Insolvency Flashcards
What are three options available to a sole proprietor or partnership who is insolvent?
- Negotiation
- Individual voluntary arrangement (IVA)
- Bankruptcy
What is an IVA?
Individual voluntary arrangement - no. of creditors agree to accept a reduced amount of money and payment at a different time
Who must a debtor instruct to draft an IVA?
Insolvency practitioner
What three things will an insolvency practitioner apply for/prepare for an IVA?
- Prepare a statement of affairs
- Apply for an interim order
- Prepare a report advising on chances of a successful proposal and calling a meeting of creditors
What does an interim order prevent?
Creditors from filing a bankruptcy petition
What percentage of the unsecured debt by the creditors is required for approval of an IVA?
75%
_________ creditors (e.g. employees due wages in the last ____ months) and _______ creditors aren’t bound by an IVA unless they ______ to the proposal
Preferential, four, secured, agree
What can a supervisor or creditor petition for against a debtor who fails to comply with an IVA/provides false information?
Petition for the debtor’s bankruptcy
What is the difference between insolvency and bankruptcy?
Insolvency - business unable to pay their debts
Bankruptcy - individual unable to pay their debts
Which type of creditor can submit a petition for a bankruptcy order, and how much must they be owed?
Unsecured creditors
At least £5,000
If a debtor owes a liquidated debt for £_____ or more, a creditor can make a statutory demand for payment.
If the debt is not paid within __ ____, or the debtor does not apply to ___ _____ the demand within this timeframe, the creditor can ask the court to make a bankruptcy order
£5,000, 21 days, set aside
If a debtor owes a future liability of more than £______, the creditor may serve a statutory demand for proof of ______ __ ____ and if the debtor doesn’t show reasonable prospect of being able to do so or set this aside, the creditor can ask the court to make a bankruptcy order.
£5,000, ability to pay
If a debtor owes a judgment debt of more than £______, a creditor can seek to _______ on this (e.g. through bailiffs) , and if it fails, the creditor can ask the court to make a bankruptcy order
£5,000, enforce
What three things is the bankrupt entitled to keep?
- Essential items for day-to-day living
- Work tools
- Salary
Name four things a bankrupt cannot do during proceedings
- Apply for credit over a certain amount
- Be a company director
- Be a partner
- Trade under another name
For bankruptcy, in what order does the trustee pay the creditors? (Clue: there’s 4 creditors/debts to guess)
- Costs of bankruptcy
- Preferential debts
- Ordinary unsecured creditors
- Postponed creditors
What is the maximum bankruptcy order for a person who’s caused their bankruptcy by their own dishonesty, negligence etc.?
15 years
Partnership at will will be ______ on the bankruptcy of the partner, and their share of assets will be turned over to the ______
dissolved, trustee
Partnership for a specific term/undertaking will _______ if a partner goes bankrupt, and the remaining partners will _______ the insolvent partner’s interest
continue, purchase
What are 5 options for a company/LLP who becomes insolvent?
- Fixed-asset Receivership
- Administration
- Company voluntary arrangement (CVA)
- Moratorium
- Liquidation
What happens in a fixed-asset receivership?
Where a creditor (C) has taken a charge over a company’s fixed assets, if the company defaults, C can appoint a receiver to take the charged asset and sell it to pay off the obligation
Which type of creditors are receiver’s duties owed to?
Secured creditor
What happens in administration?
A procedure in which the affairs, business, and property of a company is managed by an administrator
What are the 3 objectives of an administrator from most to least important?
- Rescue the company as a going concern (aka the primary purpose)
- Achieve a better result for a company’s creditors than what would have been if the company is wound up
- Realise property to make a distribution to one or more preferential or secured creditors
What type of arrangement can an administrator enter into in an effort to rescue a company?
Company Voluntary Arrangement (CVA)
Who does the administrator act in the interests of?
The company’s creditors as a whole
How can an administrator be appointed (3 options)
- By the court via an administration order
- By the company/its directors
- By a qualifying floating charge holder
What is a qualifying floating charge holder?
A creditor with a floating charge over the whole or substantially the whole of a company’s assets
An administration will automatically end after what period of time unless an extension is permitted?
12 months
How is the process started for a CVA and what percentage of approval is needed?
Directors make a written proposal to creditors and nominate an insolvency practitioner
75% of unsecured creditor value (same as IVA)
Can a creditor be bound by a CVA even if they voted against it?
Yes - if they are an unsecured creditor
Can a secured creditor be bound by a CVA?
No - secured creditors cannot vote for CVAs (save to the extent their debt is unsecured) and so aren’t bound by it
What is a moratorium?
What does it grant to companies?
A court order which halts most actions by creditors to enforce their rights against company.
It gives company breathing space to explore their insolvency options
How long does an initial period of moratorium last for?
20 business days
What are 2 key effects of a moratorium?
- Restricts the ability of third parties to enforce their rights against the company
- Prevents the commencement of formal insolvency procedures
A moratorium is not available to companies which are/have been subject to an insolvency procedure within what previous timeframe?
12 months
What is meant by liquidation?
