Insolvency Basic Flashcards
What is MVL
Members Voluntary Liquidation
What is CVL
Creditors voluntary liquidation
What does MVL portray
It signifies a solvent corporate’s voluntary act of ceasing operations ( winding up its operations).
Key here is that it’s SOLVENT.
What does CVL portray
When creditors file for the company to be wound up. The company is insolvent. The company is pressured to commence the liquidation process.
What are the characteristics of an insolvent company? What are the main indicators.
1.) liabilities exceed assets
2.) unable to pay creditors within 21 day intermediary (sum around 750+) on demand.
3.) stagnant cash flow
4.) unpaid judgement debt
Purpose of commencing insolvency process?
To pay creditors. To restructure the company. Enter into administration and rescue the company or maximise creditor returns. Restructuring debt.
What are floating charges?
a security interest or lien over a group of non-constant assets that change in quantity and value.
Example, a STOCK
Liquidation processes?
• Creditor voluntary liquidation
• Members Voluntary liquidation
• Compulsory Liquidation
Voluntary liquidation?
CVL and MVL
How is MVL distinct from CVL (mention MVL’s characteristics)
MVL involves: Directors declaring the company’s SOLVENCY. And in order to appoint a liquidator, a resolution must be passed.
How is CVL distinct from MVL?
In MVL, the directors declare the company’s INSOLVENCY. In addition, the creditors nominate a liquidator.
Compulsory liquidation?
Initiated by COURT PETITION (formal request made to the courts). Winding up order appoints Official Receiver as liquidator.
What methods are available to secured creditors when recovering their debts?
• LPA receivers (under fixed charges)
• Administrative receivers (under floating charges)
Who/what are receivers?
Receivers are appointed to manage assets one behalf of creditors
Company Voluntary arrangements? CVA
• solvent company
• short term cash flow issues
• agreement between company and creditors
How is the CVA proposal put forward?
• 75% in value creditors (so creditors who own 75% of value of the total debt)
• 50% unconnected creditors approval
Again, how is the CVA proposal put forward?
• 75% creditors in value
• 50% of unconnected persons approved
Connected persons vs unconnected persons?
• unconnected persons: those not directly involved in company management.
• connected persons: directly involved in management.
Who oversees CVA implementation?
An insolvency practitioner
What are the alternatives to liquidation?
• administration
• CVA
• schemes of arrangement
• restructuring plans
• free standing Moratorium
• informal agreements
Again, what are the alternatives to liquidation?
• moratorium: breathing space
• Restructuring :
• Administration: appointed receiver
• schemes of arrangement: requires court hearings. Complex restructurings for large companies.
• informal agreement : risky. Non binding. Enforcement issues.
• CVA: agreement between company and creditors
RE MC BACON. What is the significance of this case in relation to preferential treatment. “Desire to prefer”?
The courts concluded that “commercial pressure” did not amount to intention to prefer creditors.
Briefly speaking, a debenture was procured by NATWEST who had “commercially pressured” the insolvent company.
Terminology: What is a debenture?
A debenture is a security over an asset for a loan which is acquired by the insolvent company during insolvency proceedings.
What is “intention to prefer” a component of?
Clue: V….. P…..
Voidable Preference. Preferential treatment offered to creditors at the detriment of the insolvent company in question.
Think: giving someone 10 bags of sweets for £1, when in actual reality, the true value of those bags of sweets cost £5 each
Transaction at undervalue is a branch that stems from voidable preference. But what is is?
Transaction at undervalue, undervaluing an asset, defying it’s true value for no fundamental reason.
Presumptions of preferential treatment
• connected persons presumed, but can be rebutted.
• unconnected persons, not presumed
What remedies are available in cases where voidable preference is demonstrated?
• court will oblige the assets to be returned
• discharge security
• proceeds back to company
When should transaction occur for it to be considered as a possible TAU
2 Years, 2 years prior the onset of insolvency.
Defences of TAU?
• reasonable grounds
• good faith
• business purposes
What is ECT? Extortionate Credit Transactions. And when do they arise?
