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Business Practice > Insolvency > Flashcards

Insolvency Flashcards

1
Q

When is a company insolvent?

A

1) A creditor has served a statutory demand for an outstanding sum of £750 or more and the company does not pay
2) A creditor has obtained judgment against the company and has tried to enforce that judgment but the debt still has not been paid in full
3) It can be proved to the court that the company is unable to pay its debts as they fall due (CASH FLOW TEST)
4) It can be proved to the court that the company’s liabilities exceed its assets (BALANCE SHEET TEST)

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2
Q

Liquidation - Definition

A

Winding up, the process whereby the business stops trading its assets are sold and the company ceases tp exist. 3 types:
1) Compulsory liquidation
2) Creditor’s voluntary liquidation
3) Members voluntary liquidation

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3
Q

Compulsory liquidation - Definition

A

Commenced by a third party. A winding up petition is the first stage in a company’s liquidation - this is when the company’s assets are sold, the proceeds will be used to pay creditors

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4
Q

Creditor’s voluntary liquidation

A

Commenced by the company itself when it is insolvent, usually in response to pressure from creditors.

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5
Q

Members’ voluntary liquidation

A

Commenced by a solvent company because it wishes to cease trading or because it is dormant and it wishes to bring its affairs to an end in an orderly manner

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6
Q

The process of liquidation

A

Liquidator’s powers include:
- Carrying on the company’s business
- Commencing and defending litigation on the company’s behalf
- Investigating the company’s past transactions
- Investigating the directors’ conduct
- Collecting and distributing the company’s assets
- Doing all that is necessary to facilitate the winding up of the company

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7
Q

Preserving and increasing assets

A

Liquidator’s have the power to investigate the company’s affairs generally and to investigate the directors’ actions prior to liquidation or administration. Potential claims are:
- Avoidance of certain floating charges
- Preferences
- Transactions at an undervalue
- Transactions defrauding creditors
- Extortionate credit transactions

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8
Q

Avoidance of certain floating charges

A

These are invalid floating charges which are automatically void. A charge is automatically void where at the relevant time before the onset of the company’s insolvency a charge was granted without the company receiving fresh consideration in exchange for granting security.

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9
Q

Avoidance of certain floating charges - Relevant time

A

If the charge was created in favour of a person who is connected with the company during the two years ending with the onset of insolvency. If the charge was created in favour of any other person during the 12 months prior to the onset of insolvency.

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10
Q

Avoidance of certain floating charges - What else needs to be shown?

A

The company must have been insolvent at the time of the transaction or have become insolvent as a result of the company entering into the transaction

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11
Q

Avoidance of certain floating charges - What is the effect of a connected person?

A

Makes relevant time longer and it removes the requirement that the company was insolvent at the time of the charge

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12
Q

Avoidance of certain floating charges - What is the likely result?

A

The original loan would be an unsecured credit.

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13
Q

Preferences - Definition

A

Where the company puts the other person in a better position in the event that the company went into insolvent liquidation or administration than they would have been in otherwise.

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14
Q

Preferences - What is the effect of a connected person?

A

If a preference is given to a person connected to the company the desire to prefer is presumed but this can be rebutted. It also effects the relevant time

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15
Q

Preferences - Relevant time

A

If the preference was given to a person who is connected with the company during the two years ending with the onset of insolvency. If the preference was given to any other person during the 6 months ending with the onset of insolvency.

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16
Q

Preferences - What else needs to be shown?

A

There must be a desire to prefer the other party rather than just an intention to prefer them. The company must have been insolvent at the time of the preference or have become insolvent as a result of giving the preference.

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17
Q

Preferences - What is the likely result?

A

If the preference is proven the court may order the release of any security given, the return of any property transferred or the payment of proceeds of sale of property forming part of the transaction

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18
Q

Transaction at an undervalue - Definition

A

An undervalue is where the company makes a gift to the other person or enters into a transaction and receives consideration which is significantly lower in value than the consideration provided by the company

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19
Q

Transaction at an undervalue - What is the effect of a connected person?

A

Insolvency is presumed where the transaction was with a person connected to the company but this presumption can be rebutted

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20
Q

Transaction at an undervalue - Relevant time

A

Relevant time means during the two years ending with the onset of insolvency

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21
Q

Transaction at an undervalue - What else needs to be shown?

A

The company must have been insolvent at the time of the transaction or have become insolvent as a result of the company entering into the transaction

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22
Q

Transaction at an undervalue - Defence?

A

There is a defence if the transaction was entered into in good faith for the purpose of carrying on the business and where when the transaction was entered into there were reasonable grounds for believing it would benefit the company.

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23
Q

Transaction at an undervalue - What is the likely result?

A

Difference in value between what you paid vs its market value.

