Insolvency Flashcards
What is the test for insolvency?
Company is insolvent (ie. unable to pay its debts) when:
I. Creditor has served statutory demand for outstanding £750 or more & company doesn’t pay / come to an arrangement within 21 days
II. Creditor has obtained & tried to enforce judgement against company, but debt still not paid
III. Cash flow test: can be proved that company unable to pay debts as they fall due
IV. Balance sheet test: can be proved that company’s liabilities exceed assets
What is liquidation?
a. Compulsory Liquidation
b. Creditors Voluntary Liquidation
C. Members Voluntary Liquidation
Business stops trading, its assets are sold & the company ceases to exist
a. Compulsory Liquidation: commenced by third party presenting winding up petition to court
b. Creditors’ Voluntary Liquidation: commenced by insolvent company (usually in response to pressure from creditors)
c. Members’ Voluntary Liquidation: commenced by solvent company
Can a company prevent compulsory liquidation?
Can prevent winding up petition if can show genuine & substantial dispute in relation to the money owed
If can show will be able to pay within reasonable period, court may adjourn hearing
What is the effect of the court ordering that a company be wound up?
Official Receiver automatically becomes the company’s liquidator
- Runs company (director’s powers cease)
- May review & challenge past transactions to obtain more money for paying back creditors
- Will then distribute assets to creditors in order set down by statute
What is administration?
Administrator appointed to run company
- Statutory moratorium during administration
- Can be commenced in court or out-of-court
- Ends automatically 1 year from date administration took effect (but can be extended / ended earlier)
What is the statutory moratorium during administration?
Not possible for anyone to commence or continue with legal action against the company
What is the objective of an administrator?
- Rescue company as a going concern
- (If not possible,) achieve better result for creditors than if company just wound up
- (If also not possible,) to realise property to pay creditors
What are 7 of the administrator’s statutory powers?
a. Removing / appointing directors
b. Commencing fraudulent / wrongful trading proceedings against directors
c. Paying creditors (only w/ court’s permission if unsecured creditor)
d. Calling meeting of creditors or shareholders
e. Dealing w/ property subject to a floating charge
f. Dealing w/ property subject to a fixed charge (w/ court’s permission)
g. Investigating & challenging past transactions
What are the 2 ways of commencing administration?
a. Court Route
b. Out-of-court Route (by company/directors or by QFCH)
Administration - Court Route: When can the court make an administration order?
Only if it is satisfied that:
- Company is likely to become unable to pay its debts; and
- Administration order is reasonably likely to achieve one of the purposes of administration (rescue as going concern / achieve better result / realise)
→
After applying, applicant must notify:
- Any person who has appointed /entitled to appoint administrative receiver
- Any QFCH entitled to appoint an administrator
Who can appoint an administrator on the out-of-court route?
i. Company / Directors
ii. Qualifying floating charge holder
How can the company appoint an administrator on the out-of-court route?
Serve notice of intention of administration on:
1. Court
2. Any QFCH
3. Any lender entitled to appoint an administrative receiver
&
File statutory declaration that company unable to pay debts & is not in liquidation
Who is a qualifying floating charge holder?
The holder of a charge where:
- Charge doc states that para 14 Schedule B1 Insolvency Act applies
- Charge doc empowers holder to appoint administrator / administrative receiver
- Charge doc relates to whole / substantially whole of company’s property
How can a qualifying floating charge holder appoint an administrator on the out-of-court route?
I. Notify in advance any other QFCH who would have priority
II. File notice of appointment at court, incl. statutory declaration that:
1. Lender is holder of QFC in relation to company’s property
2. Floating charge is enforceable
3. Appointment complies with Sch B1 Insolvency Act
What is a company voluntary arrangement?
Binding written agreement between company & creditors where creditors agree to wait longer to receive what they are owed, or to accept payment of only part of a debt (or both)
Must be approved by:
- 75% or more in value of the company’s creditors and
- 50% or more of non-connected creditors
Generally used when company has temporary cash flow issues
((Does not affect rights of secured creditors))
Who must a company voluntary arrangement be approved by?
- 75% or more in value of the company’s creditors
and
- 50% or more of non-connected creditors
What is an option for secured creditors of a (potentially) insolvent company?
Appoint a receiver
What is fixed asset receivership?
Secured creditors appoint receiver to take possession of the property subject to the charge & deal with it (usually by selling) it for the benefit of charge holder specifically
Will be
- LPA receiver (appointed by fixed charge holder)
- Administrative receiver (appointed by floating charge holder over company’s whole undertaking created before 15 Sept 2003)
What is the role of a receiver?
They run the company & sell the charged assets (proceeds used to pay their costs + pay charge holder what they’re owed)
→ If sum realised not enough, charge holder becomes unsecured creditor for remainder
→ If sum realised more than owed, surplus returned to company
What are some of the claims a liquidator / administrator can bring as part of their duty to maximise assets available for creditors?
Setting aside a floating charge
Preferences
Transactions at an undervalue
Fraudulent & wrongful trading
When can a liquidator / administrator set aside a floating charge?
Creditor obtained floating charge to secure existing charge for no new consideration
Time limits:
I. Connected person: within 2 years before onset of insolvency
II. Any other person: within 1 year before onset of insolvency
Only need to show company insolvent at time / became insolvent as a result if charge given to someone unconnected
When is the ‘onset of insolvency’?
Compulsory liquidation: date of presentation of winding up petition
Voluntary liquidation: date company formally enters into liquidation
Administration: when company files notice of intention to appoint administrator
What is a preference?