• grossly exorbitant payments
• 3 years before insolvency
What is the distribution of assets in liquidation?
• fixed charge assets
• liquidation expenses
• preferential debts
• floating charge holders
• unsecured creditors
• Shareholders
Again, distribution of assets during liquidation (in order)?
• fixed charge assets
• liquidation expenses
• preferential debts
• floating charges
• unsecured creditors
• shareholders
Who are preferential creditors, and how much can they claim?
• employees
• claim up to £800 earned in FOUR months prior to winding up the company
• HMRC (so PAYE/VAT) are considered secondary preferential. They’re given priority (Ofc🙄)
What are proceeds distributed to creditors called?
Dividends
Ring Fencing. What is it? 🤺
• preserving a portion of funds
• from floating charge assets
• reserved for unsecured creditors
• reserves a level of recovery for unsecured creditors.
Okay… reserving a portion of funds from floating charges for unsecured creditors. How are those funds allocated then?
• 50% of the first 10,000£
• 20% of the remainder
• take note of the 800,000£ limit/cap
What is a moratorium?
• alternative to liquidation procedure
• offers temporary protection of company from creditor actions
• duration from 20 business days (extendable) up to 1 year with creditor consent.
Eligibility for moratorium?
• unable/unlikely to pay debts
• not available to companies having used in within 12 months
• excludes certain companies, ie Banks
🚨 Key considerations re moratoriums is that directors retain control (under supervision nonetheless); debts incurred during intermediary must be repaid in full.
Key considerations re moratoriums is that directors retain control (under supervision nonetheless); debts incurred during intermediary must be repaid in full.
Restructuring plan under CIGA 2020: court supervised arrangement to address financial difficulties.
Insolvency and Bankruptcy procedures?
• firstly, proving insolvency requires…
• statutory demand : serve demand for £5,000+ liquidated sum. Wait 3 weeks for payment.
• future liability : wait 3 weeks for payment or application to set aside. Wait 21 days for debtor to “ prove that they can pay” or “apply to set aside”.
• court judgement : obtain judgement for £5,000 and fail execution
S.172 ~ “Good Faith”. What does acting in good faith involve?
• promoting the success of the company for the benefit of its members as a whole
172 highlights the responsibility companies have to take decisions that promote the success of the company. What is regarded as upholding this provision?
• interests of company employees
• long term consideration
• fostering relationships
• maintaining reputation
• fairness
What about s.174? Duty to exercise reasonable care, skill and diligence?
• persons carrying out directorship work are expected to uphold this provision.
• expected to possess general knowledge skill and experience
122 insolvency Act: Circumstances which a company may be wound up by court.
• special resolution
• public company without trading certificate more than 1 year
• old public company (subject to definition)
• company unable to pay debts
• court opinion that it’s just and equitable that the company should be wound up
• company suspends business for a whole year/ doesn’t commence business operations within a year of its incorporation
In relation to insolvency, re the s.122, keep the two provisions in mind: “the court….” “The company…” which justify reasons for the company to be wound up BY the court.
• company unable to pay its debt
• the courts find it just and equitable
S.123 defines inability to pay debts
• debtor unable to pay a sum exceeding £750. Due server on company. Company hasn’t paid in 3 weeks. (Statutory order)
Breach of fiduciary duty or misfeasance. In this context, who can be held responsible? Is it only the Directors?
No, liquidators, receivers, officers of the company can. Those directly involved with money, property or any duties associated with the company.
What remedies are available? How will the courts deal with breaches and misfeasance?
court order to:
• Repay with interest as the court thinks just.
• contribute X sum to the company’s assets by way of compensation.
All in all, where the court thinks JUST.
S.213 Fraudulent Trading. What is fraudulent trading?
The act of the company defrauding its creditors through trade.
Remedies (consequences) for defrauding creditors?
Those involved will be liable to (on the application of the liquidator) make X contributions to the company’s assets as the court thinks PROPER.
What is misfeasance?
It’s where a director has inappropriately managed company funds. Acting contrary to company’s best interests. Defying principle 172 CA.
