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Duff and Phelps > Insolvency > Flashcards

Insolvency Flashcards

1
Q

What is insolvency?

A

The state of being unable to repay the money owed.

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2
Q

What are the two types of insolvency?

A

Cash flow insolvency and balance sheet insolvency.

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3
Q

Cash flow insolvency?

A

Inability to pay debts when they fall due.

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4
Q

Balance sheet insolvency?

A

Value of assets less than liabilities.

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5
Q

What is statutory demand?

A

If a creditor is owed money, they can issue a statutory demand. A statutory demand is a formal written request that a debt must be paid. An individual or business that receives a statutory demand has 21 days to: settle the debt. It has to have a value of over £750.

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6
Q

What is unpaid judgement?

A

An unpaid judgement is essentially an unpaid debt where the creditor has used the court system to make an official ruling against the debtor showing that, according to the courts, they do indeed owe money to the creditor.

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7
Q

What does the Companies Act define as ‘financially distressed?

A

Reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable within the immediately ensuing six months. (or reasonably likely they will become insolvent in the next 6 months).

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8
Q

When was the Insolvency Act established?

A

1986

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9
Q

What is the Insolvency Act?

A

Provides the legal platform for all matters relating to personal and corporate insolvency in the UK.

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10
Q

Where do insolvency procedures terminology remain similar and change?

A

Similar in England, Wales and Northern Ireland but different in Scotland.

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11
Q

What is the objective of insolvency procedures?

A

To maximise returns to creditors.

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12
Q

What are the two regulatory bodies for Insolvency Practitioners in the UK?

A

The Insolvency Practitioners Association and The Insolvency Service.

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13
Q

What is the aim of The Insolvency Practitioners Association?

A

To promote and maintain standards of performance and professional conduct amongst those engaged in insolvency practice.

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14
Q

What is the role of The Insolvency Service?

A

A Government agency that provides services to those affected by financial distress or failure.

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15
Q

What are the five types of insolvency processes?

A 
Administration (ADM)
Creditors' Voluntary Liquidation (CVL)
Compulsory Liquidation (CL)
Company Voluntary Arrangment (CVA)
Members' Voluntary Liquidation (MVL)
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16
Q

Administration (ADM) objectives?

A

Designed as a rescue procedure for insolvent companies.

  1. Rescuing the company
  2. Achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up without going into ADM.
  3. Realising property in order to make distribution to one or more secured or preferential creditors.
17
Q

Creditors’ Voluntary Liquidation (CVL)

A

The companies directors choose to voluntarily bring an insolvent company to an end by the appointment of a Liquidator.
Its a method used to realise the value of the companies assets prior to shut down.
Usually chosen when there is no chance of saving the company.
The creditors have control liquidation and appoint a liquidator of their choice, despite it being started by resolution of the shareholders.

18
Q

Compulsory Liquidation (CL)

A

When the winding up of the company is ordered by the court.

Usually arises due to a petition by the creditor for the winding up of the company due to unpaid debt.

19
Q

Company Voluntary Arrangement (CVA) overview

A

The company can agree to a binding compromise with its creditors, for example, paying its creditors 50p in the £ in satisfaction of its debt.
A successful CVA allows for the company as a legal entity to be reduced and returned to a position of solvency.
It requires the approval of at least 75% in value of its creditors.
The CVA procedure often used on the conclusion of, or sometimes during, ADM.

20
Q

Members’ Voluntary Liquidation (MVL)

A

A voluntary winding up procedure for solvent companies. Liquidator is appointed by the shareholders.
Why?
Proprietors may wish to unlock their capital and retire.
A group of companies may wish to close down a subsidiary which has outlived its usefulness and only exists on paper.
Used in corporate restructuring.

21
Q

Why can ADM be positive?

A

It offers breathing space for companies to make plans free from the pressure that creditor pressure often brings. This is done through a MORATORIUM, making no legal action possible against the company without either permission of the appointed ADM or leave of the court.

22
Q

What is a moratorium?

A

A legalised perdio of delay in the performance of legal obligations or payment of debt.

23
Q

CVA advantages?

A

Possible survival of a company as a going concern.
Preservation of goodwill of the business.
Higher return to creditors from trading profits/sale of the business as a going concern.
Binds all creditors
Directors maintain control of the company.

24
Q

‘going concern’?

A

A company that is able to continue operating without the threat of liquidation.

25
Q

Pre-pack Administrations?

A

Can be used to enable the business and assets of the company to be sold to a new company or existing company. (often called a newco or Phoenix company).
All valuations, due diligence, finance etc has been arranged prior to the appointment of an Insolvency Practitioner, who is to act as the ADM of the company.
Upon the appointment of the ADM, the deal is ratified without either shareholder or creditor consent.
Allows for a seamless purchase of a company.

26
Q

What are Pre-packs regulated through?

A

Regulated through the issue of Statement of Insolvency Practice 16 (SIP 16). SIP 16 lays down details on how the Insolvency Practitioner should disclose to creditors details of the sale.

27
Q

Trading whilst in Administration?

A

Not uncommon as businesses tend to have more inherent value if they are sold as a going concern.
Its a good way of liquidating stock at its highest value.

28
Q

What is trading administration?

A

A process whereby the directors, shareholders and/or floating charge holder seeks to place the company under administration, given temporary protection to the company from creditors while the appointed administrator ( a licensed Insolvency Practitioner) manages the company on a temporary basis.
The aim is to rescue the company where it would have been impossible if it had not been given the time, also to realise a better return from the company’s assets or property.
During the administration period, the administrator would market the business for sale.

Duff and Phelps (3 decks)

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