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Insolvency Flashcards

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1
Q

What are the two central roles of insolvency law?

A

(1) To ensure priority of distribution

(2) To ensure control over the process

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2
Q

What are the two types of voluntary winding-up?

A

(1) Members

(2) Creditors

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3
Q

When does compulsory winding-up occur?

A

When specified persons petition the court to have the company wound up on specific grounds. The court has no power to compulsorily wind up a company on its own initiative.

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4
Q

Who can petition the court for a compulsory winding up of a company and what is the authority for this?

A

S.124 IA 1986

  • the company itself
  • the directors
  • any creditor of the company
  • an administrator or official receiver
  • a contributory of the company (includes members)
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5
Q

What are the specific grounds for compulsory winding up of a company and where can they be found?

A

S.122 IA 1986:

(1) special resolution by the company
(2) company unable to pay its debts
(3) court is of the opinion that it is just and equitable to wind company up

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6
Q

When is a company held to be unable to pay its debts and where is the authority for it?

A

S.123 IA 1986

  • creditor indebted more than £750 and notice on company that due
  • proved to satisfaction of the court that company is unable to pay its debts as they fall due
  • proved to satisfaction of the court that value of the company’s assets is less than the amount of its liabilities
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7
Q

Where is the definition of an asset and what does it typically include?

A

S.436 IA 1986 - property includes money, goods, things in action, land

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8
Q

What is onerous property for a liquidator and where is this defined?

A

S.178(3) IA 1986
(A) any unprofitable contract
(B) any other property of the company which is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act

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9
Q

What is the order of the distribution of assets under liquidation?

A

(1) Liquidation expenses
(2) Preferential debts
(3) Debts secured by floating charge (minus the ‘prescribed part’)
(4) Unsecured creditors
(5) Shareholderd

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10
Q

If there are insufficient funds to pay a group fully then what rule applies and what effect does this have?

A

The pari passu rule applies meaning that each creditor amongst the group will receive the same percentage of repayment as their debt amongst that class

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11
Q

What are preferential debts? Where is authority?

A

Sums due to employees - Sch 6 IA 1986

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12
Q

Are secured creditors normally included in the distribution of assets pool? What are the exceptions?

A

No because they have a charge over property that they can normally enforce, but will be if balance remains due after they have taken their security.

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13
Q

What is the prescribed part of assets (that have floating charge holders over them) that have to be set aside for unsecured creditors?

A

50% of the first £10,000

20% of the remainder

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14
Q

Where is the authority for the fact that liquidation expenses rank ahead of all other claims?

A

S.115, 156 and 176ZA IA 1986

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15
Q

What is included in the definition of liquidation expenses and where is the authority for this?

A

Rule 4.218 Insolvency Rules 1986
Includes expenses properly chargeable, or incurred in preserving, realising or getting any of the assets, remuneration of liquidator

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16
Q

What happens in when a company goes into administration?

A

An administrator is appointed who from then on manages the company’s affairs instead of the director. The directors can no longer exercise any managerial powers without the administrator’s consent. Also provides statutory moratorium, meaning that no creditor can enforce their security over the company’s property or institute/continue legal proceedings against the company (para 43, Sch B1 IA 1986)

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17
Q

What are the advantages of administration over liquidation?

A

(1) administration is usually cheaper
(2) administration may allow the business of the company to be sold as a going concern rather than selling off the assets of the business for whatever price can be obtained under liquidation
(3) the creditors may have better prospects of being paid than they would if the company was liquidated

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18
Q

What are the purpose of administration and what is the authority for this?

A

Para 3, Sch B1 IA 1986

(1) Rescue the company as a going concern
(2) Achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up
(3) Realize property in order to make a distribution to one or more secured or preferential creditors

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19
Q

When can an administrator consider liquidation?

A

(A) it is not reasonably practicable to save the company

(B) a liquidation would achieve a better result for the company’s creditors as a whole

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20
Q

What are the differences between administration and liquidation?

A

(1) Administrator has full management powers; liquidator may only carry on business for the benefit of winding up the company
(2) An administrator has no power to disclaim onerous property
(3) The appointment of a liquidator is primarily a matter for creditors; the appointment of an administrator is usually left to directors
(4) Administration is more flexible because it does not preclude liquidation

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21
Q

Where is the authority for a company to enter into a Company Voluntary Arrangement (CVA)?

A

Company is able to enter into a binding agreement with its creditors under Part 1 of IA 1986

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22
Q

What are the stages of a CVA?

A

(1) Proposal for it by either administrator or liquidator (or directors if not in either)
(2) If approved, needs to be supervised by proposer.
(3) Supervisor has to submit report stating whether proposed CVA has reasonable prospect of being approved and implemented and recommend whether meetings needed to consider proposal
(4) If meetings proposed then they should be called in order to approve proposal
(5) If proposal approved it will bind the company and supervised

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23
Q

What is the distinction between a creditors and a members’ voluntary winding up?

A

A members winding up will include a declaration of solvency by the directors under s.89 IA 1986 that directors have made full enquiry into company’s affairs and have the formed the opinion that company will be able to pay its debts in full within a period

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24
Q

When does a voluntary winding up occur? What is the authority?

