insolvency Flashcards
What are the tests for insolvency? (4)
Cash flow test- inability to pay debt as they fall due
Balance sheet test- companies liabilities are greater than its assets
statutory demand- failure to comply with a statutory demand for debt over £750
judgement debt- failure to comply with an enforcement of a judgement debt when a creditor sues a company and obtain a judgement
what duty to directors have towards a companies in financial difficulties
must continually review the financial performance of a company and recognises when its facing financial difficulties. It is the directors who need to decide to take action on behalf of the company. In making this decision they must seek advice on their decision, responsibilities, and liabilities .
- REVIEW FINANCIAL PERFORMANCE
- TAKE ACTION
- SEEK ADVICE
what are the options for a company facing financial difficulties
- nothing
- Do a deal: formal arrangement with the company’s creditors with a view to rescheduling debts
- Appoint an administrator
- request the appointment of a receiver
- liquidation
what is the statutory order of priority
- liquidator costs
- fixed charge creditors
- other costs and expenses of liquidation
- preferential debts
- prescribed part fund
- floating charge creditors
- unsecured creditors
- interest on unsecured debts
- The shareholders
what is the statutory order of priority
- liquidator costs
- fixed charge creditors
- other costs and expenses of liquidation
- preferential debts
- prescribed part fund
- floating charge creditors
- unsecured creditors
- interest on unsecured debts
- The shareholders
what if is the fixed charge holders are not fully re-paid?
- they they also hold a flooring charge they are paid in step 6
- if they did not hold another charge, they might be paid money left over after paying the prescribed fund before the shareholders
what are the two sorts of preferential debts?
- employees pay - £800 max/employee + accrued holiday pay +pension scheme pay
- HMRX payment (PAYE, VAT, Employee NI)
What is paid from the proceeds of the floating charge?
- other expenses of the liquidator
- preferential debts
- floating charge holders are paid whatever is left
What is paid from the proceeds of the floating charge?
- other expenses of the liquidator
- preferential debts
- floating charge holders are paid whatever is left
who is the prescribed fund used to pay? what is the order?
-Ordinary trade creditors who have not been paid (unsecured creditors)
- shareholders with preferential cumulative shares
- Employees (if step 4 was not enough) in their capacity as unsecured creditors
if anything is left from the prescribed fund:
- fixed charge holders who are not paid in full in step 2 rank as unsecured creditors
- floating chart holders who are not paid in full in sec 6 rank as unsecured creditors
Standstill agreement with creditors
Standstill agreement with creditors
company can informally negotiate with creditors and enter contractually binding arrangements to scour the cost and time of formal solvency arrangements or proceedings- difficulty is getting all the creditors to agree
what may the company have to do to obtain the creditors agreement
- grant new/ additional security
- replace directors or senior employees
- sell failing business or subsidies to sell profitable one to raise cash
- reduce the workforce of the salary bill
- issue new shares to the creditors (debt for equity swap)
Standstill agreement with creditors
- Creditors could enter into Standstill Agreements where they agree not to enforce their rights or remedies for a certain period of time to give the company a breaching space to reach agreement with its other creditors
what actions are restricted by a pre- insolvency moratorium
- creditors cant enforce security
- stay of existing legal proceedings and prevention of new ones against it
- no winding up or administration proceedings can be started
what actions are restricted by a pre- insolvency moratorium
- creditors cant enforce security
- stay of existing legal proceedings and prevention of new ones against it
- no winding up or administration proceedings can be started
what 2 statements must be files at court for a pre- insolvency moratorium?
- statement that company is/ likely to becomes unable to pay debt as they fall due
- statement form a licensed insolvency practitioner (accountant) aka the monitor stating that it is likely that the moratorium will result in the rescue of the company
how long can the pre- insolvency moratorium last?
- 20 days
- extra 20 days extension by directors
- max period 1 year
when does the moratorium terminate?
automatically if the company enters liquidation, administration, CVA approved to court approves restructuring plan.
when does the moratorium terminate?
automatically if the company enters liquidation, administration, CVA approved to court approves restructuring plan.
