Insolvency Flashcards
S123 IA 1986 a company is insolvent when….
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
Options for secured creditors
Fixed charge - LPA receiver
Floating charge before 15.09.13 administrative recover
Floating charge after 15.09.13 administrator
2 new options created by the corporate Insolvancy and governance act 2020
Moratorium
Restructuring plan
What is Insolvancy
Inability to pay debts
Aims of corporate Insolvancy law
Save company
Control D
Protect creditors
Aims of personal Insolvancy law
Protect creditors
Encourage entrepreneurs
What is liquidation
Winding up
What happens to D during liquidation
Ds powers cease and liquidator runs company
3 types of liquidation
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
Process for compulsory liquidation
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
Claims a liquidator can make to maximise assets for creditors
Avoidance of certain floating charges Preference Transactions at an undervalue Transactions defrauding creditors Extortionate credit transactions
What does liquidator do
Sell assets
Pays creditors
Apply for release
When does liquidation end
Liquidator applies for release
3 months later registrar of companies dissolved company
Duty of liquidators
Maximise assets for creditors
What happens to Ds powers in compulsory liquidation
Their appointments are terminated
Who runs a company during liquidation
Liquidators
Liquidators powers
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
Extortionate credit transaction - corporate liquidations or administration
L or A can challenge transaction made in 3 years prior to L or A
Grossly exorbitant payments or breaches fair dealing
What is a transaction defrauding creditors
Transaction at an undervalue which company entered into to put assets out of reach of creditor
Is there a time limit to challenge a transaction defrauding creditors
No
Who can challenge a transaction defrauding creditors
A. L or creditor
Do you need court permission to challenge a transaction defrauding creditors
Yes
Consequences of successfully challenging a transaction defrauding creditors
Return property
Discharge security
What is a transaction at an undervalue
Gift or consideration significantly lowers than consideration given by company
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
Defence to transaction at an undervalue
Entered into in good faith
To carry on business
Reasonable grounds for believing it would benefit company
What is a preference
Where company puts person in better position than they otherwise would be in it company went into L or A
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
Consequences of successfully challenging a preference
Release security
Return property
Transfer proceeds of sale of property that formed part of deal
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
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
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)
Order of payment in liquidation
Fixed Expenses of winding up Preference - rank and abate equally Floating Unsecured - rank and abate equally S
Meaning of rank and abate equally
All creditors in that category get same percentage of the outstanding debt they are owed
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
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
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
What is ring fencing
Setting aside a portion of the available money for floating charge holders and unsecured creditors
Which floating chargers benefit from ring fencing
Those created on or after 15.09.13
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
Alternatives to liquidation for corporate Insolvancy
Administration Company voluntary arrangement Scheme of arrangement Restricting plans A free standing memorium Informal agreements with creditors
What is a restructuring plan
Company proposed a plan to creditors and members
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
What is a free standing memorium
Sought by D by making a filing at court
No litigation for period of time
Are informal agreements with creditors binding
No
What is pre-packaged administration
Where administrator sells assets and business straight away often to management of company
As a going concern
Are unsecured creditors consulted when a pre packaged administration is planned
No
What is administration
When administrator makes changes to company to improve finances or gets it in position for sale
Who does administrator have a duty to
Creditors
Primary objective of an administrator
Rescue company as a going concern
If not possible then try to get better result for creditors
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
Who do receivers have a duty to
The person who appointed them
Who do administrative receivers have a duty to
Primary duty to those who appointed them
Secondary duty to others
2 ways to commence administration
Out of court
In court
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
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
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
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
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
What must a lender do to appoint an administrator
File notice of appointment at court including a statutory declaration
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
When does moratorium come into effect
Once administration has started
Steps of an administrator
Put forward proposals for company to creditors
Creditors can ask for info and amend proposals
Proposals approved
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
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
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
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
Who supervises a CVA
Insolvency practitioner
Does CVA apply to past and future debts
Only past debts
Not future costs
Who is a CVA available to
L, A or company
Special entitlement for small companies who enter into CVA
They get a moratorium of 28 days after filing CVA at court
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
When is an individual insolvent
S267IA
Cannot pay a debt due now
Or
No reasonable prospect of paying a debt due in the future
What is bankcruptcy
when debtors assets are passed to trustee in bankruptcy who pays as many debts as possible
Individual is subject to restrictions
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
When is bankruptcy discharged
1 year later
How are student loans treated differently during bankruptcy
Student loans must be paid in full even after bankruptcy is discharged
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
Options for an insolvent individual
Individual applies for bankruptcy
Individual voluntary agreement
Debt relief order
Creditor petitions for bankruptcy
Can creditor petition for individual bankruptcy of debtor if they are owed less than £5k
Creditors can join together if owed £5k together
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
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
Who acts as a trustee in bankruptcy
Official receiver
Creditor can appoint private trustee if enough funds
What must debtor provide OR with to assist with bankruptcy process
Statement of affairs detailing recent transactions
How is property transferred from debtor to OR
It happens automatically
How is the trustee in bankruptcy released at the end
Must apply to be released
What does a trustee in bankruptcy do
Challenge transactions
Sells assets
Pay debts
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
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
Income payments agreement
Can be voluntary or through a court order
Debtor gives bankruptcy trustee some of salary
Lasts 3 years
Can a trustee in bankruptcy sell a debtors house
If someone else is in it then will need a court order
Personal insolvency alternatives to bankruptcy
IVA
Negotiate with creditors
Debt relief order
What is an IVA
Binding agreement between unsecured creditors setting out how much each creditor will get
Who supervises an IVA
Insolvency practitioner
Can a debtors transactions be set aside using an IVA
No
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
Who is bound by IVA
All unsecured creditors
Only binds secured or preferential creditors if they consent
Can creditors still petition for bankruptcy if there is an IVA
Yes if debtor gave false info or didn’t cooperate
Are negotiations with creditors binding
No
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
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
Do all bankruptcy restrictions end when bankruptcy is discharged
No necessarily
Property is not returned to individual. Must help trustee sell it
Is bankruptcy always discharged after 1 year
Normally but could be suspended if individual is uncooperative or dishonest
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
Who does a trustee in bankruptcy owe a duty to
Creditors
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
What personal restriction apply to debtor in bankruptcy
Need SRA permission to practice as solicitor
Disclose bankruptcy for credit over £500
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