A

S.84 IA 1986
(A) if occurrence of event triggering company being dissolved
(B) passing of special resolution

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25
Q

What is the aim of the liquidator?

A

Maximise sale of assets and payment back to creditors, and investigate cause of liquidation of company. Duty owed to creditors as a general class and to the company

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26
Q

What powers does a liquidator have under Sch 4 IA 1986?

A

Ability to pay creditors in full
Power to bring or defend legal proceedings on behalf of the company
Power to carry on the running of the business in order to achieve a more beneficial winding up
Power to sell any of the company’s property

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27
Q

What is authority for the fact that a liquidator can be sued for any misfeasance or breach of duty in relation to the company?

A

S.212 IA 1986

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28
Q

Where is the authority for a liquidator or administrator to apply to the court for a remedy on the ground that the company entered into a transaction for an undervalue?

A

S.238 IA 1986

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29
Q

When is the relevant time for assessing a transaction at an undervalue? What is the authority?

A

S.240(1)(a) IA 1986

2 years ending on the date of insolvency

30
Q

What is the necessary requirement for a transaction at an undervalue to fall within the relevant time period to be able to bring a claim for this? What is the authority?

A

S.240(2) IA 1986

Company must have been unable to pay its debts then or became unable to pay its debts due to the transaction

31
Q

If a claim for a transaction at an undervalue is successful what will the court do? Authority?

A

S.283(3) IA 1986
Court will make an order it thinks fit for restoring the company to the position it would have been in had the company not entered into the transaction

32
Q

What are the justifications for gifts/transactions with no consideration under s.238(5) IA 1986?

A

That they are bona fide payments for the benefit of the company by providing positive encouragement to the workforce and enhance industrial relations

33
Q

What does s.238 IA 1986 refer to?

A

Transactions at an undervalue

34
Q

What is a case law example of a transaction at an undervalue concerning mortgaged farm? What were the facts?

A

Agricultural Mortgage Corp. Plc v Woodward [1994]
Shortly before repayment deadline on mortgaged property agreed a tenancy. Value of farm with vacant possession was double worth with tenancy though so this was transaction at an undervalue.

35
Q

Which case held that the benefits given and received during a transaction must be valued as they are at the time of the transaction? What did the case concern?

A

Ramlort v Reid [2004] - payout under a life assurance policy

36
Q

What are the defences available to a transaction at an undervalue under s.238 IA 1986?

A

(A) company entered into the transaction in good faith and for purpose of carrying on its business
(B) at the time it did so there were reasonable grounds for believing that the transaction would benefit the company

37
Q

Which case held that the term ‘carrying on its business’ for the purpose of a defence to a transaction at an undervalue in s.238 IA 1986 includes the process of liquidation?

A

Re Sarflax [1979]

38
Q

What are the possible remedies for a transaction at an undervalue (s.238 order)? What is the authority?

A

s. 241(1) IA 1986:
- require any property transferred as part of the transaction to be vested in the company
- require any person to pay, in respect of benefits received by him from the company, such sums to the office-holder as the court may direct

39
Q

Which case is authority for the fact that a court has the discretion not to make a s.238 order (transaction at an undervalue)? Facts?

A

Investment Management Ltd (No.1) [2004]
Company on the verge of collapse but not entering into transaction at an undervalue would have actually made the position worse

40
Q

Which section of the IA 1986 provides that the court does not have to make a s.238 order (transaction at an undervalue) if the interest acquired from a person other than the company in good faith and for value, or require that someone who received a benefit in good faith and for value to pay a sum?

A

s.241(2)

41
Q

Why do preferences occur?

A

A company may attempt to avoid a liquidator’s hierarchy of payments by paying off certain low-ranking creditors prior to liquidation, with the result that upon liquidation there may not be enough assets to pay the higher-ranking creditors

42
Q

What provision of the IA 2006 allows the liquidator to apply to the court to make an order to restore the company to the position it would have been in when a company has provided a creditor with a preference?

A

s.239

43
Q

What are the relevant time periods for assessing whether a company has provided a creditor with a preference under s.239 IA 1986? Where is the authority?

A

s.240 IA 1986 - 2 years ending with onset of insolvency when party connected with the company. 6 months for unconnected party

44
Q

What is the definition of a connected party and what is the authority for this?

A

s. 249 IA 1986
(a) director or shadow director of company or an associate of such
(b) associate of the company

45
Q

What is the definition of an associate and what is the authority for this?

A

s. 435 IA 1986
- husband, wife or civil partner
- relative of individual
- any person the individual employs or is employed by
- the company is associate of another company if the same person has control of both, or if he has control of one and his associates or him plus his associates have control of the other

46
Q

Under s.239 IA 1986 when does a company give a creditor preference?

A

(a) if the person is one of the company’s creditors
(b) and the company does anything or suffers anything to be done which has the effect of putting that person into a position which, in event of the company going into insolvent liquidation, will be better than the position it would have been
[also look for desire to prefer]

47
Q

In which case did the court hold that the granting of security over premises even though the bank account was overdrawn was a legitimate reason as security for a new advance rather than being a preference to the creditor?