Does the company have to pay debts?
- Pre-moratorium debts: the company does not have to pay pre-moratorium debts during the moratorium – these are debts for obligations incurred before the moratorium (regardless of when the debts fall due)
- This does not apply to: monitor’s expenses, goods supplied during the moratorium, rent during the moratorium, wages, loans
- Moratorium debts: all obligations incurred during the moratorium must be paid
company voluntary arrangement
what is it
Who can initiate
who does it bind
requirements,
- agreement with creditors to restructure debt, change time frame, pay less
director, liquidator, administrator
binds all unsecured creditors, but not secured and preferential unless they unanimously agree
agreed by 75% of creditors and 50% SH
advantages/ disadvantage of a company voluntary arrangement
- no court sanction required
- directors remain in control
disadvantage:
-secured and preferential creditors are not bound
procedure for company voluntary arrangement
- nominee appointed
- direcots submit proposals and statement of affairs to nominee
- nominee considers proposals and report to the court whiting 28 days
- nominee gives 14 days notice for a meeting of creditors- creditors vote
- meeting of members takes place 5 days after creditors decide- members vote
- nominee reports to the court- creditor has 28 days to challenge CVA from reporting
- nominee becomes supervisor and implements proposals
restructuring plan
what is it?
who an initiate?
who needs to approve?
binds who?
restructuring of debt, change timeline, or pay part.
directors, creditors, members, liquidators, administrator
sanctioned by court or 75% of each affected class of creditors and shareholder
binds all creditors
Advantages and disadvantages of restructuring plan
advantage- binds all credits
disadnatage- court procedure is long and expensive
who can appoint in administration vs compulsory liquidation
The following can appoint/apply to court to appoint an administrator:
- Company
- Directors
- Creditors
- CVA supervisor
- Liquidator
- Qualifying floating charge holder
The following can apply to court for a winding up petition:
- Creditor
- Company
- Directors
- Administrator
- Administrative receiver
- CVA supervisor
- Secretary of State for BEIS
who can appoint in administration vs compulsory liquidation
The following can appoint/apply to court to appoint an administrator:
- Company
- Directors
- Creditors
- CVA supervisor
- Liquidator
- Qualifying floating charge holder
The following can apply to court for a winding up petition:
- Creditor
- Company
- Directors
- Administrator
- Administrative receiver
- CVA supervisor
- Secretary of State for BEIS
what is the process for administration v compulsory liquidation
Administration:
There are 2 procedures:
- The out of court procedure can be used by the company, directors, and QFCH
- The court procedure can be used by creditors, liquidator, CVA supervisor, company, and directors rare, used to block winding up
compulsory liquidation:
the applicant must present a petition for winding up to the court and it is for the court to make the winding up petition
what are the grounds for the administration v compulsory liquid
The company is or is likely to become unable to pay its debts
NOTE: a QFCH does not have to show this on application
- Inability to pay debts any 4 test of insolvency – as set out in s123
- Just and equitable grounds – as set out in s122(2)
Is a moratorium available for administration v compulsory liquidation
Administration: The company has the benefit of a full moratorium from the date of appointment of administrators
An interim moratorium comes into force when:
(1) Administration application is made to court and lasts until the administration order is made (court procedure), or
(2) When company files a notice of intention to appoint administrators – lasts for 10 business days (out of court procedure)
Compulsory Liquidation: No moratorium but there is automatic stay on commencing or continuing proceedings against the company
This is not the same as moratorium because there is no freeze on the enforcement of a security by a secured creditor
Can company trade? admin v liquid
admin- yes
liquidation- no
How does the company exit the procedure?
Administrator:
There are many exit routes available to the administrator:
- They can restructure the rights of creditors by implementing a restructuring plan, a scheme of arrangement, or a CVA
- If the company is returned to solvency, it can be handed back to the directors
- The company can enter liquidation and a distribution is made to creditors
liquidation:
Once the liquidator has realised the company’s assets and made distributions to creditors, they will give notice to Company’s House that the winding up of the company has concluded.
The company is dissolved 3 months later
