Insolvency Flashcards
1
Q
S123 IA 1986 a company is insolvent when….
A
Statutory demand for £750+ and don’t pay or make an arrangement within 21 days
Creditor obtained judgement and tried to enforce it unsuccessfully
Cash flow test- cannot pay debts as they fall due
Balance sheet test - liabilities exceed assets
2
Q
Options for secured creditors
A
Fixed charge - LPA receiver
Floating charge before 15.09.13 administrative recover
Floating charge after 15.09.13 administrator
3
Q
2 new options created by the corporate Insolvancy and governance act 2020
A
Moratorium
Restructuring plan
4
Q
What is Insolvancy
A
Inability to pay debts
5
Q
Aims of corporate Insolvancy law
A
Save company
Control D
Protect creditors
6
Q
Aims of personal Insolvancy law
A
Protect creditors
Encourage entrepreneurs
7
Q
What is liquidation
A
Winding up
8
Q
What happens to D during liquidation
A
Ds powers cease and liquidator runs company
9
Q
3 types of liquidation
A
Compulsory - third party petitions at court on grounds company cannot pay debts. Establish a s123 ground
Creditors voluntary - insolvent company under pressure from creditors
Members voluntary - solvent company wants to end
10
Q
Process for compulsory liquidation
A
Winding up petition
Ground- cannot pay debts. S123
Cannot proceed if genuine and substantial dispute about money owed
If can pay in reasonable period may adjourn
Official receiver becomes liquidator
Or private practitioner if enough funds
11
Q
Claims a liquidator can make to maximise assets for creditors
A
Avoidance of certain floating charges Preference Transactions at an undervalue Transactions defrauding creditors Extortionate credit transactions
12
Q
What does liquidator do
A
Sell assets
Pays creditors
Apply for release
13
Q
When does liquidation end
A
Liquidator applies for release
3 months later registrar of companies dissolved company
14
Q
Duty of liquidators
A
Maximise assets for creditors
15
Q
What happens to Ds powers in compulsory liquidation
A
Their appointments are terminated
16
Q
Who runs a company during liquidation
A
Liquidators
17
Q
Liquidators powers
A
Collect and distribute assets Carry on company business Commence and defend litigation Investigate past transactions Investigate Ds conduct Anything necessary to facilitate winding up of the company
18
Q
Extortionate credit transaction - corporate liquidations or administration
A
L or A can challenge transaction made in 3 years prior to L or A
Grossly exorbitant payments or breaches fair dealing
19
Q
What is a transaction defrauding creditors
A
Transaction at an undervalue which company entered into to put assets out of reach of creditor
20
Q
Is there a time limit to challenge a transaction defrauding creditors
A
No
21
Q
Who can challenge a transaction defrauding creditors
A
A. L or creditor
22
Q
Do you need court permission to challenge a transaction defrauding creditors
A
Yes
23
Q
Consequences of successfully challenging a transaction defrauding creditors
A
Return property
Discharge security
24
Q
What is a transaction at an undervalue
A
Gift or consideration significantly lowers than consideration given by company
25
Requirements to challenge a transaction at an undervalue
2 years ending in Insolvency
Insolvent at time or as a result
Insolvency presumed if connected person
26
Defence to transaction at an undervalue
Entered into in good faith
To carry on business
Reasonable grounds for believing it would benefit company
27
What is a preference
Where company puts person in better position than they otherwise would be in it company went into L or A
28
Requirements to challenge a preference
```
2 years ending in insolvency - connected person
6 months - unconnected person
Insolvent at time or as a result
No presumption of insolvency
Desire to prefer not just intention
Connected person presume desire
```
29
Consequences of successfully challenging a preference
Release security
Return property
Transfer proceeds of sale of property that formed part of deal
30
When can a floating charge be avoided
Charge is void if it was granted without company receiving fresh consideration in exchange for security
2 years ending in insolvency if connected person
12 months if unconnected person
If unconnected must be insolvent or insolvent as a result. Not if connected
31
How does L or A avoid a floating charge
L or A writes to charge holder saying it is invalid
| If charge holder tries to enforce it L or A can get injunction
32
Who is a connected person
D
Shadow D
Relative or business associate of D or shadow D
Associate of company (company in same group or controlled by same D)
33
Order of payment in liquidation
```
Fixed
Expenses of winding up
Preference - rank and abate equally
Floating
Unsecured - rank and abate equally
S
```
34
Meaning of rank and abate equally
All creditors in that category get same percentage of the outstanding debt they are owed
35
What is proving the debt
Liquidators send form to unsecured creditors which they complete with demands of debt owed to them
Liquidators approve or reject the claim
36
What are preferential debts
Wages of employees in past 4 months up to £800
Employee accrued holiday pay
HMRC behind employees - taxes company collect on HMRC behalf but not taxes company owes directly to HMRC
37
What if there is a shortfall once fixed charge asset is sold
The charge holder becomes an unsecured creditor for the remainder of the outstanding debt
38
What is ring fencing
Setting aside a portion of the available money for floating charge holders and unsecured creditors
