Insolvency

Question 1

What is the test for insolvency in s 122 and s 123?

Answer 1

1) creditor served demand for outstanding sum of £750
2) creditor has obtained judgment against company and has tried to enforce judgment but debt is still not paid
And either:
- cash flow test - proven to court that company is unable to pay its debts as they fall due
- balance sheet test - it can be proven to court that company’s liabilities exceed its assets

Question 2

What is liquidation ?

Answer 2

Winding up - business stops trading, it’s assets are sold and company ceases to exist.

Question 3

What are the three types of liquidation ?

Answer 3

• Compulsory
• creditors voluntary liquidation
• members voluntary liquidation

Question 4

What is compulsory liquidation ?

Answer 4

Third party commences insolvency proceedings against insolvent company

Question 5

What is creditors voluntary liquidation ?

Answer 5

Commenced by company itself

Question 6

What is members voluntary liquidation ?

Answer 6

Commenced by solvent company because it wishes to cease trading

Question 7

Under compulsory liquidation what is the effect of issuing a statutory demand against the company ?

Answer 7

If it remains unpaid for 3 weeks then can issue a winding up petition against the company

Question 8

What is required for members voluntary liquidation to happen ?

Answer 8

Directors must swear statutory declaration that company is solvent

Question 9

What floating charges can be avoided in liquidation ?

Answer 9

Charge is automatically void of charge was granted without company receiving fresh consideration in exchange for granting security.

(if charge was created in favour of person connected to company during 2 years before insolvency)

Question 10

What does relevant time mean ?

Answer 10

During 2 years before insolvency

Question 11

What is a preference ?

Answer 11

Company puts other person in a better position if company was to go insolvent

Question 12

Under what grounds can liquidator challenge transaction ?

Answer 12

Where company has given preference to someone at a relevant time.

(Transaction that benefits someone in case of insolvency 2 years before)

Question 13

What is a transaction at undervalue ?

Answer 13

Company making a gift or transaction where consideration given to company is significantly lower then value provided

Question 14

What is the rule with transactions at undervalue ?

Answer 14

Rebuttable presumption of insolvency where transaction was with a person connected to company

Question 15

What is the order of distribution during liquidation ?

Answer 15

• Fixed charge holders
• expenses of winding up
• preferential debts
• money subject to floating charge
• unsecured creditors

Question 16

What is an example of preferential debts ?

Answer 16

Wages of employees in 4 months before winding up.

Question 17

What is ring-fencing ?

Answer 17

Statutory procedure of setting aside portion of available money for floating charge holders for benefit of unsecured creditors

Question 18

What’s the the rules for ring-fencing ?

Answer 18

• For securities created after 2003
• 50% of first £10k received from property subject to floating charges and
• 20% remaining money
  Up to limit of £800k

Question 19

What are alternatives to liquidation ?

Answer 19

• Administration - administrator appointed to manage company
• restructuring plan
• moratorium - lasts 20 business days (can be extended to up to a year).

Question 20

What is a company voluntary arrangement (CVA) ?

Answer 20

Creditors agree to wait longer to receive what they are owed
Needs to be approved by:
- 75% or more in value of creditors and
- 50% of non connected creditors

Question 21

How is personal insolvency triggered?

Answer 21

Serving a statutory demand on debtor for liquidated sun or £5k or more and waiting 3 weeks to see whether debtor pays or applies to have demand set aside by court

Question 22

What is a petition brought by a creditor under personal insolvency ?

Answer 22

Entitled to present a bankruptcy petition at court if they are owed £5k or more and must show that debtor is unable or has little prospect of being unable to pay debts

Question 23

What is wrongful trading ?

Answer 23

Personal liability on director where:
- company goes insolvent
- director knew or ought to have known they would certainly become insolvent
- person was a director at the time and continued to operate past this point

Question 24

What is the defence to wrongful trading ?

Answer 24

If director took every step with a view to minimising the potential loss to company creditors

Question 25

What is the test for the defence against wrongful trading ?

Answer 25

• what would a reasonable director have known in the circumstances and
• what did THIS director know

Question 26

What are the time frames for setting aside from floating charge ?

Answer 26

12 months unconnected or 2 years from connected can be set aside

Question 27

What time frame to set aside preference ?

Answer 27

2 years for connected - 6 months for unconnected - can be set aside

Question 28

What is the time frame for undervalue ?

Answer 28

2 years for connected and unconnected - can be set aside

Question 29

Defence against transaction at undervalue ?

Answer 29

It was to benefit the company