Company’s assets to be sold to pay off debts, then the company will dissolve (i.e. cease to exist) - it’s also known as ‘winding up’
What are the 3 types of liquidation?
- Compulsory Liquidation
- Creditors Voluntary Liquidation (CVL)
- Members Voluntary Liquidation (MVL)
Give 3 grounds for a company to liquidate via Compulsory Liquidation.
- Court decides that it is “just and equitable” for company to be wound up
- Director of company applies for liquidation, showing 75% of shareholders approve and company cannot pay its debts of over £750
- Creditor applies for liquidation with debts of at least £750 and showing the company is unable to pay its debts
What are 2 ways a creditor who applies for compulsory liquidation can prove to show a company not being able to pay its debts?
- Creditor has made a statutory demand for payment which hasn’t been paid in the 21 day time period
- Obtained a judgment and attempted to execute the judgment but the debt is not fully satisfied
When does a Creditors Voluntary Liquidation (CVL) take place?
When the company has been advised that it’s insolvent, it decides itself to enter into liquidation (instead of being compelled to)
What must directors show to the insolvency practitioner who will oversee a CVL?
Statement of affairs - disclosing all the company’s assets and liabilities
What are the 5 main steps of a CVL?
- Directors consult with an insolvency practioner and are advised of insolvency
- Directors will call a general meeting where the shareholders will pass a special resolution to wind-up the company and an ordinary resolution to appoint the liquidator.
- Meanwhile, the proposed liquidator will notify the creditors of its intention to enter voluntary liquidation
- Liquidator must file a copy of SR at Companies House and it must be advertised in The Gazette.
- Distribute assets in order of priority on insolvency.
Summary: Consultation, GM, Notification, Filing & Advertising of SR, Distribute
What is a Members Voluntary Liquidation (MVL)?
Where the company is solvent but still decides to wind up the company
What is the key difference between a CVL and a MVL?
CVL = company is insolvent (or will be if not wound up)
MVL = company is solvent
What are the 4 main steps of an MVL?
- Directors make a formal declaration of solvency
- The members pass an ordinary resolution to appoint a liquidator and a special resolution to voluntarily wind it up
- Company advertises the SR in The Gazette within 14 days and sends signed declaration of solvency to Companies House
- Distributes assets
What is the time period for a company to pay its creditors under an MVL?
12 months
What 4 things will a liquidator do once appointed?
- Realise the company’s assets
- Settle any legal disputes
- Pay any outstanding creditors
- Distribute the remaining surplus funds to the company’s shareholders/members
In what order are debts paid off to creditors when a company is wound up?
- Fixed charge holders
- Costs of liquidation
- Preferential creditors
- Floating charge holders
- Unsecured creditors
- Interest
- Shareholders
*Five Cats Prefer Fish, Usually Interested in Salmon. *
What happens if there is not enough money to equally satisfy all the creditors at one level for compulsory liquidation?
Debts rank and abate equally
When does a preference arise?
When a debtor does something that intentionally puts a creditor in a better position on insolvency than they otherwise would have been
When will a desire to prefer a creditor be presumed under a preference?
If the preference is in favour of a connected person (e.g. a director or their spouse)
For an event to constitute a preference, it must have occurred within how long of the onset of insolvency for:
1. Unsecured creditors
2. Connected persons (e.g. a director or their spouse)
- Unsecured creditors - 6 months
- Connected persons - 2 years
What is the consequence of finding a preference?
Transaction is voidable at the discretion of the court (i.e. it’s set aside and payable to a creditor)
What is a transaction at undervalue (TAU)?
Where property that would have been part of insolvency assets of the company was given as a gift/sold significantly below market value
What is the time period in which a TAU may be found within the:
1. Company’s insolvency
2. Individual’s bankruptcy
- Insolvency - 2 years
- Bankruptcy - 5 years
For a TAU to be set aside for a company, it must have been insolvent at the _____ of the ___________ or become so as a result.
However when will a presumption of insolvency arise?
time, transaction
If the TAU was made to a connected person
For an individual, there is no requirement to prove the debtor was insolvent at the time the TAU was made if it was made within what timeframe of petition for bankruptcy?
2 years
For companies, there is a defence to TAU if it was entered into in ____ _____ for the purposes of carrying on the business, and there were _________ ______ for believing it would benefit the company
good faith, reasonable grounds
Can a grant of a security interest be a transaction at undervalue?
No
What are 3 requirements for a creditor to set aside a floating charge?
- The floating charge was given in exchange for prior consideration (e.g. to secure loans previously made)
- FC was made 1 year before onset of insolvency, or 2 years before if in favour of a connected person; and
- At the time the FC was created, the company was unable to pay its debts or became unable to pay its debts as a consequence of the charge
If a FC was created in favour of a connected person, is there still a requirement to prove insolvency (3rd limb)?
No - only first 2 requirements are needed
When does fraudulent trading arise?
When a director or other knowing associate carries on business of the company with the intent to defraud creditors
When does wrongful trading arise?
When directors/associates carry on a business when they knew or ought to have known that the company has no reasonable prospect of avoiding insolvency and fail to take adequate steps to minimise losses to creditors
This may arise if a company fails to implement a CVL
