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UK Business Law > Financial Matters > Flashcards

Financial Matters Flashcards

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1
Q

What is a debenture?

A

A document issued by the company usually showing a charge on company property in respect of a loan to the company

Debenture stock is loan capital and can be fixed with a redemption date or perpetual

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2
Q

How does a debenture act as a security?

A

The charge is the security offered by the company for the loan - in the event of the debt not being repaid, the lender may realise the charged assets in order to recover what is owed

The power to borrow is normally stated in the company’s articles

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3
Q

What types of debentures exist?

A
  • Debentures secured on a fixed charge
  • Debentures secured on a floating charge
  • Unsecured debentures

Unsecured credit is not covered by debentures

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4
Q

How many lenders can debenture stock raise money from?

A

Debenture stock can raise money from a number of lenders, each of whom takes a holding of a specified value in a large loan: the lenders hold the debenture through a trust

Public companies can offer debentures to the public

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5
Q

What is the case of Re Yorkshire Woolcombers’ Association [1902]?

A

YWA borrowed money from various guarantors. A trust deed said it was giving a floating charge to the guarantors to secure the money. The guarantors wanted repayment and made another deal charging doer the company’s book debts as indemnity and specific security.

Claimant appointed a receiver to call in the book debts of £71,000 and argued that the original trust deed was void as the floating charges had not been registered as they were meant to be .860 Companies Act 2006).

Held - the charge was floating and so void

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6
Q

How did the judge in Re Yorkshire Woolcombers’ Association [1902] 2 Ch 284 define floating charges?

A
  • A class of assets
  • Which in the ordinary course of business will change from time to time
  • The company can continue to carry on business utilising that class of asset
  • Until Crystallisation which happens automatically
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7
Q

What is crystallisation?

A
  • If a receiver is appointed
  • The company goes into liquidation
  • The company ceases to carry on business
  • When stipulated in the contract

All charges must be registered and a list of charges kept at the registered office

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8
Q

What is the priority of charges?

A
  • Fixed charges have priority from the time that they are created; floating charges usually do (so the firm in time take priority over later charges on the same asset)
  • Floating charges only attach to property from the point of crystallisation
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9
Q

What is a fixed charge?

A

Similar to a mortgage, the company will not be able to change or dispose of the charged property without the consent of the debenture holder.

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10
Q

What is the case of Re Brightlife Ltd [1986] Ch 200?

A

Concerns the conversion of a floating charge into a fixed charge - crystallisation. It held that an automatic crystallisation clause was part of the parties’ freedom of contract. The floating charge had crystallised a week before and took priority over other debts.

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11
Q

What is personal bankruptcy?

A

If a partner or a sole trader is unable to pay his debts as they fall due, he is made bankrupt

Governed by the insolvency act 1986

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12
Q

What does the Insolvency Act 1986 state?

A
  • Debtor must be domiciled in England or Wales at the time the creditors petition is presented
  • The debt which forms the basis of the petition must be for liquidated sum
  • The debt must amount to at least £750
  • The debt must be unsecured
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13
Q

What is the procedure for personal bankruptcy?

A
  • Service of statutory demand
  • Issue of a creditors’ permission - a creditor must prove you are unable to pay your debts and serves a permission on the court
  • Court hearing takes place and an examination may take place
  • A bankruptcy order is made and the official receiver becomes receiver and manager of the estate, debtor will become an undischarged bankrupt
  • He or she will become deprived of their ownership of property, assets and any income that exceeds what is necessary to cover any essential living costs
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14
Q

What are the advantages of personal bankruptcy?

A
  • Frees the bankrupt from the burden of their debts

- For the creditors it allows an investigation into the reasons for the debtor’s insolvency

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15
Q

What are the disadvantages of personal bankruptcy?

A
  • Loss of control of your assets
  • Cannot obtain credit former than £500 without permission from the lender
  • Some professions will preclude you from being a member
  • You cannot act as a company director
  • You cannot trade under any other name without informing all persons
  • Your credit will be affected for many years after annulment
  • Most bankruptcies will be discharged within 12 months
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16
Q

Who can discharge criminal bankruptcies?