A

Robertson v Grigg (1932)

48
Q

In which case did the court hold that you should consider the total effect of transactions in an overdrawn bank account to assess whether the creditor’s position has been improved under a s.239 order for preference? What did the court hold?

A

Re Weiss [1970]

A payment in to an overdrawn account may be preferential but a subsequent drawing by the company can negate it.

49
Q

Which case is authority for the fact that paying a cheque into a bank account carries no intention to prefer a creditor?

A

Airservices Australia v Ferrier (1996)

50
Q

In which case did the court hold that when the bank took a fixed charge over the assets of a company and a floating charge on remaining assets but allowed the company to draw on the account to pay other creditors this still amounted to a preference even though technically the bank was paying them?

A

G&M Alridge Pty Ltd v Walsh (2001)

51
Q

In which case did Millett J hold that you can infer the desire to prefer from the circumstances of the case?

A

Re M C Bacon Ltd [1990]

52
Q

Where are the potential remedies for a preference to creditors order (s.239 IA 1986) located?

A

s.241(1) IA 1986

53
Q

What other transactions can the liquidator seek to set aside under s.244 IA 1986?

A

Extortionate credit transactions

54
Q

Which section of the Insolvency Act 1986 makes floating charges invalid where they have been granted to directors or someone connected to them where 12 months before onset of insolvency?

A

S.245 IA 1986

55
Q

Where do you find the definition of a director and what does it include?

A

S.251 IA 1986 - any person occupying the position of director, by whatever name called (includes shadow directors, de facto directors and de jure directors)

56
Q

What are the possible consequences of insolvency for company directors?

A
  • personal liability to contribute (by virtue of a misfeasance, fraudulent trading or wrongful trading court order)
  • disqualification as director
  • prevention from directing over phoenix companies
57
Q

What does s.212 IA 1986 allow a liquidator to do?

A

Bring an action in respect of a breach of duty by directors and others and court can order repayment or contributory payment to company’s assets

58
Q

Which case is authority for the fact that members do not have the power to ratify the directors’ conduct that is to the detriment of creditors and the basis of a s.212 IA 1986 misfeasance order?

A

Precision Dippings Ltd v Precision Dippings Marketing Ltd

59
Q

Where is the statutory authority for the fact that a liquidator may hold a director or anyone else liable for fraudulent trading?

A

S.213 IA 1986

60
Q

If the court holds someone liable for fraudulent trading what could be a remedy? Authority?

A

S.213(2) - hold them liable to make contribution to the company’s assets

61
Q

Which case is authority for the fact that if a company continues to carry on business and to incur debts at a time when there is to the knowledge of the directors no reasonable prospect of the creditors ever receiving payment, this can amount to fraudulent trading under s.213?

A

Re William C. Leitch Brothers Limited

62
Q

Which case established that fraudulent trading under s.213 IA 1986 requires actual dishonesty involving, according to current notions of fair trading among commercial men, real moral blame?

A

Re Patrick and Lyon Ltd

63
Q

Which case is authority for the fact that fraudulent trading under s.213 includes where the person realised at the time when the debts were incurred that there was no reason for thinking that funds would become available to pay the debt when it became due or shortly after?

A

R v Grantham

64
Q

Where is the statutory authority for the fact that a liquidator can bring a wrongful trading claim against a director?

A

S.214 IA 1986

65
Q

What makes a director liable under s.214 IA 1986 for wrongful trading?

A

If the director knew or ought to have concluded that the company had no reasonable prospect of not going into insolvent liquidation and did not take every step that ought to have been taken by a director to minimise the potential loss to the company’s creditors

66
Q

What is the authority for the fact that for a wrongful trading order the director is taken to have (a) the general knowledge, skill and experience that may be reasonably expected of a person carrying out the same functions and (b) general knowledge, skill and experience that that person has?

A

S.214(4) and (5) IA 1986

67
Q

Which case is authority for the fact that under s.214 wrongful trading assessment of company’s position includes reference to the factual information available to the director and also what was ascertainable given reasonable diligence and the standard of the director?

A

Re Produce Marketing Consortium Ltd (No.2)

68
Q

Where is the statutory authority for the fact that a director can be disqualified?

A

S.1 Company Director Disqualification Act (CDDA) 1986

69
Q

On what ground could a director be disqualified and what is the statutory authority for this?

A

S.6 CDDA 1986 - unfitness because of conduct as director of company that has gone insolvent

70
Q

In which case did the judge accept that there are three tiers when deciding how long to disqualify a director for under CDDA 1986 and what are the three tiers?

A

Re Sevenoaks Stationers Ltd

(1) 2-5 years for where case is relatively not very serious
(2) 6-10 years serious cases not meriting the top bracket
(3) 10-15 years for very serious cases (e.g. Serial insolvency of companies)

71
Q

Which statutory authority makes it impossible for a director of an insolvent company to trade using the same or similar company name during the next 5 years? (I.e. A phoenix company)

A

S.216 IA 1986

Company Law (4 decks)

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