Insolvency Flashcards
What is the test for insolvency in s 122 and s 123?
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
What is liquidation ?
Winding up - business stops trading, it’s assets are sold and company ceases to exist.
What are the three types of liquidation ?
- Compulsory
- creditors voluntary liquidation
- members voluntary liquidation
What is compulsory liquidation ?
Third party commences insolvency proceedings against insolvent company
What is creditors voluntary liquidation ?
Commenced by company itself
What is members voluntary liquidation ?
Commenced by solvent company because it wishes to cease trading
Under compulsory liquidation what is the effect of issuing a statutory demand against the company ?
If it remains unpaid for 3 weeks then can issue a winding up petition against the company
What is required for members voluntary liquidation to happen ?
Directors must swear statutory declaration that company is solvent
What floating charges can be avoided in liquidation ?
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)
What does relevant time mean ?
During 2 years before insolvency
What is a preference ?
Company puts other person in a better position if company was to go insolvent
Under what grounds can liquidator challenge transaction ?
Where company has given preference to someone at a relevant time.
(Transaction that benefits someone in case of insolvency 2 years before)
What is a transaction at undervalue ?
Company making a gift or transaction where consideration given to company is significantly lower then value provided
What is the rule with transactions at undervalue ?
Rebuttable presumption of insolvency where transaction was with a person connected to company
What is the order of distribution during liquidation ?
- Fixed charge holders
- expenses of winding up
- preferential debts
- money subject to floating charge
- unsecured creditors
What is an example of preferential debts ?
Wages of employees in 4 months before winding up.
What is ring-fencing ?
Statutory procedure of setting aside portion of available money for floating charge holders for benefit of unsecured creditors
What’s the the rules for ring-fencing ?
- 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
What are alternatives to liquidation ?
- Administration - administrator appointed to manage company
- restructuring plan
- moratorium - lasts 20 business days (can be extended to up to a year).
What is a company voluntary arrangement (CVA) ?
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
How is personal insolvency triggered?
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
What is a petition brought by a creditor under personal insolvency ?
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
What is wrongful trading ?
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
What is the defence to wrongful trading ?
If director took every step with a view to minimising the potential loss to company creditors
