Insolvency

Question 1

How can a creditor commence wind-up proceedings?

Answer 1

Must prove the company is insolvent to be able to issue a winding up petition.

A creditor can prove insolvency by either:

1. serving a statutory demand which is not paid within 21 days in respect of a debt of £750 or more, or
2. by obtaining a judgment and attempting to execute the judgment but the debt is not fully satisfied.

Creditor would then apply to court to petition liquidation. BUT court may dismiss petition if company can convince the court that it may recover financially.

Question 2

Who can make petition for bankruptcy order?

Answer 2

1. Debtor can apply online
2. One or more unsecured creditors who is/are owed at least £5,000 combined can present a petition for an order of bankruptcy to the bankruptcy court.
3. Supervisor of IVA can petition for debtor’s bankruptcy IF debtor is on breach of the IVA.

Question 3

What is the position of an unregistered charge?

Answer 3

A charge which has not been validly registered at Companies House is void against other creditors.

Question 4

What is the time limit for preference payments to be clawed back

Answer 4

1. 6 months from start of insolvency OR
2. 2 years if relates to a connected person (eg director)

Question 5

What is a preference?

Answer 5

A preference arises when a debtor does something to put one creditor ahead of others in insolvent liquidation or administration with intent to do so.

cf. Making a new contract with a new supplier to save money on supplies would not be a preference.

Question 6

What are pre-emption rights, how and when are they applied?

Answer 6

When a company allots ordinary shares after the initial allotment, existing ordinary shareholders have a right to purchase a portion of the shares to maintain their proportional ownership if the shares are to be issued for cash (**not for property**)

NB - Only ordinary shareholders have preemption rights.

Preemption right will be alloted according to current portion of shares held.

Can remove pre-emption right by special resolution

Question 7

When should a private company file accounts?

Answer 7

No later than nine months after the relevant accounting reference period.

Question 8

What is a transaction at an undervalue?

Answer 8

A transaction at an undervalue arises when a company makes a gift or otherwise enters into a transaction selling company property for significantly less than the property’s market value within 2 years of company’s insolvency or within five years of individual’s bankruptcy

Question 9

What 5 insolvency options are available to Companies?

Answer 9

1. Receivership - Enables creditors to recover what is owed solely to them;
2. Administration and company voluntary arrangements - these seek to rescue the company
3. Restructing plan - allows company to restructure their debts with sanction of the Court
4. Moratorium - protects eligible companies from claims by creditors
5. Liquidation - causes company’s assets to be sold to pay off debts - company ceases to exist.

Question 10

What is a restructing plan and when is it available?

Answer 10

A company may propose a compromise or arrangements with its creditors or members when it has encountered or is likely to encounter financial difficulties which affect, or will or may affect, its ability to carry on business as a going concern.

This is NOT a formal insolvency procedure, but it is very broad in scope.

The company MUST APPLY to the court to sanction the restructuring plan, which the COURT MAY sanction if the plan has the support of 75% by VALUE of the affected creditors or members or any class of them NOTE CRAM DOWN

Question 11

In what circumstances may the Court approve a restructuring plan where one or more of the creditors/classes of creditors does not agree?

Answer 11

The Court can “cram down” (i.e. override) dissenting creditors where they oppose the overall restructuring plan, which will then bind all the creditors IF

1. court is satisfied that if the plan is sanctioned none of the members of the dissenting class would be any worse off than they would be in whatever scenario the court considers would be most likely to occur in relation to the company if the restructuring plan was not sanctioned; AND
2. plan has been approved by at least one class who would receive a payment or have a genuine economic interest in the company in that alternative scenario.

Question 12

What is a moratorium and when is it NOT available?

Answer 12

1. Designed to give breathing space to enable company to restructure debt and rescue company.
2. Directors must apply/file forms with Court. Usually granted for 20 business days.
3. Protects company from claims by creditors & winding up petitions.
4. Does not protect against claims by employees/wages.
5. Monitor appointed who oversees and ensures that rescue of company and interest of creditors is feasible and protected.
6. Directors remain in control of running the company.

It is not available for companies which are, or have within the previous 12 months been, subject to an insolvency procedure.

Question 13

When is a monitor appointed and what is their role?

Answer 13

An insolvency practitioner is appointed as ‘monitor’, to oversee the company’s affairs and ensure that it is likely that the MORATORIUM will result in its rescue as a going concern.

The directors remain in charge of running the business. The monitor must ensure the purpose of the moratorium continues to be achievable and that creditors’ interests are protected.

Question 14

What is the procedure for obtaining a moratorium?

Answer 14

The process for the directors of an eligible company to obtain a moratorium involves:

1. the directors and the monitor filing certain documents with the court; and
2. where the company is subject to an outstanding winding-up petition, a court order MUST BE made.
3. The monitor notifies Companies House and the creditors of the moratorium.
4. The moratorium lasts for an initial period of 20 business days, which may be extended or terminated in certain circumstances.

