Insolvency Flashcards
Four company insolvency tests under the Insolvency Act
- Unsatisfied statutory demand (made by a creditor) after 21 days passed and not paid
- Creditor obtained a judgment against the company and is unsatisfied
- Balance sheet test - the assets are less than the liabilities
- Cash-flow test - the company unable to pay its debts when they are due
Risks for Directors (incl. Shadow Directors) of an Insolvent Company
- Disqualification proceedings
- Wrongful trading
- Fraudulent trading
Disqualification proceedings
Disqualification proceedings (against a director) - prevented from acting as a director, an official receiver, an insolvency practitioner, or in any way participating in the management of a company for any where between 2 and 15 years. Cannot act for a company as a director without leave of court in this time period.
Wrongful trading
Directors sued in their personal capacity as directors of a company for any losses caused to the company if they continued to trade after the company has become insolvent
Who can apply? Liquidator or administrator
Elements:
1. Directors of an insolvent company continued to trade AND
2. Directors knew or ought to know that the company cannot avoid insolvency
Result: Personal liability for any losses to the company by making personal contributions to the assets of the company AND / maybe? / disqualification proceedings.
Fraudulent trading
Any person who carried business with the purpose of defrauding creditors may be personally liable for any loss caused to the company.
Who can apply? Liquidator or administrator
Elements:
1. Carrying on a business with the purpose to defraud creditors or the company
2. Knowingly doing so
2-stage test =
1. Subjective test of knowledge - the facts as the person perceived them AND
2. Objective test - is the conduct of this person reasonable against the standards of ordinary decent people?
–> the Ivey test for dishonesty
Result: Personal liability for any losses to the company by making personal contributions to the assets of the company AND / OR disqualification proceedings AND / OR criminal offence.
Creditors’ Voluntary Liquidation (CVL) - the decent way of insolvency
Started by the members but controlled by the creditors
Members choose a liquidator via Ordinary Resolution and send the appointment for approval to the creditors. Until approval, the liqudator has limited powers.
A notice of the OR published in the London Gazette.
Statement of affairs prepared by the directors.
Final returns filed with the Companies House and the company is dissolved within 3 months of the completion of the winding up of the company.
Compulsory Liquidation (CL)
A creditor files a petition with court to have the company liquidated (one of the 4 tests for insolvency under the Insolvency Act is met). Then an official receiver is appointed by the court, unless a liquidator is appointed by the creditors.
The petition is published in the London Gazette.
Statement of affairs prepared by the directors.
Final returns filed with the Companies House and the company is dissolved within 3 months of the completion of the winding up of the company.
Distribution of assets of an insolvent company = Statutory Priority of Debts (the Waterfall)
FEPFUPS
- Fixed charge holders (up to the extent of their security AND in order of registration)
- Expenses and fees of the liquidator
- Preferential debts (taxed collected on behalf of HMRC, payments towards employee’s wages)
- Floating charge holders (in order of registration) AFTER deducting the prescribed part, which is 50% of the first 10,000 GBP and 20% of the rest - carved out for paying unsecured creditors
- Unsecured creditors
- Interest on debts
- Deferred debts
- Surplus
Pre-insolvency transactions that can be set aside / challenged
- Undervalue transactions
- Invalid floating charges
- Transactions defrauding creditors
- Preference transactions
Undervalue transactions
-Transferred an asset at an undervalue (or a gift) within 2 years before the onset of the insolvency
- The company was insolvent at the time or became insolvent as a result of this transaction (presumed if made to a connected person)
Transactions defrauding creditors
-Transactions at an undervalue
-Entered into with the purpose to defraud creditors and put assets beyond reach in case a claim is raised
NO REQUIREMENT FOR INSOLVENCY
Preference transactions
-Transactions to grant a preference
-With an intention to grant it (presumed if to a connected person)
-within 6 months before onset of insolvency (or 2 years if to a connected person)
-The company was insolvent at the time or became insolvent as a result of this transaction
Invalid floating charge
-Floating charge created only for prior consideration (to secure loans previously made)
-Made within 1 year of onset of insolvency (or 2 years if to a connected person)
-The company was insolvent at the time or became insolvent as a result of this transaction (if made to a connected person - it is not relevant)
AUTOMATICALLY GRANTED
Connected person - Definition
Directors, shadow directors, an associate of a (shadow) director - e.g. spouse, child, relatives, an associate of the company
Insolvency Rescue Mechanisms
- Restructure debt
- Refinance through a fresh investment
- Negotiate with creditors
- Company Voluntary Arrangement
- Administration proceedings
Insolvency rescue only for secured creditors - Fixed Asset Receivership
Remedy for a fixed charge holder to recover the security over the fixed charge. Appointing a fixed charge receiver to manage / sell the property secured by the fixed charge so that the holder receives the monies. The asset cannot be used by the company.
