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Business Law & Practice > Corporate Insolvency > Flashcards

Corporate Insolvency Flashcards

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1
Q

What entities are these flashcards relevant to?

A

Companies and LLPs

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2
Q

What duty do directors owe on insolvency?

A

They owe a duty to creditors to maximise money. This trumps their duty to promote the success of the company.

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3
Q

What is the liability of the directors on insolvency?

A

The directors will not be personally liable, unless:
o They have given a personal guarantee; or
o They are found liable wrongful trading and ordered to make a contribution

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4
Q

What is the test for insolvency?

A

A company is insolvent when it is unable to pay its debts (s122). A company will be deemed as unable to pay its debts when (s123):
o It fails to comply with a statutory demand;
o It fails to satisfy enforcement of a judgment debt;
o It fails the ‘cash flow’ test;
o It fails the ‘balance sheet’ test; or
o It is proved to the satisfaction of the court the company is unable to pay its debts

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5
Q

When is a company insolvent?

A

When it is unable to pay its debts

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6
Q

re: test for insolvency

what are the requirements for statutory demand?

A

The creditor served a statutory demand of £750 or more and the company hasn’t paid it / come to an arrangement within 21 days

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6
Q

How does one prove that a company is unable to pay its debts?

A

o It fails to comply with a statutory demand;
o It fails to satisfy enforcement of a judgment debt;
o It fails the ‘cash flow’ test;
o It fails the ‘balance sheet’ test; or
o It is proved to the satisfaction of the court the company is unable to pay its debts

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7
Q

re: test for insolvency

what is meany by the ‘cash flow’ test?

A

The company is unable to pay its debts as they fall due. This is established by looking at the upcoming amounts the company has to pay, if that sum exceeds the sum they have available in cash to pay, then this would fail the cash flow test. This is because if the creditors demanded the money immediately they couldn’t pay.

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8
Q

re: test for insolvency

what is an example of ‘it is proved to the satisfaction of the court the company is unable to pay its debts’?

A

non-payment of a final invoice may be sufficient

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8
Q

re: test for insolvency

what is meany by the ‘balance sheet’ test?

A

The company’s liabilities exceed its assets (the balance sheet test). If ‘net assets’ on the balance sheet is in the minus, then it would fail the balance sheet test

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9
Q

When can a company be wound up by the court?

A

A company may be wound up by the court if (s122)…
o The company has passed an SR to this effect;
o The company is unable to pay its debts; or
o It is just and equitable for the company to be would up

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10
Q

What is a brief overview of the liquidation process?

A

Liquidator is appointed to run the company, trading stops, assets are sold and distributed in accordance with statute, the company is dissolved at CH

The director’s powers cease (in compulsory liquidation the director’s appointment is terminated).

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11
Q

What are the types of liquidation? How are they commenced?

A

Compulsory liquidation (court process and order)
Voluntary liquidation (SR):
 Members voluntary liquidation
 Creditors voluntary liquidation

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12
Q

How is the compulsory liquidation process started?

A

A third party (called a ‘petitioner’) commences insolvency proceedings against an insolvent company. The company must be insolvent prior to issuing.

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13
Q

Give an overview of the process once a winding up order has been granted

A
  1. the official receiver becomes the liquidator and the director’s powers cease
  2. the liquidator advertises the WUO in then gazette and notifies the registrar of companies
    3.the liquidator investigates, reports to creditors and invites them to submit proof of debts.
  3. the liquidator liquidates the assets and pays creditors in the statutory order
  4. the liquidator prepares the final accounts and sends these to creditors and SHs
  5. the final return will be filed with the Court and RoC
  6. the company will be dissolved after three months
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13
Q

Give an overview of the compulsory liquidation court process

A
  1. Petitioner issues winding up petition which they must then serve on the company
  2. Notice of the WUP must be advertised in the gazette.
  3. If the company oppose the WUP, they must file and serve a w/s 5 days before the hearing
  4. There will be a hearing.
  5. If a winding up order is granted, the official receiver becomes the liquidator
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14
Q

On what grounds can a petitioner issue a winding up petition?

A

On the basis that the company cannot pay its debts (s122), this will need to be evidenced by one of the grounds in s123.

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15
Q

What are the time requirements in relation to the WUP notice in the gazette?

A

The notice must be placed for advertisement no earlier than 7 days after service and not less than 7 business days before the hearing

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16
Q

Once a winding up petition has been issued, what must the company do?

A

Not dispose of any property and SHs cannot transfer any shares.