*NB - Where a court order is required, the court can make the order only if it is satisfied that the moratorium would achieve a better result for the creditors as a whole than is likely to be achieved through the winding-up.

Question 15

What is the effect of moratorium on company debts?

Answer 15

During the moratorium, the corporate entity has a payment holiday in relation to debts, subject to certain EXCEPTIONS including wages and other amounts owed to staff.

Question 16

What are the 5 steps of a Members Voluntary Liquidation?

Answer 16

1. Directors make statutory declaration of solvency
2. Members pass special resolution
3. Appointment of liquidator advertised in London Gazette + CH notified
4. Liquidator investigates, reports to creditors, asks details of debts
5. Liquidator distributes funds, final accounts sent to CH.

Company dissolved after 3 months

Question 17

What are the 6 steps in a Creditors’ Voluntary Liquidation?

Answer 17

1. Directors resolve insolvency
2. Members pass special resolution
3. Directors make statement to creditors and seek nomination from creditors for liquidator
4. Appointment of liquidator advertised in London Gazette + CH notified
5. Liquidator investigates, reports to creditors, asks details of debts
6. Liquidator distributes funds, final accounts sent to CH.

Company dissolved after 3 months

Question 18

How can a creditor apply for debtor to be declared bankrupt?

Answer 18

Must show that debtor is insolvent.

Can establish either by:

showing that debtor does not have funds to pay debt immediately payable, OR

showing that there is no reasonable prospect that future debt will be payable –

CAN show in these ways:

(1) Liquidated debt of £5000 or more and C makes stat demand AND debt not paid w/in 21 days
(2) Future liability of £5000 and C makes stat demand AND D does not show reasonable prosepct of being able to pay
(3) Debtor owes judgement debt more than £5000, C can seek to execute AND D fails to pay - D is insolvent

Question 19

What is an Individual Voluntary Arrangement? What is the relevant procedure?

Answer 19

An agreement bw debtor and unsecured creditors. Creditors accept less than owed. ONLY works if debtor has some money/prospects of money.

Appoint insolvency practitioner. Apply to Court for interim order (effect of moratorium on bankruptcy proceedings).

Require 75% in value of unsecured creditors to agree. Will then bind ALL unsecured creditors.

Supervisor (insolvency practioner) implements the IVA.

Question 20

What is an official receiver?

Answer 20

Appointed as trustee in bankruptcy. Usually civil servant. Unless creditors seek to appoint their own nominee.

Question 21

When will a bankruptcy be discharged?

Answer 21

Usually automatically discharged after one year

EXCEPT

Culpable bankrupt (dishonest, negliget, reckless) - Order court last up to 15 years.

Question 22

What are the three avenues available to sole traders and partners for insolvency purposes?

Answer 22

1. Negotiate with creditors - not binding & as it is a variation without consideration, creditor could always request full sum.
2. IVA - binding
3. Bankruptcy proceedings

Question 23

What are the consequences for the partnership if an individual partner is made bankrupt?

Answer 23

Partnership at will - Partnership is dissolved

Partnership NOT at will - i.e. general partnership agreement provides that the partnership will not terminate on bankruptcy of partner - Usually remaining Ps will purchase bankrupt P’s share

LLP - Bankrupt P cannot be member of LLP without approval from Court. Usually sell bankrupt’s interests to remaining members.

Question 24

What is administration for the purpose of insolvency proceedings?

What considerations by the Court?

Who can start the procedure?

Answer 24

Administrator runs the company with the rescue of the company as a going concern + in the interests of all creditors as a whole.

Procedure:

EITHER through formal court hearing (Court must be satisfied that the company is unable to pay debt AND that order is likely to achieve better result than liquidation)

OR by company, its directors or the holder of qualifying floating charge file docs at Court

**Qualifying floating charge is must be over whole or substantially the whole of the company’s assets

Usually qualifying floating charge gives lender right to appoint administrator to protect their interest

Question 25

What effect does entering into administration have on other insolvency procedures?

Answer 25

A moratorium is imposed which

restricts ability of third parties to enforce their rights

AND

prevents commencement of insolvency proceedings.

Question 26

What is compulsory liquidation and when does it take effect?

Answer 26

Court order requiring liquidation

Can be made following petition from creditor who can show that the company is unable to pay its debts.

Court will consider petition If company able to convince the Court that it will recover financially OR that the relevant debt is disputed

Question 27

When will a transaction at an undervalue be set aside? Is there a defence available?

Answer 27

For company: if company was insolvent at the time of the transaction, or became insolvent as a result.

For an individual: No requirement to prove debtor was insolvent if made within 2 years of petition. Insolvency presumed if made at any time to connected person.

Defence: For company if transaction was made in good faith and reasonable grounds for believing it would benefit the company.

Question 28

Define wrongful trading

Answer 28

Before company went insolvent the directors knew or ought to have known that there was no reasonable prospect of avoiding insolvency AND failed to take adequate steps to minimize losses to creditors.