Insolvency

Question 1

what options does an unsecured creditor have for an unpaid debt?

Answer 1

• Apply to court to put the company into administration
• sue the company - if company can’t satisfy payment of the judgement debt, file a petition at the court to liquidate the company
• Serve a statutory demand fro debt in excess of £750, wait three weeks to see if company will pay then apply to court with a winding up petition to put the company in liquidation. the court will grant liquidation

Question 2

what can directors do if they face insolvency?

Answer 2

• approach creditors to see if the company can delay repayments or come to a compromise
• put the company into liquidation themselves ; enter into a formal arrangement with their creditors called a CVA
• Appoint an administrator either turns the company around, sells it or liquidates it

Question 3

Explain the outline of the liquidation process

Answer 3

1) liquidator appointed
2) liquidator collects in company’s assets
3) Liquidator distributes assets to the creditors according to the order of priority
4) the company is dissolved

Question 4

Name the powers and duties of a liquidator

Answer 4

a) Collect in assets and distribute them according to the stat order

b) Sell assets

c) Appoint agents

d) use the company’s bank account

e) Litigate on the company’s behalf

f) Carry on the company’s business

g) Do all things necessary to carry out a winding up/liquidation

Question 5

what is compulsory liquidation

Answer 5

A petitioner has proved that the company is unable to pay its debts according to the insolvency test, meaning that one of the following applies:

• a creditor owed more than £750 has served a statutory demand on the company and they have not responded In 3 weeks / or not paid It in whole or part
• A judgement has been filed against the business that is unpaid
• fails the cash flow test(unable to Pay debts as they fall due)
• value of the company’s assets s less than the amount of liabilities

Question 6

what is a creditors’ voluntary liquidation?

Answer 6

Initiated by directors and then taken forward by creditors - usually as a result of creditor pressure, although voluntary

directors agree by majority that company is insolvent and will be liquidated

Members pass special resolution to liquidate the company. the directors powers cease. the resolution is advertised in the London Gazette.

within 7 days (beginning day after special res passed), directors produce statement and send to creditors , also ask creditors to nominate a liquidator. the appointment of the liquidator by the creditor is advertised in the London Gazette and the registrar is notified.

the liquidator carries out their duties of distributing assets to creditors. A return is sent to creditors which is filed with the Registrar. The company is then dissolved after 3 months.

Question 7

what is a members voluntary liquidation?

Answer 7

only a solvent company can do this( where they want to wind itself up because the director shareholders want to retire)

• the directors must make a statutory dec of solvency
• Members pass a special resolution to start liquidation and ordinary resolution to appoint a liquidator. Directors powers cease. Appointment of liquidator by the creditor is advertised in the London Gazette and the Registrar is notified.
• liquidator distributes assets, final return sent to members and filed with registrar. the company is then dissolved after 3 months.

Question 8

what is administration?

Answer 8

a type of insolvency procedure
during administratrion, an administrator, an independent insolvency practitioner , runs , reorganises and possibly sells the company or distributes assets

• the directors no longer run the company and their powers cease
• admin owes duties to the creditors to all the creditors as a whole - both secured and unsecured.
• advantage- admin enjoys moratorium, freeze on creditor actions
• more flexible than liquidation

Question 9

what are the duties of an admin?

Answer 9

cascading duties- moves down the list if each one is not available or not in the interest of creditors

rescue company as a going concern

better result for creditors as a whole

Sell any company property to make a distribution

Question 9

what is the administration process?

Answer 9

Commenced by:
court route - application to court and a hearing, after which the court decides if an administrator should be appointed. the application can be made by the company directors or creditors

Out-of-court route - admin appointed by
the company
the holder of a qualifying floating charge (QFC) over the company assets.

moratorium comes into effect after administration - moratorium prevents creditors from making claims against company

Question 10

what is a qualifying floating charge?

Answer 10

a floating charge over all of company’s property

Question 11

how does admin process come to an end

Answer 11

ends automatically after a year unless extended (by creditor consent for another year)

if object of admin process achieved, the administration can be terminated. this means o the whole the company can continue to trade after its debts have been restructured or repaid

the admin can dissolve the company if there is no property to distribute to creditors or choose to put the company into liquidation.

Question 12

what is a company voluntary arrangement?