If the company oppose the WUP, they must file and serve a w/s 5 days before the hearing

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17
Q

What may happen at the WUP hearing?

A

a. Dismiss the petition
b. Adjourn the hearing
c. Make a winding-up order (WUO)
d. Make an interim order
e. Make any other order it thinks fit

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18
Q

Why might the judge adjourn the WUP hearing?

A

the company indicates they can pay within a reasonable time or the company proves there is a genuine dispute in relation to the money owed

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19
Q

re: compulsory liquidation

Once the Official Receiver has been appointed, what steps will they take?

A
  1. They may appoint a private insolvency practitioner depending on the nature of the case, the creditors’ wishes and if the company has sufficient funds to pay the fee
  2. Advertise the WUO in then gazette and notifies the registrar of companies
    3.Investigate, report to creditors and invites them to submit proof of debts.
  3. Liquidate the assets and pays creditors in the statutory order
  4. Prepares the final accounts and sends these to creditors and SHs
  5. File the final return with the Court and RoC
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20
Q

if there are outstanding debts after the company has been liquidated (using any type), what happens?

A

Any outstanding debt will be written off unless D gave a personal guarantee

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21
Q

Who commences creditors’ voluntary liquidation? Why might they do this?

A

An insolvent company. This can be sensible as it avoids any personal claims against Ds for misfeasance, fraudulent trading or wrongful trading.

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22
Q

What effect does voluntary liquidation the right to commence compulsory liquidation?

A

None. Even if a company started CVL or MVL, this does not prevent a creditor or contributory from applying to the court for compulsory liquidations

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23
Q

Give an overview of the creditor voluntary liquidation process

A
  1. Board meeting - directors must agree by majority that the company is insolvent and should be placed into liquidation. They resolve to call a general meeting.
  2. General meeting - SHs must pass an SR to place the company into liquidation. The directors must file the SR with CH.
  3. Within 7 days of passing the SR, the company must sent to creditors:
    o a statement of affairs (which is compliant with the Insolvency Rules 2016)
    o a notice seeking the creditors’ decision of the liquidator
  4. Within 14 days:
    o the creditors must confirm their decision as to the nomination of the liquidator
    o notice of CVL must be placed in the gazette
  5. the liquidator undertakes their role
  6. once complete, the company will be dissolved after 3 months
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24
Q

re: creditors’ voluntary liquidation

Once the liquidator has been appointed, explain the actions they will take

A
  1. Within 14 days of appointment, the liquidator must place a notice in the Gazette
  2. Investigate and report to creditors
  3. Liquidate the assets and pays creditors in the statutory order
  4. Prepares the final accounts and sends these to creditors and SHs
  5. File the final return with the Court and RoC
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25
Q

re: creditors’ voluntary liquidation

what must the directors do before the shareholders pass the SR?

A

Directors must give written notice to qualifying floating charge holders before the SR is passed

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25
Q

re: creditors’ voluntary liquidation

at the board meeting, what must the directors do?

A

They must agree by majority that the company is insolvent and should be placed into liquidation and resolve to call a GM

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26
Q

re: creditors’ voluntary liquidation

when the directors send a notice to the creditors seeking their decision as to the liquidator, what must the notice include?

A

i. Any liquidator nominations from the company (the creditors do not have to pick one of these).
ii. Whether the deemed consent procedure is being used or if there will be a virtual meeting.

If more than 10% of the creditors object to the deemed consent procedure being used, there will need to be a meeting to come to a decision.

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26
Q

re: creditors’ voluntary liquidation

when does the company officially go into liquidation?

A

As soon as the SR is passed

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27
Q

What is the deemed consent procedure?

A

If the liquidator gives notice of a decision to be made under the deemed consent procedure, the decision will be deemed to have been made unless more than 10% of the creditors object to DCP being used.

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28
Q

re: creditors’ voluntary liquidation

what are the consequences if the company fails to place notice of CVL in the gazette?

A

The company and defaulting officers can be fined

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29
Q

re: creditors’ and members voluntary liquidation

can a new liquidator be appointed?

A

Yes, a new liquidator can be appointed by majority agreement of the creditors. An ordinary resolution must be passed to this effect.

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30
Q

When can members’ voluntary liquidation be commenced?

A

This is only available if the company is solvent. The directors must * swear a statutory declaration to this effect

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31
Q

When is members’ voluntary liquidation used?

A

when a company wants to cease trading or is dormant and wants to bring affairs to an end

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31
Q

What happens if a company starts members’ voluntary liquidation and it transpires it is insolvent?

