Insolvency

Question 1

What is insolvency?

Answer 1

A financial state of affairs where a company is unable to pay its debts

Question 2

What are the two options available to companies that are insolvent?

Answer 2

Administration - aims to rescue a company so that it can continue trading

Liquidation - this winds up the company, bringing its life to an end (voluntary or compulsory)

Question 3

What is adminisration?

Answer 3

Process whereby a specialist takes control of a company’s affairs and tries to rescue the company from insolvency and improve its financial position.

Question 4

Who can appoint an administrator?

Answer 4

the court in response to petition from company members/directors

a court order appointment can be made by either QFCH (a holder of a qualified floating charge over company’s assets)

Question 5

When will the appointment of an administrator agreed?

Answer 5

the company is, or is likely to become unable to pay its debts

the administration order is likely to achieve its objective

Question 6

What is liquidation?

Answer 6

Where a company’s assets are ingathered and used to repay existing debts. The company’s affairs are ‘wound up’ and company is dissolved.

Question 7

What happens to debts that are not paid off during liquidation?

Answer 7

expire along with the company

Question 8

What are the two methods of liquidations?

Answer 8

Voluntary Liquidation
Compulsory Liquidation

Question 9

What is voluntary liquidation?
Insolvency Act 1986, s84

Answer 9

when there is broad agreement that the company has no viable future a voluntary winding up allows the company’s affairs to be settled without the formality of going to court

Question 10

What are the two types of voluntary liquidation?

Answer 10

Members’ Voluntary Liquidation - the company is solvent so the creditors will be paid and don’t need to be involved

Creditors’ Voluntary Liquidation - creditor’s don’t believe they will get paid so supervise liquidation

Question 11

What is compulsory liquidation?

Answer 11

This commences when a petition for a winding up order is presented to the court

Question 12

What are the primary function of the liquidator?

Answer 12

to ingather the company’s assets and apply those assets in satisfaction of the company’s liabilities

Question 13

What is the creditor ranking in liquidation?

Answer 13

1. holders of fixed securities
2. cost of liquidation
3. preferential creditors (unpaid employees)
4. floating charge holders
5. ordinary creditors