A

Criminal bankruptcies can only be discharged by order of the court. Bankruptcy restriction notices may be sought.

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17
Q

What are the alternatives to bankruptcy?

A

Individual insolvency :
- Informal arrangements - family; not legally binding

  • Administration orders - at least one creditor can obtain a court judgement, regular payments to the court to pay your creditors, cannot have debts more than £5000
  • Individual Voluntary Agreement (IVA): allows debtors to agree with creditors by an arrangement to satisfy their claims through full or part payment, apply through the court and assisted by an insolvency practitioner
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18
Q

What are the advantages of IVAs?

A
  • You have more of a say in how the assets are dealt with (E.g you may be able to retain your home)
  • You avoid restrictions which apply to a bankrupt
  • Costs are likely to be less than bankruptcy
  • Partnerships can use Ivas, either personally or as a partnership
19
Q

What is the IVA process?

A
  • Identify and appoint an insolvency practitioner who applies to the court for an interim order
  • This prevents creditors from presenting a bankruptcy petition
  • IP presents you proposal to the court and they decide if a meeting is called
  • If meeting called, all editors who are served notice will be bound by it; they vote if they will accept it - need 75%
20
Q

What are company insolvency proceedings?

A

Winding up/liquidation = the life of the company is terminated.

Formal and strictly regulated procedure. Company’s assets are realised and distributed to creditors and members.

Not all winding up procedures result in insolvency although most that go into liquidation are insolvent

Not all insolvency proceedings result in winding up

21
Q

Which legislation governs company insolvency proceedings?

A
  • Companies Act 2006
  • Company Directors’ Disqualification Act 1986
  • Insolvency Acts 1986 and 2000
22
Q

How does the insolvency act 1986 divide up the procedure?

A
  • Members voluntary winding up
  • Creditors’ voluntary winding up
  • Compulsory winding up order by the court
23
Q

Who are the personnel involved in insolvency proceedings?

A

Official receiver - officer of the court, investigates cause of insolvency, acts as a trustee in bankruptcy and liquidator in compulsory liquidations

Insolvency Practitioners (licensed), acts on behalf of the company but looks after creditors interests, must be qualified

Administrative receiver or administrator - not a liquidation procedure

24
Q

What is members’ voluntary winding up?

A

Not an insolvency procedure:

  • Members adopt a resolution to liquidate
  • Must have a declaration of solvency by the directors
  • Qualified insolvency practitioner must be appointed liquidator by the members
  • No involvement is required by the court
25
Q

What is creditors’ voluntary winding up?

A
  • Insolvency procedure initiated by members adopting a resolution to liquidate without having a declaration of solvency by the directors
  • Unsecured creditors may appoint a qualified insolvency practitioner
  • A liquidation committee representing the creditors may be appointed to supervise the liquidator
  • Involvement of the court is not generally required
26
Q

What is liquidation by order of the court?

A

An application by any creditor, any contributory, the company, the directors, a supervisor of voluntary arrangement, a justices’ clerk, the Secretary of State or official receiver

Under the insolvency acts:

  • The company is unable to pay its debts or
  • It is just and equitable to wind up the company
27
Q

What are the liquidators duties?

A

To secure the assets of the company: must gather the assets, notify contributories and may bring or defend any legal proceedings in the name of the company, carry on the business, make arrangement with creditors, or debtors or the company

To achiever a fair distribution among creditors: distribute assets in accordance with priorities

To investigate the causes of insolvency

28
Q

Who will initially be the liquidator?

A

The official receiver will initially be the liquidator but an insolvency practitioner may be appointed liquidator where there are substantial assets.

29
Q

What is the order of priority for fair distribution among creditors?

A

i. Debentures secured on a fixed charge
ii. Liquidation costs
iii. Preferential creditors* [now wages, and related debts in respect of employees’ pensions, holiday funds etc.]
iv. Debentures secured on a floating charge*
v. Unsecured creditors
vi. Repay money owed to members
vii. Repay capital
viii. Distribute further sums to members pari passu
(i) [*subject to changes introduced in the Enterprise Act 2002]

30
Q

How are floating charges created after 15 September 2003 subject to “top slicing” under the Enterprise Act 2002?

