditors to approve the nominated liquidator or put forward their own choice

105
Q

Where the creditor’s choice of liquidator differs from that of the shareholder, which choice takes precedence?

A

The creditor’s nomination

106
Q

What happens to directors on entering liquidation?

A

Their management power over the company is terminated and transferred to the liquidator

107
Q

Do all liquidators have to be qualified insolvency practitioners?

A

Yes (other than the Official Receiver)

108
Q

What powers do liquidators have?

A
  • 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
  • do all other things that may be necessary on winding up the company’s affair 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
  • pay debts and compromise claims
109
Q

What transactions do liquidators have the power to challenge and apply to the court to have them set aside?

A
  • transaction at an undervalue
  • a preference
  • a extortionate credit transaction
  • a transaction defrauding creditors
110
Q

What happens to floating charges granted before liquidation?

A

If they were entered into within a certain time of liquidation then they will be void, except if the company granted fresh consideration for them

111
Q

What can liquidators do under power to disclaim onerous property?

A

They can terminate leases of land/property

112
Q

What can affect the statutory order of priority?

A

Priority or subordination agreements entered into by creditors under which one class of creditor agrees to rank behind another

113
Q

What is the statutory order of priority for distribution on insolvency?

A

1) Liquidator’s fees and expenses of preserving and realising assets subject to fixed charges

2) Fixed charge holder - paid from proceeds of selling fixed charge asset

3) Liquidator’s other remuneration, costs and expenses, such as pursuing litigation

4) Preferential creditors (the first tier and then the secondary tier)

5) Creation of the prescribed part fund (if available) for unsecured creditors

6) amount due to creditors with floating charges

7) unsecured creditors such as trade creditors (including payment of the prescribed part)

8) interest owed to unsecured creditors

9) shareholders

114
Q

If the liquidator is going to pursue litigation, who has to approve it? What is the consequence if it is not approved?

A

Preferential creditors and floating charge holders or the court

Otherwise the cost of litigation cannot be recovered

115
Q

What debts are in the first tier of preferential debts?

A
  • employee claims for unpaid remuneration due in four months before the relevant date (generally winding up resolution or petition date) up to £800 per employee plus accrued holiday pay
  • certain contributions owing to an occupational person scheme
116
Q

What debts are in the second tier of preferential debts?

A

Crown debts:

  • PAYE and employee national insurance deductions made by the company from employee salaries and wages not paid over to insurance deductions made by the company from employee salaries and wages not paid to HMRC
  • VAT the company has received on supplies it has made and which it has not paid to HMRC
117
Q

How is the prescribed part fund to be calculated?

A

Calculated by reference to certain percentage of net property ie the proceeds of selling property other than tan which is subject to a fixed charge after deductions of the liquidators expenses and any preferential debts

  • 50% of first £10,000
  • 20% thereafter up to a maximum of £600,000 for floating charges created before 6th April 2020 and £800,000 after that date
118
Q

How do unsecured creditors rank?

A

They rank pari passu ie they get a share on an equal and proportionate basis (based on their entitlement) in relation to assets available to them

119
Q

Can a floating charge holder who did not have all of their debt paid off, benefit from prescribed part?

A

No - they can only be paid after prescribed part distributed and they will rank as unsecured creditor for any funds not covered by floating charge proceeds

Business Law and Practice (22 decks)

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