Insolvency Flashcards
chapter 8
What are the two main tests for corporate insolvency?
Cash flow test (inability to pay debts as they fall due) and balance sheet test (liabilities exceed assets)
What is compulsory liquidation?
A third party (usually a creditor) starts insolvency proceedings against an insolvent company by presenting a winding up petition at court
What is a creditors’ voluntary liquidation (CVL)?
The company itself initiates liquidation when it is insolvent, often due to pressure from creditors.
What is a members’ voluntary liquidation (MVL)?
A solvent company starts liquidation because it wants to stop trading, or it is dormant and wishes to conclude its affairs.
What is the role of a liquidator?
The liquidator takes over the running of the company, sells assets, distributes money to creditors, and investigates past transactions.
What is a floating charge?
A security interest over a company’s assets that can change over time. Certain floating charges can be voided if granted at a relevant time before insolvency without fresh consideration.
What is a preference in insolvency?
When a company puts one person in a better position than others in the event of liquidation or administration.
What is a transaction at an undervalue?
A transaction where a company makes a gift or receives significantly less consideration than it provides.
What is administration?
An independent insolvency practitioner (administrator) is appointed to run the company, improve its financial position, or sell it as a going concern.
What is a company voluntary arrangement (CVA)?
A written agreement between a company and its creditors where creditors agree to wait longer for payments or accept part payment, aiming to prevent liquidation.
What is the order of priority for distributing assets in corporate liquidation?
Expenses of winding up, preferential debts, money subject to floating charges, and unsecured creditors.
What are preferential debts in corporate insolvency?
Primarily, employee wages and holiday pay, and certain taxes owed to HMRC.
What is “ring fencing” in corporate insolvency?
A procedure that sets aside a portion of money for unsecured creditors from funds that would otherwise go to floating charge holders.
What is a restructuring plan under CIGA 2020?
A court-supervised ‘arrangement’ between a company and its creditors/shareholders, allowing for a ‘cross-class cram down’ provision to ensure viable plans are not blocked by dissenting creditors.
What is a moratorium under CIGA 2020?
A period where a company is protected from creditor actions, allowing the company “breathing space” to attempt to rescue the company, and debts incurred during the moratorium must be paid in full.
How is a person considered insolvent?
When a debt is payable now but they don’t have enough money, or a debt is payable in the future with no reasonable prospect of payment.
What is bankruptcy?
A process where a debtor’s assets are managed by a trustee in bankruptcy to pay creditors, with the debtor being discharged from most debts after one year.
What is the role of the Official Receiver (OR) in personal insolvency?
The OR acts as the initial trustee in bankruptcy, investigates the bankrupt’s affairs and protects and disposes of the bankrupt’s assets.
What assets can a bankrupt keep?
Items needed for work (tools of the trade) and everyday household items. The trustee can sell high-value versions of these items and replace them with cheaper alternatives.
What is an income payment agreement (IPA) or order (IPO)?
The bankrupt may have to pay some of their income to the trustee to meet their liabilities.
What happens to the bankrupt’s home
The trustee takes control of the bankrupt’s interest in their home. After one year, the creditors’ interests usually outweigh those of anyone else living there. Ownership is transferred back to the bankrupt after three years, unless the trustee takes further action.
What is a transaction at an undervalue in personal insolvency?
A gift or a transaction where the bankrupt receives significantly less consideration. The trustee can investigate transactions from up to five years prior to bankruptcy.
What is a preference in personal insolvency?
An arrangement that puts a creditor in a better position than they would otherwise have been in on bankruptcy, and the debtor intended this.
What is the order of priority for distributing assets in personal bankruptcy?
Costs of the bankruptcy, preferential debts, ordinary unsecured creditors, and postponed creditors (spouse/civil partner).