A

If the company starts MVL and the liquidator discovers that they are insolvent, the liquidator must convert to CVL process

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32
Q

Explain the members’ voluntary liquidation process

A
  1. Directors make a statutory declaration of solvency
  2. Within 5 weeks of the declaration, the SHs must pass:
    o An SR to start liquidation; and
    o An OR to appoint a liquidator
  3. Within 15 days of SR, the declaration and SR are to be filed at CH
  4. Within 14 days of appointment, the liquidator must publish a notice in the Gazette and inform CH
  5. Investigate and report to creditors
  6. Liquidate the assets and pays creditors in the statutory order
  7. Prepares the final accounts and sends these to creditors and SHs
  8. File the final return with the Court and RoC
  9. The company is dissolved after 3 months
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33
Q

re: members’ voluntary resolution

what must take place within 5 weeks of the statutory declaration?

A

Within 5 weeks of the declaration, the SHs must pass:
a. An SR to start liquidation; and
b. An OR to appoint a liquidator

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34
Q

What are reviewable transactions?

A

This is a collective term for transactions that were entered into by the company shortly before insolvency

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35
Q

What is the officer holder’s obligations in relation to reviewable transactions?

A

They have a general duty to maximise assets available to creditors and so have the power to investigate and challenge certain transactions. they can bring a claim on behalf of the company, should this be necessary.

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35
Q

for the purposes of all reviewable transactions, what is a ‘connected person’?

A

They are a D or shadow D of the company; or

They are an associate of D / shadow D, i.e.:
* Married or related (by blood or marriage)
* Business partner (or their spouse)
* Employed by or an employee of D

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36
Q

in relation to compulsory liquidation, what is the definition of the onset of insolvency?

A

the date the WUP is presented to the Court

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37
Q

Who is the ‘office holder’?

A

Liquidators and administrators

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38
Q

for the purposes of all reviewable transactions, what is a ‘connected company’?

A

The same person has control over both companies; or
The companies are part of the same group

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39
Q

in relation to voluntary liquidation, what is the definition of the onset of insolvency?

A

the date of the SR

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40
Q

in relation to administration, what is the definition of the onset of insolvency?

A

the earlier of:
* The date the application for an administration order is issued;
* The date the notice of intention to appoint an administrator is filed at court; or
* The date the appointment of the administrator takes effect

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41
Q

When will a floating charge be invalid?

A

A floating charge will be invalid if:
o No new consideration was given for the charge;

o It was made within the ‘relevant time’;
 Connected person/company - within 2 years prior to insolvency
 Unconnected person/company - within 1 year prior to insolvency

o At the time the charge was created, the company was insolvent or became insolvent due to the charge

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41
Q

What are the different reviewable transactions?

A

o avoidance of certain floating charges
o preferences
o transactions at an undervalue
o transactions defrauding creditors
o extortionate credit transactions

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42
Q

If a floating charge is deemed invalid, what is the effect of this?

A

It will be automatically void. Therefore, the officer holder does not need to make an application to court, they need to write to the charge holder and say they believe it is invalid.

If charge holder tries to enforce the security, the office holder will need to seek an injunction on the basis that it is invalid

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43
Q

Give an example of an invalid floating charge

A

An unsecured loan is given in 2015. A second loan is given in 2016 and the lender wants a charge to cover the 2015 loan and 2016 loan.

The charge will be invalid for 2015 loan, but valid for 2016 loan (as loan and charge were given at the same time)

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44
Q

When does a company give a preference to a person?

A

A company gives a preference to a person where:
o They do (or suffer) something which puts a creditor in a better position than it otherwise would have been on the company’s insolvency;

o The transaction was made within a ‘relevant time’; and
 Connected person/company - within 1 year prior to insolvency
 Unconnected person/company - within 6 months prior to insolvency

o At the time the preference was given, the company was insolvent or became insolvent due to the preference

o The company was influenced by a desire to prefer that person

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45
Q

re: preferences

what is meant by a ‘desire’ to refer that person?

A

Desire is a higher threshold than intention (i.e. the company must have positively wished to put them in a better position)

This is presumed if the person is connected (i.e. they wont need to evidence this)

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46
Q

re: preferences

what is an example in relation to ‘desire’

A

the court decided it was not a voidable preference because the company didn’t have a desire to put the creditor in a better position, if they didn’t prefer the creditor they would have lost the financial support from the creditor.

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47
Q

If there has been a voidable preference, what must the officer holder do?

A

Bring a claim against the preferred creditor

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48
Q

re: preferences

if the officer holder’s claim is successful, what can the court order?