39
Which floating chargers benefit from ring fencing
Those created on or after 15.09.13
40
How much money is ring fenced
50% of first £10k of proceeds of property subject to floating charge
20% of remaining proceeds
Up to £800k
Or £600k for charges created before 6.4.20
Unless charge created after that ranks equally or in priority to pre-April charge then £800k applies to both charges
41
Alternatives to liquidation for corporate Insolvancy
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Administration
Company voluntary arrangement
Scheme of arrangement
Restricting plans
A free standing memorium
Informal agreements with creditors
```
42
What is a restructuring plan
Company proposed a plan to creditors and members
43
What is a scheme of arrangement
Restructure large companies
Require 2 court hearings and meeting of S with creditors
Can be entered into at any time. No need to be insolvent
44
What is a free standing memorium
Sought by D by making a filing at court
| No litigation for period of time
45
Are informal agreements with creditors binding
No
46
What is pre-packaged administration
Where administrator sells assets and business straight away often to management of company
As a going concern
47
Are unsecured creditors consulted when a pre packaged administration is planned
No
48
What is administration
When administrator makes changes to company to improve finances or gets it in position for sale
49
Who does administrator have a duty to
Creditors
50
Primary objective of an administrator
Rescue company as a going concern
| If not possible then try to get better result for creditors
51
During administration there is a statutory memorium. What does this mean
No one can continue or start legal action against company, enforce judgement or issue a winding up petition without administrators consent
52
Who do receivers have a duty to
The person who appointed them
53
Who do administrative receivers have a duty to
Primary duty to those who appointed them
| Secondary duty to others
54
2 ways to commence administration
Out of court
| In court
55
When will court grant administration
If company is likely to become unable to pay debts and it will achieve a better result for creditors than liquidation
56
What to do after administration order is made using court route
Applicant must notify anyone entitled to appoint administrative receiver And any QFCH entitled to appoint administrator
57
Process for commencing administration using out of court route
D or company serve notice at court, on QFCH and on any lender entitled to appoint administrative receiver
D must declare company cannot pay debts and is not in liquidation
Moratorium comes into effect
58
Can out of court administration be used if a winding up petition has already been presented at court
No D must instead apply for an order than the company go into administration instead of winding up
59
Can any QFCH appoint an administrator
They must check if any other QFCH has priority
| Must notify anyone with priority to get them the first chance to appoint an administrator
60
What must a lender do to appoint an administrator
File notice of appointment at court including a statutory declaration
61
What is a QFC
States that para 14 of sch B1 to IA 1986 applies
Charge docs allows holder to appoint administrator or administrative receiver
And
The charge doc related to whole or substantially the whole of company property or does so when added to other security held by same lender
62
When does moratorium come into effect
Once administration has started
63
Steps of an administrator
Put forward proposals for company to creditors
Creditors can ask for info and amend proposals
Proposals approved
64
When are administrator proposals approved
Majority of creditors present and voting are in favour
And
Those who vote against aren’t more than 50% in value of the creditors who are unconnected to the company
65
When does administration end
One year from taking effect - automatic
Can be Extended
Or early by application to court if objective achiever or if administrator believes objective cannot be achieved or by application of creditor
Creditor can then present winding up petition
66
Administrators statutory powers
Anything necessary or expedient for management of affairs, business and property of company
Remove and appoint D
Paying creditors (need court permission to pay unsecured creditor)
Calling meetings of S or creditors
Dealing with property (court permission to deal with fixed charge property)
Investigate and challenge past transactions
Commence proceedings against D
67
What is a company voluntary arrangement
A written agreement binding all unsecured creditors and secured creditors who agree
Agree to wait longer or accept part payment
68
Who supervises a CVA
Insolvency practitioner
69
Does CVA apply to past and future debts
Only past debts
| Not future costs
70
Who is a CVA available to
L, A or company
71
Special entitlement for small companies who enter into CVA
They get a moratorium of 28 days after filing CVA at court
72
Who must agree to a CVA
75% or more in value of company creditors
And
50% of more of non connected creditors
Secured creditor cannot vote except if they are also unsecured creditors
Chair of CVA meeting decides who is connected
73
When is an individual insolvent
| S267IA
Cannot pay a debt due now
Or
No reasonable prospect of paying a debt due in the future
74
What is bankcruptcy
when debtors assets are passed to trustee in bankruptcy who pays as many debts as possible