Answer 12

a written agreement binding on all parties and is known as a statutory contract.

creditors are likely to agree that they will - delay repayment of their debt
accept part payment of their debt
a combination of the two

Question 13

what is the process for a CVA?

Answer 13

• directors make written proposal to creditors. May appoint an insolvency practitioner to help oversee the process
• the proposal is voted by unsecured creditors. It needs 75% or more in value of creditors and 50% or more non-connected creditors
• All creditors (excepted secured and preferential, unless they agree) are bound by the CVA even if they didn’t vote.
• the directors continue to run the company, supervised by the practitioner. the practitioner will report to members and creditors on the CVA at the end of the process.

Question 14

what is fixed asset receivership?

Answer 14

A receiver appointed by a fixed charge holder under the terms of the charging document

Creditors who take security may have a right to appoint a receiver if the borrower is not complying with the terms of the loan

receiver will sell fixed charge assets and only owe duties to the fixed charge creditor

Question 15

what is a preference transaction

Answer 15

where a creditor has been put in a better position by the company than they would have been had the company been insolvent

Transaction is voidable if there has been a preference

Question 15

what is the statutory order of priority on a distribution of a company’s assets?

Question 16

what is a transaction at undervalue?

Answer 16

when a company gives to another , an asset either for free or below market value

Question 17

On what grounds can a liquidator or administrator set aside a floating charge?

Answer 17

when a creditor got a floating charge in connection with an existing loan for no fresh consideration

Question 18

what is wrongful trading ?

Answer 18

when directors continue to trade when the company is about to go into liquidation/administration

test: whether the director knew or ought have known that the company was about to go into liquidation.

Question 19

what is fraudulent trading?

Answer 19

When a director intentionally defrauded creditors by continuing to conduct business before liquidation to avoid any money being paid to them.

defence = the director genuinely believed they could trade out of the company’s difficulties. known as the sunshine defence

if proven-directors personally liable

Question 20

what does it mean when an individual is personally insolvent ?

Answer 20

An individual is personally insolent if they cannot pay their debts. it is established if the debt owed to a creditor Is 5k or more and cannot be paid within 7 weeks

Question 21

what is the bankruptcy process

Answer 21

• creditor with 5k debt not paid in 3 weeks applies to court for bankruptcy order
• court determines whether to make order
• Official receiver as trustee in bankruptcy will take control of debtors property and will preserve the value of the debtor’s goods

*bankrupts estate vests in the trustee from the moment the bankruptcy order is made

• trustee collects and sells debtors assets/pay off past conduct
• trustee can apply for release when fulfilled their role
• Automatic discharge may be suspended if the bankrupt is uncooperative
• bankrupt may be subject to a bankruptcy restriction order or bankruptcy restriction undertaking

Question 22

what property can the bankrupt keep + what happens to bankrupts home?

Answer 22

can keep items necessary for day to day living eg stuff needed for work and household items . but if they are expensive trustee can sell them and replace them with cheaper alternative.

Bankrupts home will vest in trustee. trustee will sell it but if others are living in it/have an interest the trustee must get a court order. After one year the trustee can sell the house regardless of occupiers

Bankrupts can receive their salary but may enter into an income payments agreement or a court-imposed income payments order if their salary is high.IPA and IPO last for three years so will survive the bankruptcy

Question 23

How can a bankruptcy trustee claw back or preserve the bankrupt’s assets

Answer 23

disclaim onerous property - unprofitable lease

Transactions at undervalue - investigate anything 5 years before petition

Preferences - the trustee can challenge preferences within 6 months of petition or two years if an associate . Bankrupt must have been insolvent at time of preference or become insolvent as a result of it.

Transaction defrauding creditors

Extortionate credit transactions - trustees can set aside extortionate credit terms received within 3 years before the petition.

Question 24

what is the order of priority for the distribution of unsecured assets of the bankrupt

Answer 24

1. Costs of bankruptcy
2. Preferential debts
3. Unsecured creditors
4. Spouse of bankrupt

secured creditors take possession of their assets, sell them and give any surplus to the trustee. they become unsecured creditors if there is a shortfall

Question 25

what is an individual voluntary arrangement?

Answer 25

A binding agreement for the bankrupt and unsecured creditors setting out how much each creditor will get to settle their debts