Insolvency, Administration And Liquidation Flashcards
What is meant by the term “insolvency”?
When a company or individual is not able to meet credit commitments. Where the money going out > money going in.
What is meant by the term “Administration”?
Where a business is deemed to be insolvent so an insolvency practitioner (IP) is brought in to diagnose the problem and try to bring about a solution.
What is meant by the term “Liquidation”?
Where a business is deemed to be insolvent with a vast amount of debt meaning the business must come to an end. This is when all assets are sold and the capital is distributed in an agreed order.
Describe administration caused by voluntary action.
A meeting between the the board of directors takes place where a vote is made to take the company into administration.
Describe how administration is chosen through involuntary action.
If the debt owed is more than £750, the creditor is able to issue a statutory demand with a specific time period to pay the money back by.
If the debt isn’t paid within this time frame, 21 days after the terminal date the creditor is able to invoke the company into administration involuntarily.
Through a dispute, It will then be up to the court to decide whether it is due to insolvency using the cash flow test. If it is decided to be due to insolvency, an IP could be appointed.
What is the role of the administrator/ IP once appointed?
They become and agent acting on behalf of the company’s best interests. They will remove the board of directors and assume control of the business. The business is able to continue trading during this.
Provide an example of how a construction company may go through administration.
-Company operates in an expensive city centre office.
- administrator may suggest selling the premises and moving to a smaller, cheaper office outside of the city.
- could also suggest rationalisation- may create redundancies however.
- the business could then be handed back to the directors in a better financial position.
Describe how liquidation is chosen through involuntary action
If the debt owed is more than £750, the creditor is able to issue a statutory demand with a specific time period to pay the money back by.
If the debt isn’t paid within this time frame, 21 days after the terminal date the creditor is able to invoke the company into liquidation involuntarily.
Through a dispute, It will then be up to the court to decide whether it is due to insolvency using the cash flow test. If it is decided to be due to insolvency, an IP could be appointed.
What is the first stage of liquidation?
- Assets are assets, including monies owed to the business.
- It’s not usual to carry on business but there is a duty to act as a prudent person. I’m construction this could be to complete remedial work needing to be done on an existing job to recover retention money.
- no new business can be completed.
- once the monies have been gathered, the liquidator will draw up a list of creditors and pay out according to the recognised payout list.
How is the payout list organised?
First category - secured creditors:
- Usually banks who have locked on assets such as buildings etc
- liquidator is at the top of the list.
Second category- preferential creditors:
- employees entitled to redundancy pay
- payments owed to the tax department.
What are the second and third stages of liquidation?
Liquidator must look for any fraud. S320 of this act allows them to pursue fraud.
Could be where assets have been sold off prior to liquidation for under-value or over-value.