Individual is subject to restrictions
75
3 ways a creditor can prove an individual is insolvent
Serve statutory demand for £5k or more and after 3 weeks it isn’t paid or set aside
Serve statutory demand for future debt of £5k or more and after 3 weeks haven’t set it aside or shown reasonable prospect of being able to pay
Obtain court judgement for £5k or more and attempt execution unsuccessfully
76
When is bankruptcy discharged
1 year later
77
How are student loans treated differently during bankruptcy
Student loans must be paid in full even after bankruptcy is discharged
78
How is bankruptcy commenced
Individual applies
Creditor can petition at court and serve it on debtor if owed £5k or more - show cannot pay or not reasonable prospect using one of three methods in s268
79
Options for an insolvent individual
Individual applies for bankruptcy
Individual voluntary agreement
Debt relief order
Creditor petitions for bankruptcy
80
Can creditor petition for individual bankruptcy of debtor if they are owed less than £5k
Creditors can join together if owed £5k together
81
How a creditor petitions at court for individual bankruptcy
Creditor can petition at court and serve it on debtor if owed £5k or more - show cannot pay or not reasonable prospect using one of three methods in s268
Pay deposit and court fee
82
How an individual applies for their own bankcruptcy
Apply online
Adjudicator decides within 28 days or 42 if more info needed
Ground is unable to pay debts
Pay deposit for OR and application fee
83
Who acts as a trustee in bankruptcy
Official receiver
| Creditor can appoint private trustee if enough funds
84
What must debtor provide OR with to assist with bankruptcy process
Statement of affairs detailing recent transactions
85
How is property transferred from debtor to OR
It happens automatically
86
How is the trustee in bankruptcy released at the end
Must apply to be released
87
What does a trustee in bankruptcy do
Challenge transactions
Sells assets
Pay debts
88
Order of distribution in bankruptcy
```
Secured creditors
Costs of bankruptcy
Preferential debts
Unsecured creditors
Postponed creditors (spouse)
```
Within each category they rank and abate equally
89
What assets can a debtor keep so trustee in bankcruptcy cannot sell them
Assets for day to day living, work and everyday household items
Can replace expensive item with cheaper version
Salary
90
Income payments agreement
Can be voluntary or through a court order
Debtor gives bankruptcy trustee some of salary
Lasts 3 years
91
Can a trustee in bankruptcy sell a debtors house
If someone else is in it then will need a court order
92
Personal insolvency alternatives to bankruptcy
IVA
Negotiate with creditors
Debt relief order
93
What is an IVA
Binding agreement between unsecured creditors setting out how much each creditor will get
94
Who supervises an IVA
Insolvency practitioner
95
Can a debtors transactions be set aside using an IVA
No
96
Steps to get an IVA
Debtor gives nominee statement of affairs
Applies to court for interim order to get moratorium for 14 days
Nominee tells court of creditors decision making process should take place
If it does need 75% of creditors in value to agree at least 50% of which in value are not associated to debtor
97
Who is bound by IVA
All unsecured creditors
| Only binds secured or preferential creditors if they consent
98
Can creditors still petition for bankruptcy if there is an IVA
Yes if debtor gave false info or didn’t cooperate
99
Are negotiations with creditors binding
No
100
What is a debt relief order
When the debtors assets are very low
OR makes order
Debtor is protected from enforcement action by creditors
12 months later mostly free from debt
Same restrictions as bankruptcy apply
Debtor must cooperate with OR and pay creditors if finances improve
101
How long can restrictions under a debt relief order last
Up to 15 years if debtor is culpable or dishonest
| Can get extra period by OR applying for debt relief restrictions order against debtor
102
Do all bankruptcy restrictions end when bankruptcy is discharged
No necessarily
| Property is not returned to individual. Must help trustee sell it
103
Is bankruptcy always discharged after 1 year
Normally but could be suspended if individual is uncooperative or dishonest
104
What are bankruptcy restriction orders and bankruptcy restriction undertakings
Order is for dishonest, negligent or reckless bankrupt. Order made by court. Last 2-15 years
Undertaking is voluntary
Neither can be D, MP or IP, and cannot get credit over £500 without disclosing order
105
Who does a trustee in bankruptcy owe a duty to
Creditors
106
What business restrictions apply to debtor in bankruptcy
Cannot be a D
Need court permission to manage, prompt or form a company
Disclose bankruptcy for credit over £500
Cannot trade under different name without disclosing bankruptcy
Partnership ends
107
What personal restriction apply to debtor in bankruptcy
Need SRA permission to practice as solicitor
| Disclose bankruptcy for credit over £500
108
Claims / actions trustee of bankruptcy take take
Disclaim onerous property - anyone who suffers loss becomes unsecured creditor
Set aside transactions at an undervalue - 5yrs, no need to show insolvency
Set aside preferences - presumption of intention to prefer if relative of business associate
6m or 2yrs for connected person
Insolvent at time or as a result
Set aside transactions defrauding creditors
Avoid extortionate credit transactions
3 years, grossly exuberant terms or breach fair dealing