24
Q

Extortionate credit transactions - Definition

A

A liquidator/administrator has the power to challenge an extortionate credit transaction made in the 3 years ending with the day on which the company went into administration or liquidation. For a transaction to be extortionate it must require grossly exorbitant payments to be made or must otherwise grossly contravene ordinary principles of fair dealing

25
Q

Transactions defrauding creditors - Definition

A

A transaction defrauding creditors is a transaction at an undervalue which the company entered into in order to put assets beyond the reach of someone making a claim against it or to prejudice the interests of that person in relation to any claim they might make.

26
Q

Transactions defrauding creditors - Time

A

There is no time limit for bringing a claim. However it is often very difficult to show intention to put assets beyond someone’s reach or to prejudice their interests.

27
Q

Transactions defrauding creditors - Likely effect?

A

The other party to the transaction may be ordered to return any property which was the subject of the transaction to the company or discharge any security that was given by the company as part of the transaction.

28
Q

Order of distributing a company’s assets during liquidation

A

1) Holders of valid fixed charges
2) Fees payable to the liquidator
3) Preferential debts which rank and abate equally
4) Money which is the subject of floating charges in order of priority
5) Unsecured creditors
6) If any money left goes to the shareholders

29
Q

Alternatives to liquidation

A

6 options:
1) Administration
2) Company voluntary arrangements
3) Schemes of arrangement
4) Restructuring plans
5) A free-standing moratorium
6) Informal agreements with creditors

30
Q

Alternatives to liquidation - Administration - Definition

A

The process whereby an administrator is appointed to run the company and make whatever changes are necessary to improve its financial performance. And if this isn’t possible they will aim to get the company into a position where it can be sold.

31
Q

Alternatives to liquidation - Administration - Commencing administration

A

2 ways:
1) Court route - by court order following an application to court and a court hearing
2) Out-of-court route - involves the company, its directors or the holder of a qualifying floating charge filling certain documents at court

32
Q

Alternatives to liquidation - Administration - 3 purposes of administration

A

1) The administrator must perform their duties in the interests of all of the company’s creditors as a whole and have as a primary object the wish to rescue the company
2) If this is not practicable they must try to achieve a better result for the company’s creditors as a whole
3) If this is not practicable they must sell property to pay one or more secured or preferential creditors

33
Q

Alternatives to liquidation - Company Voluntary arrangement - Definition

A

A written agreement which binds all of the parties to it as long as the statutory procedures are followed. The parties are usually the company and all of its creditors. Once the proposal is approved it is binding on all unsecured creditors in relation to past debts but not future debts. The CVA does not affect the rights of secured and preferential creditors unless they agree to it. Only unsecured creditors are part of it but secured creditors would need to be happy with it.

34
Q

Alternatives to liquidation - Company Voluntary arrangement - When to use it

A

Generally used when the company’s business is potentially fundamentally sound but it is undergoing a temporary cash flow difficulty.

35
Q

Alternatives to liquidation - Company Voluntary arrangement - Advantages

A

The advantage for creditors is that they are likely to be paid more in a CVA than they would receive if the company went into liquidation or administration

36
Q

Alternatives to liquidation - Company Voluntary arrangement - Requirements

A

In a CVA the proposals put forward for payment of creditors must be approved by:
1) 75% or more in value of the company’s creditors and
2) 50% or more of non-connected creditors

37
Q

Alternatives to liquidation - Re-financing or debt restructuring

A

Refinancing or restructuring their debt. In general re-structuring may alleviate pressure from the largest creditor but it will not help in relation to other creditors who are in a position to petition.

38
Q

Alternatives to liquidation - Informal agreements with creditors

A

Helpful if the insolvency is temporary and consideration has been given for these arrangements but a disadvantage is that they are not binding on the creditors.

39
Q

Alternatives to liquidation - Options for secured creditors - Appointing a receiver

A

Creditors may be able to appoint a receiver to take possession of the property which is the subject of the charge and deal with it for the benefit of the charge holder as opposed to creditors generally. Normally the trigger for going into receivership is that the company has breached the charge holder’s loan agreement.

40
Q

Alternatives to liquidation - Moratorium

A

Small companies are entitled to a moratorium of 28 days, this means that no creditor can take action against the company during those 28 days. For smaller companies this is during CVA, for larger companies this happens during administration.

41
Q

Personal insolvency - Bankruptcy definition

A

Bankruptcy is the process whereby the debtor’s assets pass to a trustee in bankruptcy, whose job it is to pay as many of the debts as possible to the debtor’s creditors. After one year the bankrupt is discharged meaning that the bankruptcy ends and the bankrupt is free from almost all their debts even if they haven’t paid them all in full

42
Q

Personal insolvency - The bankruptcy procedure

A

Bankruptcy begins by a creditor presenting a petition at court or by the debtor applying for their own bankruptcy online. Creditor is entitled to present a bankruptcy petition at court if they are owed £5,000 or more.