A

o Release of any security
o Return of transferred property
o The creditor pay the proceeds from the sale of property to the company

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49
Q

When may the court set aside a transaction at an undervalue?

A

The court may set aside a transaction at an undervalue if:

o The company made a gift or enters into a transaction and receives no or consideration which is significantly lower than the consideration provided by the company;

o The gift/transaction was made within 2 years of insolvency

o At the time the transaction was made, the company was insolvent or became insolvent due to the preference

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50
Q

what is the position if a transaction at an undervalue was made to a connected person?

A

there is a rebuttable presumption that the company was insolvent

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51
Q

when will the respondent have a defence to a transaction at an undervalue claim?

Give an example

A

The respondent will have a defence to this claim if:
o The transaction was entered into in good faith;
o For the purpose of carrying on business; and
o There were reasonable grounds to believe it would benefit the company

Example - the company could not find a buyer prepared to pay full price so sold it quickly at a cheaper rate.

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52
Q

Who can bring a claim regarding a transaction to defraud a creditor? Is this impacted by the solvency status of the company?

A

The office holder or other victim (i.e. the creditor). The company doesn’t need to be insolvent before this claim is brought.

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53
Q

re: transactions to defraud creditors

when will a transaction be set aside?

A

A transaction will be set aside where:
o The transaction was entered into at an undervalue; and
o There was a desire to put assets out of reach from a person who is or may make a claim against the company or to prejudice their interests

The second limb is subjective and quite hard to evidence – what was the company’s purpose? (i.e. not the reasonable person)

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54
Q

re: transactions to defraud creditors

is there a time limit to bring a claim?

A

No

55
Q

re: transactions to defraud creditors

if the claim is successful, what orders can the court make?

A

The court can make any of the following orders
o Transfer of property
o Discharge/release of any security
o Repay money

The court can make the order against the respondent or a third party, unless the third party was a bona fide purchaser

56
Q

Explain extortionate credit transactions

A

The office holder can apply to have an extortionate credit transaction set aside that was entered into within 3 years of insolvency

A transaction is extortionate if:
o Its terms require grossly exorbitant payments to be made; or
o It grossly contravenes ordinary principles of fair dealings

57
Q

What is the statutory order of payments in liquidation?

A
  1. Fixed charge holders
  2. Expenses of winding up
  3. Preferential debts
  4. Floating charge holders
  5. Unsecured creditors
  6. Shareholders
58
Q

What happens if the liquidated asses do not cover the fixed charge in full?

A

the creditor will join the unsecured creditors for the outstanding sum

59
Q

In what order are preferential debts paid and how are they paid?

A
  1. ordinary preferential debts (rank and abate equally)
  2. secondary preferential debts (rank and abate equally)
60
Q

What are ordinary preferential debts?

A

employee wages for work carried out 4 months before WUO. This is capped at £800 + their accrued holiday per employee

61
Q

What are secondary preferential debts?

A

Taxes the company collect on behalf of HMRC i.e. PAYE and VAT.

Not taxes that are paid directly to HMRC, like corporation tax

62
Q

How might the date of the floating charge effect it on repayment in insolvency?

A

where the floating charge was created on or after 15 September 2003 and there are unsecured creditors, it will be subject to ring fencing.

63
Q

What are the ring fencing values in relation to each charge?

A

i. 50% of the first £10k is set aside for unsecured creditors
ii. 20% of the remaining money is set aside for unsecured creditors

Capped at £600k if the charge was created before 6 April 2020
Capped at £800k if the charge was created on or after 6 April 2020

If a pre-April 2020 and post-2020 charge rank equally, then £800k applies to both charge holders

64
Q

How do you calculate the monies payable when creditors rank and abate equally?

A
  1. Workout total value of debt owed
  2. Sum of remaining liquidated assets / total sum of debts = £0.00 for every pound
  3. Single value of each debt x £0.00 for every pound = portion creditor will receive

o Debt 1 (£10k) + Debt 2 (£5k) = £15k
o Sum of remaining liquidated assets = £7.5k
o £7.5k / £15k = £0.50 for every pound
 Debt 1 - £10,000 x 0.50 = £5,000 dividend payable
 Debt 2 - £5,000 x 0.50 = £2,500 dividend payable

64
Q

How does an unsecured creditor obtain payment from an office holder?

A

They must complete a form and send to a liquidator to ‘prove’ the debt

65
Q

What does rank and abate equally mean?

A

the money will be distributed amongst all of the creditors, and they will receive a portion that reflects the % of the debt owed to them.

