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Insolvency Flashcards

1
Q

What are the insolvency options for sole proprietor or partnership?

A
  • Negotiate with a creditor for payment time or a reduction in what must be paid (note such agreement may not be binding for lack of consideration)
  • Individual Voluntary Arrangement (IVA)
  • Bankruptcy
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2
Q

What is an Individual Voluntary Arrangement (IVA)

A

Where a number of creditors agree to accept a reduced amount of money and payment at a different time

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3
Q

Roles in an IVA?

A

Person in debt (debtor) cannot draft an IVA on their own so must instruct an insolvency practitioner.

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4
Q

Process in an IVA?

A
  1. Debtor prepares a statement of affairs
  2. Insolvency practitioner applies to the bankruptcy court for an interim order, this prevents creditors from filling a bankruptcy petition
  3. Insolvency practitioner prepares a report advising whether there is a realistic chance that a proposal can be crafted that might be accepted, if so calling a meeting of the creditors
  4. Approval requires creditors owed at least 75% of the unsecured debt owed by the debtor, once approved becomes binding on all ordinary unsecured creditors
  5. Insolvency practitioner supervises and implements the plan
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5
Q

What happens if debtor fails to comply with the IVA or provided false/misleading information?

A

The supervisor or any creditor party to the IVA may petition for the debtor’s bankruptcy

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6
Q

Who aren’t bound by IVAs unless they agree to the proposal?

A

Preferential creditors (employees owed holiday pay or wages due in the last four months) and secured creditors

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7
Q

What is bankruptcy?

A

A judicial process in which the assets of the bankrupt debtor are passed to a third party

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8
Q

Who can apply for bankruptcy?

A
  1. Debtor can apply online for a bankruptcy order
  2. One or more of the debtor’s unsecured creditors owed at least £5,000 can submit a petition for a bankruptcy order
  3. Supervisor of an IVA can petition for a bankruptcy order if the debtor is in default of the IVA
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9
Q

What must application for bankruptcy by one or more of the debtor’s unsecured creditors prove?

A

a. the debtor is insolvent by showing that the debt is payable immediately and the debtor doesn’t have the funds; or
b. the debt is payable in the future and the debtor has no reasonable prospect of being able to pay

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10
Q

What does application for bankruptcy cause?

A

Debtor’s creditors must stop chasing the debtor and the debtor will be discharged from most of their debts after one year

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11
Q

What is the process for bankruptcy?

A
  1. Application made
  2. Bankruptcy order made and an official receiver is appointed who will act as the trustee in bankruptcy (unless creditors seek to appoint their own nominee)
  3. Most of debtors property will automatically vest in the trustee
  4. Whilst proceedings are ongoing the bankrupt person can’t apply for credit over a prescribed amount, act as company director, be a partner, trade under another name.
  5. The trustee pays creditors in prescribed order.
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12
Q

What is the bankrupt person entitled to keep?

A

Things needed for day-to-day living, tools required for their job, their salary.

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13
Q

What order are creditors paid in for a bankruptcy?

A

a. Costs of bankruptcy
b. Preferential debts including employee wages for four months and money owed to HMRC for VAT, PAYE and National Insurance contributions
c. Ordinary unsecured creditors
d. Postponed creditors (spouse)

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14
Q

What happens if bankrupt caused the bankruptcy by own dishonesty, negligence or recklessness?

A

Bankrupt are considered culpable and can be subject to a court bankruptcy order for up to 15 years.

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15
Q

What happens if bankrupt person is a partner in a general partnership?

A

o Partnership at will – will be dissolved on the bankruptcy of the partner and the partner’s share of the assets will be turned over to the trustee
o Partnership for a specified term or undertaking – will continue and usually the remaining partners will purchase the insolvent partner’s interest

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16
Q

What happens if bankrupt person is a member of an LLP?

A

They can’t participate in management of the LLP

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17
Q

What happens if general partnership itself is insolvent

A

Partnership is wound up using bankruptcy process

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18
Q

What happens if LLP is insolvent?

A

Is wound up in the same way as a company

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19
Q

What are the insolvency options for company or LLP?

A
  • Fixed asset receivership
  • Administration
  • Company Voluntary Arrangement (CVA)
  • Liquidation either voluntary or compulsory
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20
Q

What happens on liquidation either voluntary or compulsory?

A

Company’s assets are sold to pay off debts, the company then ceases to exist.

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21
Q

What happens in fixed asset receivership?

A

If a creditor has taken a charge over a company’s fixed assets the agreement usually means that if the company defaults the creditor can appoint a receiver to take the charged asset and sell it to pay off the obligation.

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22
Q

What proof of insolvency is needed for fixed asset receivership?

A

No proof of insolvency is needed for this option

23
Q

Who does the receiver owe a duty to in a fixed asset receivership?

A

The secured creditor and no other potential creditors

24
Q

What does administration enable?

