Insolvency

Question 1

When is a company insolvent

Answer 1

When it can’t pay its debts or other liabilities

Question 2

What is insolvency

Answer 2

Legal process which brings company to an end using the assets of the company to pay creditors

Question 3

Legislation

Answer 3

Insolvency act 1986

Question 4

What mechanisms are available

Answer 4

Liquidation, administration, receivership

Question 5

Voluntary liquidation

Answer 5

Company decides to liquidate itself on its own terms, approved by shareholders, no reason/not feasible to operate

Question 6

Compulsory liquidation

Answer 6

Ordered by a court, judge decides if appropriate to make winding up order

Question 7

Insolvency tests

Answer 7

Cash flow test, balance sheet test

Question 8

Cash flow test

Answer 8

Court needs proof company can’t pay debts

Question 9

Balance sheet test

Answer 9

Court needs proof assets are less than liabilities

Question 10

During insolvency, liquidators need

Answer 10

Proof if debt from creditors, if approved ranked in statutory order of payment

Question 11

Statutory order of payment

Answer 11

1. Creditors with fixed charges, 2. Winding-up expenses 3. Preferential creditors 4. Unsecured creditors 5. Distributed amongst shareholders

Question 12

Misfeasance s.212

Answer 12

Directors found guilty of wrongdoing can be ordered to repay any money or personally contribute to the assets of the company

Question 13

Fraudulent trading

Answer 13

Director obtains credit on behalf of company knowing it won’t be repaid, rare as difficult to establish intent

Question 14

Wrongful trading

Answer 14

Directors continue to trade and incur debts despite liabilities > assets, sales very low with no prospect of improving and auditors suggesting insolvent leading to compulsory liquidation

Question 15

WT possible defences

Answer 15

Voiced concerns in board meetings, seeking independent financial advice, suggests reductions, not incurring further credit