66
Q

briefly, what happens on administration?

A

An insolvency practitioner will be appointed as the administrator of the company. They will then take over control of the company and aim to achieve one of the statutory aims of administration.

67
Q

what are the statutory aims of administration and what order must they be tackled in?

A

They will then take over control of the company and aim to achieve one of the statutory aims of administration (they should be tackled in order), i.e.:
o Rescue the company as a going concern;
o Achieve a better result for the company’s creditors than if the company were wound up;
o Realise some or all of the company’s property to one or more secured or preferential creditor(s)

68
Q

what is meant by a ‘going concern’?

A

A going concern = the business has regained financial stability following a period of financial uncertainty and it can now trade without threat of liquidation for the foreseeable future (usually 12 months)

69
Q

how is administration commenced?

A

A company can enter administration using either:
o The court route; or
o The out-of-court route

69
Q

what powers do administrators have?

A

Administrators have the power to do anything necessary for the management of affairs, inc:
o Reorganize the company inc. removing and appointing Ds
o Pay creditors (court permission is needed for unsecured creditors)
o Call meetings with creditors and SHs
o Deal with property subject to charges (court permission needed for fixed charges)
o Investigate and challenge reviewable transactions
o Commence fraudulent or wrongful trading proceedings

69
Q

when can the court route to administration not be used? What would the company need to do?

A

If a WUP has already been presented to the court, this route cannot be used. The company would need to apply to the court for an order that the company go into administration rather than liquidation.

69
Q

how is a company protected during administration?

A

During administration, the company is protected under a statutory moratorium. This prevents creditors from taking action during administration.

70
Q

explain the court route to administration

A
  1. Application is made to court by either: the company, directors or creditors
  2. As soon as reasonably practicable after making the application, the applicant must notify:
    o Any person is entitled to appoint an administrative receiver of the company; and
    o Any qualifying floating charge holder (QFCH) who is entitled to appoint an out-of-court administrator
  3. Court hearing. Administration order may be granted.
  4. Administrator appointed. Directors’ powers cease.
71
Q

re: court route to administration

when will an administration order be granted?

A

The court will only make an administration order (AO) if:
o The company is or is likely to become unable to pay its debts; and
o An AO is reasonably likely to achieve a purpose of administration

72
Q

re: court route to administration

who can apply?

A

the company, directors or creditors

73
Q

re: out-of-court route

who can appoint an administrator?

A

the company or a qualifying floating charge holder

74
Q

re: out-of-court route

when can an appointment be made by the company?

A

This is only available if:
o The company is unable to pay its debts or likely to become so
o The company hasn’t used this procedure in the last 12 months
o There is no ongoing administration application or WUP
o No administrative receiver has been appointed

75
Q

re: out-of-court route

give an overview of the appointment by the company route

A
  1. The company must serve a notice of intention to appoint 5 business days before filing to the following:
    a. The court;
    b. Any QFCH; and
    c. Any lender who is entitled to appoint a receiver
    * Once the notice of intention is served, an interim moratorium takes effect
  2. The company must then file the following documents with the court:
    a. Statutory declaration that the company is unable to pay its debts and is not in liquidation
    b. Notice of appointment
    c. A statement from the administrator consenting to the appointment and that the purpose of administration is likely to be achieved.
  3. The appointment of the administrator commences as soon as the documents are filed with the court. Directors’ powers cease.
76
Q

re: out-of-court route (appointment by the company)

who must the company serve the notice of intention on and in what time frame? What happens once this is served?

A

The company must serve a notice of intention to appoint 5 business days before filing to the following:
a. The court;
b. Any QFCH; and
c. Any lender who is entitled to appoint a receiver

Once the notice of intention is served, an interim moratorium takes effect

77
Q

re: out-of-court route (appointment by the company)

what documents must the company file with the court? what happens once these are filed?

A

a. Statutory declaration that the company is unable to pay its debts and is not in liquidation
b. Notice of appointment
c. A statement from the administrator consenting to the appointment and that the purpose of administration is likely to be achieved.

The appointment of the administrator commences as soon as the documents are filed with the court. Directors’ powers cease.

78
Q

re: administration

when will a floating charge be qualifying?

