Insolvency

Question 1

What are the four grounds on which a company may be wound up?

Answer 1

1. STATUTORY DEMAND by creditor owed more than £750; waited at least 3 weeks; not paid and no arrangement with Coy
2. UNFULFILLED JUDGMENT DEBT - Creditor obtained judgment and attempted to execute, but debt remains unsatisfied
3. CASH FLOW TEST – company unable to pay debts as they fall due
4. BALANCE SHEET INSOLVENCY – assets less than liabilities (including contingent or prospective liabilities)

Question 2

What are 3 dangers associated for directors who do nothing in an insolvency scenario?

Answer 2

1. Liability of wrongful or fraudulent trading
2. Potential disqualification
3. Breach of statutory duties (especially S.172(3) CA) which, on approaching insolvency, are owed to the creditors

Question 3

Scheme of arrangement

Answer 3

Any formal agreement between the company and its creditors, binding even dissenting or unknown creditors with court sanction

Question 4

How does a CVA work (3 points)?

Answer 4

1. WRITTEN PROPOSAL put forward at meetings of shareholders and creditors, approval binding all creditors. Two votes required to secure approval - 75% by debt; and 50% excluding all connected creditors.
2. Coy which does not fulfil obligations – supervisor can petition for WINDING UP
3. Directors of small coys can apply for 28-day MORATORIUM during rescue

Question 5

Why might a creditor opt for a CVA over a winding up (3 reasons)?

Answer 5

1. Possible ongoing profitable trading if CVA successful (creditors may receive more than on a winding up)
2. Costs of CVA lower than other insolvency proceedings
3. Floating charge holders – no risk of avoidance compared to a winding up

Question 6

Which 3 categories of people can apply for out-of-court administration procedure?

Answer 6

1. Company
2. Directors
3. Qualifying Floating Charge Holder

Question 7

Two situations where an administrator cannot be appointed?

Answer 7

1. An Administrative Receiver has already been appointed

2. A liquidator has already been appointed

Question 8

Two effects of appointing an administrator?

Answer 8

1. Immediate moratorium – no winding-up order, no enforcement of security, no legal proceedings etc
2. Administrator runs the company – directors cannot make decision without his consent

Question 9

When can administrator wind up company?

Answer 9

If the company cannot be rescued as a going concern and winding up the company to distribute its assets will be better for creditors

Question 10

3 reasons why a QFCH might want administration over AR?

Answer 10

1. Avoid bad publicity for lender
2. Prevents other creditors taking enforcement action due to immediate moratorium
3. Enables transactions at an undervalue to be disavowed

Question 11

What are the limits of the authority of a fixed charge receiver?

Answer 11

He is only the fixed charge receiver of the charge under which he was appointed, and is therefore only entitled to deal with the property concerning it.

Question 12

When can an AR be appointed?

Answer 12

The AR is appointed (i) under the terms of a debenture, including a floating charge security provided the security covers the whole or substantially the whole of the company’s property; (ii) if the charge is created before 15 September 2003

Question 13

What is an AR’s duty and to whom is it owed?

Answer 13

AR aims to take possession and sell assets of the company in order to repay the debenture holder (a duty only to the QFCH who appointed him)

Question 14

What proceedings can be initiated against a company in administrative receivership?

Answer 14

Any – there is no moratorium for AR

Question 15

3 prerequisites for compulsory liquidation?

Answer 15

1. Locus standi – creditor, administrator, AR or supervisor of a CVA applies for liquidation
2. Grounds for winding up – (i) unable to pay debts or (ii) just and equitable ground
3. Demand for more than £750 which is due and payable and not disputed on substantial grounds

Question 16

4 steps for a members’ voluntary liquidation?

Answer 16

1. SOLVENCY STATEMENT - Directors make SD of solvency (for maximum of next 12 months)
2. SR - Shareholders pass a special resolution to approve the MVL
3. LIQUIDATOR - Shareholders pass an OR to appoint a liquidator
4. NOTICE - Notice of the resolutions must be given to any QFCH

Question 17

Who commences CVL and how is it commenced (3 steps)?