A

Generally 50% of
the first £10,000, and 20% of the remainder must be set aside from the
company’s assets to meet claims by unsecured creditors, once the creditors who have priority over floating charges have been paid

31
Q

What might happen when the liquidator investigates the causes of insolvency?

A

Promoters, officers and directors of a company may be investigated by the official receiver and/or liquidator and may be required to appear in court for a public examination in compulsory liquidation.

If it is found that
fraudulent or wrongful trading has taken place and persons found liable may be made to contribute to assets in liquidation and/or be prosecuted in criminal law.

A person may also be disqualified by the courts from being a director or officer of a company.

32
Q

What is administration?

A

A means of safeguarding the continued existence of business enterprises in financial difficulties, rather than merely ensuring the payment of creditors.

Administration was first introduced in the IA 1986

The aim of the administration order is to save the company, or at least the business, as a going concern, by taking control of the company out of the hands of its directors and placing it in the hands of an administrator

Alternatively, the procedure is aimed at maximising the realised value of the business assets.

33
Q

What is the new scheme that the Enterprise Act 2002 has introduced?

A

Limits the powers of floating charge holders to appoint administrative receivers, who’s function had been essentially to secure the interest of the floating charge holder who had appointed them, rather than the interests of general creditors

Floating charge holders no longer have the right to appoint administrative receivers, but must now make use of the administration procedure as provided in that Act.

As compensation for this loss of power, the holders of floating charges are given the right to appoint the administrator of their choice.

34
Q

When is the administrator is only permitted to realise the value of property?

A

Where it is not reasonably practicable to rescue the company as going concern and he thinks that he cannot achieve a better result for the creditors as a whole than would be likely if the company was wound up. And if he does not unnecessarily harm the interests of the creditors of the company as a whole

35
Q

Who can make an application to the court for an administration order?

A
  • A company
  • The directors of a company, or
  • Any of its creditors
36
Q

How can out of court applications for administration be made?

A

The Enterprise Act allows the appointment of an administrator without the need to apply to the court for approval. Applications can be made by the company or its directors, but may also be made by any floating charge holder.

37
Q

What are the administration powers?

A
  • Do anything necessary for the management of the company
  • Remove or appoint directors
  • Pay out monies to secured or preferential creditors without the need to seek the approval of the court
  • Pay out monies to unsecured creditors with the approval of the court
  • Take custody of all property belonging to the company
  • Dispose of company property
38
Q

What do the administration powers include?

A

Property which is subject to both fixed and floating charges, which may be disposed of without the consent of the charge holder, although they retain first call against any money realised by such a sale

39
Q

How long is the administration period?

A

The administration period is usually 12 months, although this may be extended by six months with the approval of the creditors, or longer with the approval of the court.

A notice is sent to creditors when the administrator concludes the that their purpose has been achieved

This notice terminates the administrators appointment

40
Q

What is a company voluntary agreement?

A

An insolvency procedure; it is not liquidation.

Agreed by 75% of company’s unsecured creditors voting at a Creditors’ Meeting proposed by the liquidator, administrator, or directors of the company, and approved by the members to proceed by way of:

  • Composition
  • Arrangement

A moratorium exists for small companies

41
Q

What is a scheme of arrangement in terms of CVA?

A

S.895 CA 2006

  • Between the company and its creditors (or any class of them)
  • Between the company and the shareholders (of any class of them)
  • Must be approved by 7% of votes cast of different classes of creditors or members and be approved by the court
42
Q

What is the conduct in insolvency?

A

Voidable transactions defeating the ‘pari passu’ principle (equally and without preference)

  • Transactions at undervalue (under 24 months)
  • Transactions Defrauding Creditors (up to 12 or 24 months)
  • Preferences (up to 6 or 24 months) Re: Kushler [1943]
43
Q

What is the case of Re: Kushler [1943]?

A

Company advised that it was insolvent.

Company passed resolution to enter voluntary winding up process

Before this, the overdraft was repaid as it was secured by personal guarantee of the director and two bills were paid despite pressure from a major creditor

Held - the credit paid into the bak were giving the bank a preference over other creditors and the bank had to refund the liquidator of the amounts of credits concerned

UK Business Law (8 decks)

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