A

A floating charge will only be qualifying if the charge:
o Relates wholly or in part to company property;
o Contains power to appoint an administrator or administrative receiver or that para 14 applies; and
o Is enforceable

79
Q

re: out-of-court route

give an overview of the appointment by QFCH

A
  1. The applying QFCH must serve a notice of intention on other QFCHs 2 days before filing the paperwork (unless they have already consented)
    * Once the notice of intention is served, an interim moratorium takes effect
  2. The company must then file the following documents with the court:
    a. Notice of appointment which includes a statutory declaration that:
    i. The lender is a holder of a QFC in relation to the company’s property;
    ii. The floating charge is enforceable; and
    iii. The appointment complies with IA 1986, Sch B1
    b. A statement from the administrator consenting to the appointment and that the purpose of administration is likely to be achieved.
  3. The appointment of the administrator commences as soon as the documents are filed with the court. Directors’ powers cease.
80
Q

re: out-of-court route (appointment by QFCH)

who must the QFCH serve the notice of intention on and in what timescale? What happens once this is done?

A

The applying QFCH must serve a notice of intention on other QFCHs 2 days before filing the paperwork (unless they have already consented)

Once the notice of intention is served, an interim moratorium takes effect

81
Q

re: out-of-court route (appointment by QFCH)

what documents must be filed with the court? What happens once this is done?

A

Notice of appointment which includes a statutory declaration that:
i. The lender is a holder of a QFC in relation to the company’s property;
ii. The floating charge is enforceable; and
iii. The appointment complies with IA 1986, Sch B1

A statement from the administrator consenting to the appointment and that the purpose of administration is likely to be achieved.

The appointment of the administrator commences as soon as the documents are filed with the court. Directors’ powers cease

82
Q

after an administrator has been appointed, what must happen/

A

As soon as reasonably practicable after appointment, a notice of appointment must be sent to the following:
o The company
o All creditors
o The Gazette (for publishing)

Within 7 days, notice must be sent to ROC

83
Q

re: administration

what is pre-pack sale?

A

This is where the company has agreed to sell the business and/or its assets and negotiated the sale prior to the company being put into administration

The administrator will then complete the transaction immediately upon appointment

84
Q

what are the advantages of pre-pack sale?

A

o Quick and smooth transfer to new owner. Negotiating a sale whilst in administration is much more complex.
o Can reduce costs of administration process
o Minimise erosion to price due to administration status

85
Q

what are the disadvantages of pre-pack sale?

A

Can damage prospects of unsecured creditors

86
Q

what must happen within the first 8 weeks of administration?

A

Within 8 weeks (this can be ext. by court order), the administrator must send a statement setting out their proposals for administration to:
o ROC
o All creditors
o Shareholders

87
Q

can creditors modify the administrators’ proposals?

A

The creditors can modify the proposals but must make a decision within 10 weeks of the commencement of administration (this can be ext. by court order or the creditors)

88
Q

how can creditors approval for the administrators proposals be obtained?

A

the creditors’ approval can be obtained by either a decision procedure under r15.3 or deemed consent

89
Q

re: administration

what is the ‘decision procedure’?

A

 Voting creditors get 1 vote for each £1 of unsecured debt they are owed
 The proposal will be approved if creditors holding more than 50% in value vote in favour
 However, this will be invalid (i.e. a decision won’t be made) if those voting against it comprise of over half of the total number (i.e. not value) of creditors voting and they are unconnected to the company

90
Q

what must the administrator do during the administration process?

A

provide progress reports

91
Q

how are assets liquidated in administration?

A

Assets are distributed in a similar way to liquidation

92
Q

when can an application to end administration early be made?

A

An application to end administration early can be made to the court if:
o The statutory objective has been met
o The administrator believes the objective(s) cannot be met
o The creditors make an application (who may then present a WUP)

92
Q

what is a company voluntary arrangement?

A

This is an agreement between a company and its creditors, the terms of the agreement are largely for negotiation between parties i.e. creditors accept part payment or ext. the deadline for payment

93
Q

when does administration end?

A

Administration ends automatically after one year (this can be ext.)

An application to end administration early can be made to the court if

94
Q

what is the effect of a company voluntary arrangement?

A

The agreement will be binding if the process has been followed.

If approved, this will bind all unsecured creditors (even if they didn’t vote or voted against).

It will only bind secured or preferential creditors that agree to the proposals.

However, it only applies to past debts and not new ones

95
Q

who can and cannot vote on a CVA?

A

o Unsecured creditors
o Preferential creditors can vote on the CVA
o Secured creditors cannot vote on the CVA (unless part of debt is unsecured)

96
Q

who can propose a CVA?

A

Officer holders can propose a CVA at any time.

Directors can only propose a CVA if the company is not in administration or liquidation.

97
Q

what are the advantages of a CVA?

A

o Cheaper and more straightforward than administration
o Creditors are more likely to get money compared to liquidation

97
Q

when is a CVA commonly used?