43
Q

Personal insolvency - The official receiver and the trustee in bankruptcy

A

Once a bankruptcy order has been made the official receiver acts as the trustee in bankruptcy and takes control of the bankrupt’s assets. The bankrupt’s estate vests in them automatically from the moment the bankruptcy order is made. The trustee must where necessary realise and sell the bankrupt’s assets and use the proceeds to pay the creditors. The trustee has the power to investigate the bankrupt’s affairs and set aside or challenge transactions which the bankrupt entered into before the bankruptcy order was made.

44
Q

Personal insolvency - The bankrupt’s property

A

Bankrupt is permitted to keep some assets which are needed for day-to-day living such as items they need for work, everyday household items e.g clothing and furniture. If any of these items are of high value the trustee can sell them and replace them with a cheaper alternative. Bankrupts are entitled to receive their salary but if this is more than what is sufficient to meet the reasonable needs of the bankrupt and their family the trustee can ask the bankrupt to enter into an income payments agreements.

45
Q

Personal insolvency - The bankrupt’s home

A

Their interest passes to the trustee. If someone else has a legal/equitable interest in the house or a right of occupation the bankrupt cannot be evicted straight away.

46
Q

Personal insolvency - Preserving and increasing the bankrupt’s assets

A

The trustee’s primary duty is to the creditors and they have powers to investigate the bankrupt’s affairs and challenge past transactions with a view to increasing the assets. The trustee can choose to:
1) Disclaim onerous property
2) Apply to set aside transactions at an undervalue
3) Apply to set aside preferences
4) Apply to set aside transactions defrauding creditors
5) Avoid extortionate credit transactions

47
Q

Personal insolvency - Disclaiming onerous property

A

Onerous property = unprofitable contracts, land that has the burden of an onerous convenant or lease which does not have a capital value. The trustee’s disclaimer means that all of the bankrupt’s rights and liabilities in respect of the onerous property come to an end and the trustee is discharged from personal responsibility for the property.

48
Q

Personal insolvency - Transactions at an undervalue

A

An undervalue is either a gift or a transaction in which the bankrupt received consideration significantly lower in value than that which they provided. Can investigate transactions during 5 years prior to bankruptcy. The trustee does not have to show that the bankrupt was insolvent at the time of the transaction or as a result of the transaction, unless the transaction was more than two years before the petition. If the transaction was with an associate, which essentially means a close relative or business associate (s 435 IA 1986), then even if the transaction was more than two years prior to presentation of the bankruptcy petition, there is a rebuttable presumption that the bankrupt was insolvent at the time of the transaction

49
Q

Personal insolvency - Preferences

A

Preference = an arrangement placing a creditor, surety or guarantor in a better position than they would otherwise have been in on bankruptcy and the debtor intended to do this. There is a rebuttable presumption of intention to prefer if the preference is in favour of an associate. Can challenge any potential preference within 6 months prior to the presentation of the bankruptcy petition or within 2 years if its in preference of an associate. The bankrupt must have been insolvent at the time of the preference, or must have become insolvent as a result of it

50
Q

Personal insolvency - Transactions defrauding creditors

A

This is exactly the same for personal insolvency as it is for corporate insolvency.

51
Q

Personal insolvency - Extortionate credit transactions

A

If the bankrupt has obtained any credit in the 3 years prior to bankruptcy order and the terms of the credit are extortionate the trustee can apply to set aside or vary the terms of the credit.

52
Q

Personal insolvency - Distribution of assets

A

1) Secured creditors can sell their charged assets take what they are owed and pay any surplus to the trustee. If the sale does not realise enough money to pay them they will join the unsecured creditors in relation to the outstanding part of debt
2) Costs of bankruptcy - trustees fees
3) Preferential debts
4) Ordinary unsecured creditors
5) Postponed creditors - bankrupt’s spouse

53
Q

Personal insolvency - Alternatives to bankruptcy - IVAs

A

Binding agreement between unsecured creditors, setting out how much each creditor will receive from the bankrupt in settlement of their debts. Debtor’s trustee may seek one during bankruptcy or the debtor may seek one to avoid bankruptcy.

54
Q

Personal insolvency - Alternatives to bankruptcy - Negotiation with creditors

A

From a debtor’s perspective it is always worth talking to creditors if an individual is in financial difficulties. An informal arrangement with one or more creditors may enable the individual to avoid bankruptcy, however it’s not binding.

55
Q

Personal insolvency - Alternatives to bankruptcy - Debt relief orders

A

These are only for debtors whose assets and liabilities are low in value. During the time that the debtor is subject to the DRO the same restrictions apply to them as to a bankrupt

Business Practice (8 decks)

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