Insolvency and Bankruptcy

Question 1

What is insolvency

Answer 1

• A financial state in which a compnay cannot pay its bills and other obligations
• e.g when debts > assets for a company
• When a company becomes insolvent they must take immediate action to generate cash and renegoiate current debts.
• Companies who cannot do this often face bankruptcy proceedings or liquidation of all their assets

Question 2

What is Liquidation

Answer 2

• Which the existance of a company is brought to an end and its property administrated for the benefit of creditors and members.
• A liquidator is appointed to take control of the company, collect assets and pay all its debts and distribute any surplus between memebers.

Question 3

What are the alternatives to liquidation

Answer 3

• Administration - Where an adminstrator is appointed to run the company’s affairs and aims and attempts to rescue the company as a going concern.
• Voluntary arrangements- Where insolvency proceedings are substitued for a settlement of financial diffculties between the company and its creditors.

Question 4

What do people owed money (creditors) have to do when a firm goes into liquidation

Answer 4

• Make a formal claim to recover their money

Question 5

What differs between insolvency and bankruptcy

Answer 5

• Both occur when liabilties exceed assets
• Insolvency is a state of being and bankruptcy is a matter of law.

Question 6

Who can apply to the court to become bankrupt

Answer 6

• Indivduals, sole traders and members of a partnership
• A persons creditors can usually petiton the court to use a bankruptcy order if the person owes more than £5000/

Question 7

What is the procedure for when a bankruptcy order has been made against a person

Answer 7

• The official reciever administers the bankrupt persons financial affairs
• If bankrupt person has significant assets, then the official reciever will appoint an insolvency practioner as a trustee

Question 8

What is the role of a trustee

Answer 8

• Sell all the persons permitted assets and use the money to pay as much possible to the creditors

Question 9

What is alternative to bankcruptcy

Answer 9

• Is when a debtor seeks an indivdual voluntary agreement (IVA)

Creditors representing at least 75% of those who vote need to vote in favour of IVA for it to go ahead