A

This is commonly used when the business is fundamentally sound but experiencing cash flow problems

98
Q

what are the disadvantages of a CVA?

A

o No statutory moratorium (but the company could enter into a free-standing moratorium to obtain some breathing space)

98
Q

who oversees the CVA process? wWhat is their title?

A

The process is overseen by an insolvency practitioner (IP)
o Nominee = name of IP before the proposals are approved
o Supervisor = name of IP after the proposals are approved

99
Q

Give an overview of the CVA process

A
  1. Ds nominate an IP and give their draft proposals to the nominee for review
  2. Nominee has 28 days to report to court on whether to put the proposals to creditors and members
  3. Nominee starts a decision procedure (i.e. not deemed consent) to obtain creditors’ approval.
  4. 5 days after the creditors’ decision, there will be a physical SH meeting
  5. Nominee informs court of approval. This can be challenged by creditors.
  6. Nominee becomes supervisors and implements proposals
  7. On completion of CVA, the supervisor provides a final report within 28 days
99
Q

re: CVA process

what is the first role of the nominee and the timescales for this?

A

Nominee has 28 days to report to court on whether to put the proposals to creditors and members

Nominee then starts a decision procedure (i.e. not deemed consent) to obtain creditors’ approval

100
Q

re: CVA process

when will the proposals be approved?

A

The proposals will be approved if:

o at least 75% of the total number of voting creditors agree; and
o at least 50% of the non-connected creditors (the chair of the meeting decides whether they are connected)

101
Q

what is a scheme of arrangement?

A

This is a statutory procedure whereby a company can reach an agreement with its members or creditors. This is very similar to CVAs but the proposals require court approval.

102
Q

who does a scheme of arrangement bind?

A

Once approved by the court, the Scheme of Arrangement becomes legally binding on all creditors and shareholders, including those who didn’t vote in favour

103
Q

when can a scheme of arrangement be used and when is it commonly used?

A

This can be used when a company is solvent or insolvent. Typically used to restructure large companies before a takeover

104
Q

why might a CVA be more advantageous than a scheme of arrangement?

A

Because CVAs are less expensive and less procedurally

105
Q

What is a restructuring plan?

A

This is similar to a scheme of arrangement but it is only for companies in financial difficulties

The key difference is that the court has more scope to approve a plan, even if it is blocked by dissenting votes

106
Q

when does a free-standing moratorium commence?

A

It commences the first day after the documents are file or the order is granted

107
Q

how long does a free-standing moratorium last?

A

20 business days but this can be extended

108
Q

what is the position in relation to extended a free-standing moratorium?

A

it can be extended for a further 20 business days by filing further documents. It can be extended for up to 1 year is creditors agree

109
Q

what protection is offered by a free-standing moratorium?

A

Creditors cannot take action against the company during the moratorium

110
Q

to what debts does a free-standing moratorium apply?

A

This applies only to debts incurred before the moratorium, except:
o Employee wages and monitor’s renumeration

111
Q

what is the position in relation to management of the company during the free-standing moratorium?

A

Directors retain control of the company but their actions are monitored by an IP

112
Q

how is a free-standing moratorium obtained?

A

There is an out of court procedure and court procedure

113
Q

how is a free-standing moratorium obtained using the out-of-court procedure?

A

o Prescribed forms will need to be filed with the court
o It must be confirmed that the moratorium will result in the rescue of a company as a going concern

114
Q

what are the requirements to obtain a free-standing moratorium using the out-of-court procedure?

A

o Must be a UK registered company / LLP
o Must be unable or unlikely to be able to pay its debts
o Must be no outstanding WUPs against them
o Cannot have entered into a moratorium in the last 12 months
o Cannot be an ineligible entity i.e. banks

115
Q

when will an entity need to use the court procedure to obtain a free-standing moratorium?

A

If the entity is subject to a WUP or they are an overseas company they will need to apply to the court

116
Q

what is receivership? What does it involve?

A

This is a remedy available to certain secured creditors to recover outstanding amounts under a loan when the company breaches the loan agreement

It involves the appointment of a receive to take possession of the property subject to the charge.

117
Q

who does a receiver owe their duty to?

A

The duty of the receiver is to the specific charge holder, not all of the company’s creditors

118
Q

what are the types of receivership? when can they be used?

A

o Law of Property Act (LPA) receivers
o Administrative receivers

The company does not need to be insolvent for creditors to use this

119
Q

what is an LPA receiver applicable to?

A

Applicable to fixed charge holders

120
Q

how can an LPA receiver be appointed?

