Insolvency Flashcards
What insolvency options are open to sole traders/general partnerships?
- Negotiations with creditors (agreements may not be binding due to lack of consideration)
- IVA
- Bankruptcy
What is an IVA?
Number of creditors agree to accept reduced amount of money and payment at different time
What is bankruptcy?
Judicial process where assets of bankrupt debtor are passed to a third party, known as a trustee in bankruptcy, who liquidates assets and uses money from liquidation to pay off as many debtor’s debts as possible
What is the process for an IVA?
Debtor must instruct insolvency practitioner. Practitioner will then:
- Have debtor prepare statement of affairs
- Apply to bankruptcy court for interim order - prevents creditors from filing bankruptcy petition
- Prepare a report advising whether there is realistic change proposal can be crafted that be accepted and calling meeting of creditors
What is required for an IVA to be approved?
Approval of creditors owed at least 75% of unsecured debt owed by debtor
What happens after an IVA is approved?
If approved, IVA becomes binding on all ordinary unsecured creditors
Preferential creditors (employees owed holiday pay or wages due in last 4 MONTHS) and secured creditors aren’t bound unless they agree to proposal
Insolvency practitioner will supervise and implement plan
What is the process for bankruptcy?
Debtor can apply online for bankruptcy order
OR one or more of debtors unsecured creditors owed AT LEAST £5k can submit petition for bankruptcy order
What must the application for bankruptcy show?
Application must prove that debtor is insolvent (unable to pay debts) by showing either that debt is payable immediately and debtor does not have funds to pay or debt is payable in future and debtor has NO REASONABLE prospect of being able to pay
What ways can a creditor show that a debtor is insolvent?
- Statutory demand for past payment - if creditor is owed £5k or more, can make a statutory demand for payment (if debt not paid within 3 weeks) and debtor will be deemed insolvent.
- Statutory demand for proof to pay - If debtor owes a debt to be paid in the future of more than 5k, creditor may service a statutory demand for proof to pay. If debtor cannot show proof or fails to apply to have demand set aside, will be deemed insolvent.
- Judgment debt - if judgment debt of more than 5k, creditor can seek to execute on judgment. If attempt fails debtor is deemed insolvent.
- Supervisor for IVA can also apply for bankruptcy if debtor fails to comply or provides false info
What happens to a general partnership if it a partner is made bankrupt?
If partnership is at will - will be dissolved on bankruptcy of partner and partner’s share of assets will be turned over to trustee
If partnership is for specified term or undertaking, it will continue and usually remaining partners will purchase insolvent partner’s interest
What happens in an LLP if a partner is made bankrupt?
Partner cannot in management of LLP
What are the insolvency options for a company or LLP?
Receivership
Restructuring
Administration
CVA
Moratorium
Liquidation (MVL, CVL and compulsory)
What is receivership?
Creditor can appoint receiver if company defaults on loans that are secured to assets.
What are the benefits of receivership from a creditors point of view?
No proof of insolvency needed
Receiver’s duties are owed to the secured creditor and not to any other potential creditor
What is restructuring?
A significant modification made to the debt, operations or structure of a company with its creditors’ consent. After a restructuring, debt repayments become more manageable, making insolvency proceedings less likely.
Allows companies to restructure debts with sanction of the court if approved by at least those owed at least 75% of unsecured debt
Not formal proceedings - more broad in scope
What is administration?
Procedure which enables administrator to run, reorganise and or/sell the company as a going concern while the directors powers cease.
Administration can be entered through formal court hearing or by company filing certain papers with court (court can make order only if court is satisfied that an order is likely to achieve a better result for a company’s creditors than liquidation)
What is a CVA and how is started?
- If it is clear that a business could survive if debt repayments were reduced, it can enter a CVA agreement with its creditors. Under this legally binding agreement, a struggling company is allowed to repay some, or all, of its historic debts out of future profits, over an agreed period of time.
- Process started by directors of company who make a written proposal to nominate insolvency practitioner
- 75% or more in value of unsecured creditors must agree to CVA
What is a benefit of a CVA from a directors point of view?
In administration, the running of the company lies with the Administrator or Insolvency Practitioner whereas, in a CVA, the incumbent directors will retain control of the company, providing they abide fully by the terms of the CVA agreement.
What is a moratorium?
It is a court order which halts most actions by creditors to enforce rights
Can be sought whilst company seeks to implement any of the above devices - supplement to an other insolvency option
What are the two types voluntary liquidation?
Members voluntary liquidation
Creditors voluntary liquidation
What is a creditors voluntary liquidation?
Started by directors but then taken over by creditors
Usually commenced because directors are advised that company is insolvent and if they continue to trade, they could become personally liable to debts of company through fraudulent or wrongful trading.
What is members voluntary liquidation?
Available only if company is solvent but individuals who run company wish to wind it up.
What is compulsory liquidation?
Creditor who can show that company is unable to pay its debts can petition for company to be found
Liquidator is appointed to collect assets and sell them to pay off company’s debts.
Recite the order of which debts are paid in:
Expenses of winding up
Preferential debts such as employee wages and holiday pay due in last four months
Debts secured by floating charges in order of priority
Unsecured debts
Shareholders
