Insolvency (corporate) Flashcards
What is the definition of Insolvency?
A company is deemed insolvent when it is unable to pay its debts
List the 4 types
How do you prove insolvency? s123 Insolvency Act 1986 tests:
- Statutory demand
- Unsatisfied Judgement
- The cashflow test
- The balance sheet test
List the 3 parts
What is the statutory demand test? s 123 IA
- If a creditor is owed £750 or more;
- Has served a statutory demand on the company requiring it to pay the sum; and
- the company has for 3 weeks thereafter failed to pay or come to an alternative arrangement with the creditor
Unsatisfied judgement test under s123 IA?
If a creditor
- Obtains judgement against the company; and
- Tries to enforce it;
- But the debt hasn’t been paid in full/ at all
e.g. you’ve tried to send in bailiffs and failed to recover the sum due
The cashflow test under s123 IA?
Can be proved to the court that the company is unable to pay its debts as they fall due
e.g. C is having fin. difficulties - restructuring arrange. w/ creditors
What is the balance sheet test under s 123 IA?
rarely used bc balance sheet = snapshot in time, hard for credz to prove
Can be proved to the court that - total value of the company’s liabilities exceed its assets
easy for company to argue the figures are out of date
Why is it important to know when a company is insolvent?
What is a pre-requisite for winding up?
Insolvency - A creditor must be able to show that the debtor is insolvent before the creditor can apply for the company to be wound up
When is the point of insolvency - if the directors appoint an administrator?
The time at which the notice of intention to appoint is filed at Companies House
What are the 3 different types of liquidation processes?
One possible outcomes for an insolvent company
- Compulsory liquidation (3rd party commences involvency proceedings against insolvent company)
- Creditors voluntary liquidation (commenced by company itself when insolvent, usually from creditor pressure)
- Members voluntary liquidation (commenced by solvent company because it wants to stop trading or b/c its dormant and wants to bring its affairs to an end in orderly manner)
When might a petitioner be prevented from proceeding with a winding up petition?
- If the company can show that there is a genuine and substantial dispute in relaton to the money owed
(If petitioner already obtained judgement it would be difficult for company to argue that there is a dispute unless it succeeds in setting the judgement aside)
court has ultimate discretion (IA 1986) = may still wind up company
Compulsory liquidation petition- when might the court adjourn the hearing to a later date?
If the company indicates that it will be able to pay the debt within a reasonable period of time
If the court orders that the company should be wound up - who becomes the company’s liquidator/ whats their role/ can they appoint someone else?
- The Official Reciever (O.R) will automatically become the company’s liquidator
- The O.R is a civil servant and court official and employed by the Insolvency Service
- the O.R can appoint a private insolvency practioner depending on the nature of the case and the creditors’ wishes (as long as the company has sufficient assets to pay the Insolvency Practioner’s fees)
Options for insolvent companies
Advantages of talking to creditors
2 main advantages
- Creditors may agree to defer payment or come to some other compromise
- This may allow the company to continue to trade
What is a company voluntary arrangement (CVA)
Option for insolvent company - alternative to liquidation
Entering into a formal arrangement with creditors
Where the parties agree to a compromise
Define - What is administration?
Option for insolvent company -alternative to liquidation
- Administration is the process whereby an administrator (an independent insolvency practitioner) is appointed to run the company and make whatever changes are necessary
to improve its financial performance. - Alternatively, the administrator will aim to get the company into a position where it can be sold as a going concern
What is CIGA 2020 Moratorium? + who is in control +how long does it last?
(3 points)
- In this moratorium, the company is protected from actions by creditors relating to pre-moratorium debts but must pay debts incurred during the moratorium in full.
- During the moratorium - the company’s directors remain in control, BUT a qualified insolvency practitioner acts as an independent monitor who has oversight of the moratorium and can terminate it in
certain circumstances. - 20 days but can be extended
Moratorium under CIGA 2020 - What debts are excluded from the payment holiday?
- Employees’ wages or salary arising under a contract of employment
- The monitors remuneration or expenses
- Goods or services supplied during the moratorium
Moratorium under CIGA 2020 - What are the requirements for a company to participate?
- Company must be unable to pay its debts or likely to become unable to pay its debts
- If the company has not already entered into a moratorium during the previous 12 months
- Only available to English companies with no outstanding winding up petitions against them
Moratorium under CIGA 2020 - Who cannot use this?
- Banks (financial services exception)
- Non UK companies
- Companies that have entered into a moratorium in the previous 12 months
Moratorium CIGA 2020 procedure: How can the company obtain the CIGA 2020 moratorium?
- Directors must file the relevant documents at court and
- the proposed monitor must confirm that it is likely that the moratorium will result in the rescue of the company as a going concern
Moratorium CIGA 2020 - How long does it last and for how long can it be extended (subject to what confirmation)? (2 points)
- Lasts 20 business days
- but it can be extended for a further 20 business days by filing certain docs at court
- Can be extended by the directors for a period of up to 1 year if the creditors who are not going to get paid because of the payment holiday consent to this
What is CIGA 2020 Restructuring Plan
Eligible companies can enter into a court-supervised arrangement/compromise between the company and its secured and unsecured creditors and shareholders
How does CIGA 2020 restructuring plan work?
4 stages
- The directors (or SH/creditors can) prepare a restructuring plan and apply to court for approval to call
meetings of the company’s creditors and shareholders.
*Implementation of plan involves 2 court hearings *: - In first court hearing - creditors can make representations
- Between hearings - the creditor and shareholder meetings will be held where they vote to approve plan
- In second court hearing - court will decide whether to sanction the proposed plan
directors prep plan in practice bc they have the detailed info needed
CIGA 2020 Restructuring - how is the plan approved at the meeting of shareholders and creditors?
- Creditors and shareholders are divided into classes
- each class will be deemed to have approved the plan if 75% by value of that class vote in favour.
Contrast Sch.of.arragement = require overall majority in no. to approve)