A

The power to appoint is no longer in legislation and must be contained in the charging document itself

120
Q

re: LPA receivership

explain what might happen when the asset is sold

A
  • If the proceeds of sale do not realise enough money to pay the debt, the remaining sum becomes unsecured
  • If it realises more, the money will be available for unsecured creditors
121
Q

what is an administrative receiver applicable to?

A

Available to floating charge holders whose charge is over the whole (or most) of the company.

These are only available where the floating charge was created before 15 September 2003 (there are some limited exceptions)

122
Q

what will the office holder need to prove for a wrongful trading claim?

A

The officer holder will need to prove that at some point before the commencement of winding up, D knew (or ought to have known) that there was no reasonable prospect that the company would avoid going into insolvent liquidation

122
Q

when can an administrative receiver be appointed?

A

The charge holder can appoint a receiver at any time in accordance with the terms of the charging document. It will likely list ‘triggering events’.

123
Q

what happens when an administrative receiver is appointed?

A

The receiver will then take charge of the company to sell assets and repay the money owed to the creditor and their fees

Upon completion, management goes back to Ds but usually this results in liquidation

124
Q

what is a defence to a wrongful trading claim?

A

The director will have a defence if they can prove they took every step with a view to minimising the potential loss to creditors as the director ought to have taken

124
Q

what claims can be brought against directors of insolvent companies?

who can bring these claims and what is the outcome if successful?

A
  1. wrongful trading
  2. fraudulent trading
  3. misfeasance

These claims can only be bought by the office holder (and others in misfeasance claims) in insolvent liquidation/administration

If successful, the director will be ordered to make a personal contribution to the company’s assets

125
Q

what will the court consider when evaluating a defence to a wrongful trading claim?

A

The court will look at:
 The facts D ought to have known / ascertained;
 The conclusions D ought to have reached; and
 The steps D ought to have taken

126
Q

how is the court limited in terms of any order it can make? What is the effect of this? Give an example.

A

The court cannot make an order if the company is not in a worse financial position than at the point of the initial realisation

The effect of this is that the company can continue trading so long as it does not trade in a way that causes a loss. This should be exercised with caution to avoid any possible liability.

Example - a company may decide to continue trading if they are about to enter into an unusually large contract which will bring in money for creditors.

126
Q

on what basis is a defence to wrongful trading assessed?

A

This will be assessed on an objective and subjective basis:
 Objective - the general knowledge, skill and experience reasonably expected of any D
 Subjective - the general knowledge, skill and experience of that specific D (this can increase the standard expected but not lower it)

127
Q

how can directors reduce the risk of a wrongful trading claim?

A

as soon as Ds become aware that the company is in financial difficulty, they should take external professional advice

If it appears there is a risk of liquidation, Ds should:
o Seek professional advise from a solicitor/accountant
o Limit spending and minimise further purchases on credit
o Collect debts
o Frequently produce management accounts to monitor the situation
o Raise concerns with the BOD
o Keep full and proper records of all decisions
o Assess D’s salaries and other benefits and if these should be paid
o Take external professional advice

127
Q

when will a director be liable for fraudulent trading?

A

a director will be liable for fraudulent trading if, in the course of winding up the company, it appears the company’s business was being carried on with the intent to defraud creditors

128
Q

who can bring a claim in misfeasance?

A

o A liquidator
o The Official Receiver
o A creditor
o Contributory of the company’s capital

128
Q

what is the test for fraudulent trading?

A

The court have developed a two stage test:
o What was Ds actual knowledge or belief of the facts? (subjective)
o Was D’s conduct dishonest, applying standards of ordinary decent people?

These claims are rare as they are hard to evidence

128
Q

who can a claim in misfeasance be brought against?

A

o Current and past officers of the company
o Former liquidator or administrator
o Anyone who is or has taken part in the promotion, formation and management of the company

129
Q

to be guilty of misfeasance, what must the respondent have done?

A

The respondent must have done one of the following in the course of winding up:
o Misapplied, retained or become accountable for company money or property
o Breached a fiduciary or other duty owed to the company
o Otherwise been guilty of misfeasance (misfeasance = a failure to properly discharge one’s duties)

130
Q

what are examples of misfeasance claims?

A

o Ds making secret profits
o Ds granting preferences to creditors

131
Q

what powers does the court have in relation to misfeasance claims?

A

o Repay, restore or account for the money / property with an interest rate as the court sees just; or
o Contribute to the company’s assets as the court sees just

Business Law & Practice (17 decks)

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