A

An administrator to run, reorganise and/or sell the company as a going concern

25
Q

Who is an administrator?

A

An independent insolvency practitioner

26
Q

Who does the administrator act in the interest of in an administration?

A

The creditors as a whole

27
Q

How is administration entered into?

A

By:
1. Formal court hearing; or
2. The company filing certain papers with the court.

28
Q

When will a court make an order for administration?

A

If they are satisfied that this is likely to achieve a better result for the company’s creditors than liquidation

29
Q

What does a Company Voluntary Arrangement (CVA) aim to do?

A

Seeks to rescue the company

30
Q

Process for a Company Voluntary Arrangement (CVA)?

A
  1. Directors of the company make a written proposal to the creditors and nominate an insolvency practitioner to supervise the CVA
  2. 75% or more in value of the unsecured creditors must agree to the CVA in order for it to be implemented.
31
Q

What is a moratorium?

A

Court order that halts most actions by creditors to enforce their rights whilst a company seeks to implement administration or a CVA.

32
Q

Role of an insolvency practitioner during a moratorium?

A

Appointed by the directors to monitor the company’s affairs and ensure that it’s likely that the moratorium will result in a rescue of the company as a going concern.

33
Q

Who runs the company during a moratorium?

A

The directors remain in charge of running the business.

34
Q

Who can start the voluntary liquidation process?

A

The members or directors of a company

35
Q

What happens in Members’ Voluntary Liquidation?

A

The members and directors control the process from start to finish. The company must be solvent for this process, but the individuals involved wish to wind it up.

36
Q

What happens in Creditors’ Voluntary Liquidation?

A

Started by the directors but taken over by creditors. Usually started as the directors are advised that the company is insolvent and if they continue trading they could be personally liable for the debts of the company through fraudulent or wrongful trading. The directors will resolve that the company is insolvent and should be placed into liquidation and the members will pass a special resolution to start the liquidation.

37
Q

Who can start the compulsory liquidation process?

A

A creditor who can show that the company is unable to pay its debts can petition for the company to be wound up.

38
Q

Process for compulsory liquidation?

A
  1. Liquidator is appointed to collect assets and sells them
  2. Debts are paid in the prescribed order
39
Q

Prescribed order for paying debts for compulsory liquidation?

A

a. Expenses of winding up
b. Preferential debts (such as employee wages and holiday pay due in the last four months
c. Debts secured by floating charges in order of priority
d. Unsecured debts
e. Shareholders

40
Q

What happens if there isn’t enough money to fully satisfy all the creditors at one level in a compulsory liquidation?

A

The debts rank and abate equally

41
Q

What is a preference in insolvency?

A

A debtor does something that intentionally puts a creditor in a better position on liquidation than they otherwise would have been.

42
Q

What is a claw-back in insolvency?

A

The power a trustee has to reclaim a preference paid within 6 months of the onset of insolvency (upped to 2 years if the preferred creditor is a connected person).

43
Q

When is the onset of insolvency defined for individual?

A

Presentation of the bankruptcy petition

44
Q

When is the onset of insolvency defined for administration?

A

Date the company files a Notice of Intention to Appoint an Administrator or the date it enters administration, whichever is earlier

45
Q

When is the onset of insolvency defined for CVL?

A

Date the company enters liquidation

46
Q

When is the onset of insolvency defined for company compulsory liquidation?

A

Date of the presentation of the petition

47
Q

What is a transaction at undervalue?

A

A transaction in which property that would otherwise have been part of the bankruptcy estate/assets of the company were given as a gift or sold for significantly less than market value.

48
Q

When can a transaction at undervalue be set aside if the debtor is a company?

A

Company was insolvent at the time of the transaction or became so as a result. Insolvency is presumed if the transaction is to a connected person.

49
Q

When can a transaction at undervalue be set aside if the debtor is an individual?

A

If the transaction was made within 2 years before the petition there is no requirement to prove the individual was insolvent. Insolvency is presumed if the transaction was made at any time to a close relative or business associate.

50
Q

Defences for a transaction at undervalue for company’s?

A

The transaction was entered into:
1. in good faith
2. for the purpose of carrying on the business; and
3. when it was made there were reasonable grounds for believing it would benefit the company

51
Q

What is fraudulent trading?

A

When a director or any other person who knowingly participates carries on business of the company with the intent to defraud creditors.

52
Q

Consequences of fraudulent trading?

A

If fraudulent trading is established the directors may be liable to make personal contribution to the company’s assets as the court orders. Is a criminal offence.

53
Q

What is wrongful trading?

A

Where directors carry on business when they knew or ought to have known that the company has no reasonable prospect of avoiding insolvency and failed to take adequate steps to minimise the losses to the company’s creditors.

54
Q

Consequences of wrongful trading?

A

If proved the court may order the director to contribute to the company’s assets as the court deems appropriate.

Business (9 decks)

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