Answer 17

Shareholders commence but creditors control

1. SR - Shareholders must pass SR to approve the CVL
2. OR - to appoint liquidator
3. CREDITORS’ MEETING - should be convened within 14 days

Question 18

What is liquidator’s aim?

Answer 18

Collect in and realise Coy assets to maximise them for distribution to creditors generally, in order of priority

Question 19

Fraudulent trading – what are the elements (2 AR 1 MR)? Defence?

Answer 19

Actus reus – (i) any party (including director) who is party to the carrying on of a business (ii) with the intent to defraud creditors or for any fraudulent purpose

Mens rea – actual dishonesty

Defence of “sunshine” – no liability if a director genuinely believed things would get better, this is a defence even if the belief was objectively unrealistic

Question 20

Wrongful trading – what are the elements (2 AR 1 MR)? Defence (2 elements)?

Answer 20

Actus reus – (i) D was a director at the time; and (ii) company becomes insolvent

Mens rea – director (i) knew or (ii) ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation

Defence of “every step” – a director will not be liable if he can show that (i) he took every step that a reasonably diligent director (or a director with his skill and knowledge, if this imposes a higher standard) ought to have taken, (ii) to minimise the potential loss to the company’s creditors

Question 21

Who can bring a claim for misfeasance and what are its elements?

Answer 21

Where a director’s liability is already established, any creditor or liquidator may bring a claim against him for repayment, restoration or contribution to the company’s assets

Question 22

When will shareholder ratification provide a defence to misfeasance?

Answer 22

Only if the company was not insolvent at the time of the alleged act of misfeasance?

Question 23

Four situations in which directors can be disqualified

Answer 23

1. Wrongful or fraudulent trading
2. Director has been found guilty of fraud
3. Company is insolvent and director is unfit to manage the company (e..g because he procured a voidable transaction)
4. Conviction abroad of an equivalent offence

Question 24

Which voidable transaction actions does the liquidator need consent for, whose consent is needed and why is consent needed?

Answer 24

For transactions at an undervalue (238); unfair preferences (239); and transactions defrauding creditors (423). No need for 245 – avoidance of floating charges.

Consent of creditors or court is needed (due to risk of diminishing assets if action unsuccessful)

Question 25

Define a transaction at an undervalue.

Answer 25

A gift or sale for significantly less consideration than that provided by the company.

Question 26

When is an undervalue voidable (2 elements)

Answer 26

1. TIMING - Took place within 2 YEARS prior to the insolvency; and
2. INSOLVENCY - Company must have been INSOLVENT at the time of the transaction or have become insolvent as a result (presumed if transaction is with director or connected person)

Question 27

Defence to undervalue claim (3 elements)?

Answer 27

1. Good faith
2. For purpose of carrying on business
3. Reasonable grounds for believing transaction would benefit the company

Question 28

What is an unfair preference?

Answer 28

Any transaction putting a creditor, surety or guarantor in a better position in the event of an insolvent liquidation than it would otherwise have been in.

Question 29

When is a preference voidable (3 requirements)?

Answer 29

1. TIMING - transaction was within last 6 months (unconnected person) or 2 years (connected person)
2. INSOLVENCY - Company must have been insolvent at the time or become insolvent as a result
3. MENS REA - Company must have been influenced by a desire to prefer the creditor (presumed if transaction is with a connected person)

Question 30

When can a floating charge be avoided (6 elements)?

Answer 30

Where

1. an unsecured creditor
2. has obtained a floating charge
3. to secure an existing debt
4. for no new consideration (charge will be valid to the extent there is new consideration but voidable to the extent there is not)
5. within the last 1 year (unconnected person) or 2 years (connected person)
6. Company must have been insolvent at the time or become insolvent as a result

Question 31

What turns an undervalue transaction into a transaction defrauding creditors?

Answer 31

It can be proved that the intention or purpose of the transaction was to put assets beyond the reach of present or future creditors