Company put the creditor in a better position in the event of the company going insolvent than they otherwise would have been
→ Must demonstrate:
- Company was insolvent at time / became insolvent as a result and
- Company was influenced by desire to prefer the creditor (presumed if connected)
Time limits:
I. Connected person: within 2 years before onset of insolvency
II. Other person: within 6 months before onset of insolvency
What can the court order if a preference is proven?
Release of any security given by company
Return of any property transferred as part of transaction
Payment of proceeds of sale of property forming part of transaction to the company
What is a transaction at an undervalue?
Company made a gift or sale for significantly less than provided by company
Must demonstrate company insolvent at time / became insolvent as a result (presumed if connected)
Time limit: within 2 years before insolvency
Defence: if transaction
1. Entered into in good faith
2. For purposes of carrying on the business
3. reasonable grounds for believing would benefit the company
What is the defence to a transaction at undervalue being voidable?
- Transaction entered into in good faith
- For the purposes of carrying on the business, and
- There were reasonable grounds for believing would benefit the company
What is a transaction defrauding creditors?
A transaction at undervalue which company entered into to put assets beyond reach of someone making claim against them, or to prejudice interests of that person
No time limit (brought at discretion of court)
What must a liquidator / administrator show to successfully bring a wrongful trading claim against someone?
- Company has gone into insolvent liquidation / administration
- Before commencement of winding up, director knew / ought to have known there was no reasonable prospect company would avoid insolvent liquidation
- They were a director of the company at the time
(Defence: not liable if took every step with view to minimising potential loss to company’s creditors)
What must a liquidator / administrator show to successfully bring a fraudulent trading claim against someone?
Business carried on with intent to defraud creditors or for any fraudulent purpose
What is the order of priority for distribution to creditors?
- Fixed charge holders
- Expenses of winding up
- Preferential debts (rank & abate equally)
- Floating charges, in order of priority
- Unsecured creditors (rank & abate equally)
What does ‘rank & abate equally’ mean?
All creditors in the category share the available money between them, received in the same percentage of the outstanding debt they are owed
What are preferential debts?
I. Wages of employees for work carried out in the 4 months immediately preceding (max. £800)
(if leftover salary, join pool of unsecured creditors)
II. HMRC in relation to taxes company collect on their behalf (ie. PAYE & VAT)
How can a creditor prove an individual is insolvent?
By serving statutory demand for outstanding debt / future liability of £5,000 or more & individual doesn’t pay or apply to court to set aside within 3 weeks
or
Obtaining & attempting to execute court judgement for debt of £5,000 or more without success
What are the options for an insolvent individual?
- Bankruptcy
- Individual Voluntary Arrangement
Who can bring a petition for bankruptcy?
- Creditor if owed £5,000 or more which debtor is unable to pay
- Debtor unable to pay their debts - apply online & adjudicator must make/refuse order within 28 days
What is the effect of a bankruptcy order?
The debtor’s assets vest automatically in the T. I. B.
Is a bankrupt entitled to be paid their salary?
Yes - but if more than sufficient to meet their reasonable needs, TIB can require them to enter into Income Payments Agreement (pay some of their salary to TIB)
When does a TIB need a court order to sell a bankrupt’s home?
If there is someone else with a legal or equitable interest or a right of occupation
NB. After 1 year of bankruptcy, creditor’s interests outweigh others (so more likely to get order)
When does ownership of the bankrupt’s home transfer back to them from TIB?
After 3 years unless TIB has:
- Sold property
- Applied for order for sale or possession or a charging order over the house
- Entered into agreement with bankrupt
What are 3 ways a TIB can challenge past transactions?
Disclaim onerous property
Apply to set aside transactions at an undervalue (differs from corporate rules!)
Apply to set aside preferences (same as corporate)
How are the rules re transactions at an undervalue different in bankruptcy?
Time limit is transactions made in the 5 years prior to the presentation of the bankruptcy petition
If more than 2 years prior, must show that the bankrupt was insolvent at time or as a result of the transaction (presumed if with associate)
What is the order of distribution in bankruptcy?
- Costs of bankruptcy
- Preferential debts
- Ordinary unsecured creditors
- Postponed creditors (bankrupt’s spouse / CP)
All rank & abate equally
What are some of the business restrictions on a bankrupt? (3)
Obtain credit of more than £500 for their business without disclosing their bankruptcy
Act as director of company or be involved in the management or formation of a company
Continue in partnership (unless partnership agreement has varied default in PA 1980)
What is a Bankruptcy Restriction Order (BRO)?
Imposes more stringent restrictions on bankrupt for between 2 & 15 years where bankrupt culpable (ie. caused own bankruptcy by being dishonest, negligent, reckless)
When is a bankruptcy order automatically discharged?
After 1 year (unless charge is suspended)
Nb. may still be subject to a BRO
What is an individual voluntary arrangement?
A binding agreement between unsecured creditors settling how much each creditor will receive in settlement of their debts
Can be sought by TIB during bankruptcy or debtor seeking to avoid bankruptcy
What percentage of creditors must agree to the proposals for an individual voluntary arrangement to succeed?
- 75% of the creditors in value
and
- 50% of non-associated creditors
A client is owed £17,000 by a company in liquidation. The company has assets of £200,000 and liabilities of £415,000. All of the company’s creditors are unsecured and there are no preferential creditors.
How much will the client receive for every pound it is owed?
£0.48
You need to divide total assets by total liabilities (200,000/415,000 = £0.48). This gives the amount every creditor should receive for each pound they are owed.
