Insolvency Flashcards
CVA
The essence of a CVA is that the creditors agree to part payment of the debts owed to them and/or to a new extended timetable for repayment. The CVA proposal, once approved in accordance with the IA 1986, must be reported to court but there is no requirement for the court to approve the CVA proposal.
The directors draft a CVA proposal and appoint a Nominee (who must be an insolvency practitioner).
The Nominee considers the CVA proposal and, within 28 days, must report to court on whether in their opinion, the company’s creditors and shareholders should be asked to vote on the CVA proposal.
Approval:
- 75% in value of creditors (excluding secured) AND a majority in value of unconnected creditors
- Plus, simple majority (over 50%) of members (although creditors’ vote will prevail)
Who does it bind?
- All unsecured creditors (including those who voted against)
- Secured and preferential creditors not bound (unless they consent)
IVA
Usually involve the debtor paying only a part of the contractual debt owed and/or having a longer period to pay than the contractual period
Usually requires the debtor to pay funds to the IVA supervisor out of their income (e.g. from the debtor’s business) or assets or a combination of both
The IVA Supervisor (licensed insolvency practitioner) will then pay a dividend to creditors based on their determined claims against the debtor
Some advantages of an IVA include the following:
* It is an alternative to bankruptcy and avoids the stigma and restrictions associated with bankruptcy;
* It can bind all unsecured creditors; and
* A moratorium is available if an interim order is made
Some disadvantages of an IVA include the following:
* It may last longer than a bankruptcy;
* It cannot bind a secured creditor or preferential creditor without that creditor’s consent; and
* It can be an expensive and time-consuming process and there is some uncertainty as to whether creditors will approve it
Bankruptcy
Collective insolvency procedure enabling an orderly collection, sale and distribution of an insolvent individuals’ assets for the benefit of all the bankrupt’s creditors
Can be initiated by the debtor or a creditor (ground: debtor unable to pay its debt of over £5000)
Voidable preferences
Put the creditor in better position than they would be in the event of insolvency
Insolvent at the time the payment was made
There was a desire to prefer the creditor
Defence: commercial pressure, absence of desire to prefer
Time prior to onset of insolvency: 2 years connected person, 6 months otherwise
Remedy: restoration order
Transactions at an undervalue
Loss of value from a company, whether through gifts or a transaction where there has been a significant inequality in the value of the consideration which the company received compared to the value of the asset it gave away, to the company’s detriment at a time when it is ‘insolvent’
Insolvency: cash flow or balance sheet basis (presumed where TUV with CC)
Relevant time: 2 years
Claim against the other party
Defence: entered into in good faith and reasonable grounds for believing the transaction would benefit the company
Fraudulent trading
Can be brought against any person, who is knowingly party to the carrying on of any business of the company with intent to defraud creditors or for any fraudulent purpose
Actual dishonesty must be proved for a claim to succeed (Ivey test)
At least one creditor being defrauded is enough to bring a claim
A person found liable can be ordered to make such contribution to the company’s assets as the court thinks proper (court is also likely to make a disqualification order and criminal sanctions)
Any sums recovered are held on trust for the unsecured creditors generally and not for the defrauded creditor
Wrongful trading
Can be brought against any director by a liquidator or administrator
Insolvency judged solely on the ‘balance sheet test’, meaning that the value of the company’s assets are insufficient for the payment of its debts and other liabilities
The court must be satisfied that at some point before the commencement of the winding up (‘point of no return’), the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or insolvent administration
The court will apply the reasonably diligent person test to determine what the directors knew or ought to have known, considering both:
1. the general knowledge, skill and experience that may reasonably be expected of a director carrying out the same functions as each director (‘objective test’); and
2. the actual skill, knowledge and experience of that particular director (‘subjective test’)
The court then applies the higher of the two standards
Defence: ‘every step defence’ (voicing concerns at board meetings, seeking financial and legal advice, suggesting reductions in liabilities, not incurring further credit, taking advice on restructuring)
Directors cannot escape liability by resigning, as the claim may be brought against current directors or former directors
Setting aside a floating charge
Floating charge must have been created within the ‘relevant time’ (12 months ending with onset of insolvency, extended to 2 years if granted to a CC)
Insolvency: cash flow or balance sheet basis (presumed if CC)
New floating charges are valid if ‘new money’ or fresh consideration is provided
Where a floating charge is void, the security is void not the debt itself
Statutory order of priority
Step 1 Liquidator’s fees and expenses of preserving and realising assets subject to fixed charges
Step 2 Amount due to the fixed charge creditor out of the proceeds of selling assets subject to the fixed charge
Step 3 Liquidator’s other remuneration, costs and expenses
Step 4 Preferential creditors (the first tier and then the secondary tier)
Step 5 Creation of the prescribed part fund (if available) for unsecured creditors
Step 6 Amount due to creditors with floating charges
Step 7 Unsecured creditors such as trade creditors (including payment of the prescribed part)
Step 8 Interest owed to unsecured creditors
Step 9 Shareholders
Appointment of administrator: court procedure
Mainly used by directors when there are pending winding up proceedings
Court may appoint an administrator where the company is or is likely to become unable to pay its debts on the application of: the company, the directors, a creditor, the supervisor of a CVA or a liquidator. The court must, when deciding to make an administration
order, consider whether the appointment is reasonably likely to achieve the purpose of the administration.
An interim moratorium temporarily freezing creditor action comes into effect on the application to court and lasts until either, the administration order is made or the court dismisses the application.
Appointment of administrator: out of court procedure
Far more common
1) Directors may appoint an administrator by filing a notice of intention to appoint (NOI) at court, and 10 days later file a notice of appointment at court (if company has granted a QFC, must also send the NOI to QFC holder who then has 5 business days to appoint their own choice of administrator if they wish)
2) A holder of 1st ranking QFC must first enforce its security in accordance with the terms of the QFC and the appointment will take effect when it has filed a notice of appointment at court
Statutory objectives of administration
1) to rescue the company as a going concern, or if that is not reasonably achievable,
2) to achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up, or if that is not reasonably achievable, and
3), to realise the company’s property in order to make a distribution to one or more secured or preferential creditors
