Insolvency I MCQs Flashcards
A private limited company has been put into insolvent liquidation. At the time of the liquidation, the company had a number of unsecured creditors and 5 employees who are owed £1000 each in respect of wages for work carried out in the two months prior to the liquidation.
From where will the employees recover the wages they are owed?
From funds for the preferential creditors and the prescribed part fund
From funds for the preferential and unsecured creditors
From the prescribed part fund
From funds for the preferential creditors
From funds for the unsecured creditors
From funds for the preferential and unsecured creditors
Correct. Whilst the other answer options might sound plausible, they are each incorrect. As the employees in this scenario meet the criteria as preferential creditors in relation to some of the monies owed to them, they will recover the rest as unsecured creditors. Whilst ultimately some of the funds paid to them as an unsecured creditor may come from the prescribed part fund, they will receive this in their capacity as an unsecured creditor along with any other unsecured creditors.
A private limited company is in liquidation. The company granted a floating charge to a supplier over stock on 13 March 2008. This charge was registered at Companies House on 20 March 2008. The company also granted a floating charge to its lender to secure an overdraft facility on 14 March 2008 which was registered at Companies House on 17 March 2008. There are no fixed charge holders and all sums due to HMRC have been paid. There are two employees with claims for unpaid salary. The liquidator has realised all the company’s assets. There will be insufficient sums to pay unsecured creditors in full.
Which statement best describes the order in which the liquidator should distribute the monies after payment of their costs?
(1) Set aside the prescribed part (2) the supplier (3) the lender (4) the unsecured creditors.
(1) Preferential creditors (2) set aside the prescribed part (3) the lender (4) the supplier (5) the unsecured creditors.
(1) Preferential creditors (2) set aside the prescribed part (3) the supplier (4) the lender (5) the unsecured creditors.
(1) Set aside the prescribed part (2) the lender (3) the supplier (4) the unsecured creditors.
(1) Preferential creditors (2) the supplier (3) the lender (4) the unsecured creditors.
(1) Preferential creditors (2) set aside the prescribed part (3) the supplier (4) the lender (5) the unsecured creditors.
Correct. The employees will rank as preferential creditors for part of their claim.
A private limited company is in financial difficulty. An unsecured creditor issued a winding up petition two days ago and the company has today received notice that an administrator has been appointed by the bank which has a floating charge over substantially all of the assets of the company.
What will be the impact of the administration on the winding up petition issued by the unsecured creditor?
The winding-up petition proceedings would be stayed, but the unsecured creditor could appoint its own administrator to consent to the proceedings continuing.
The winding-up petition proceedings would be stayed and would require the consent of the administrator or the court to continue.
The winding-up petition proceedings would continue but could be stayed at the discretion of the administrator.
The winding-up petition proceedings would continue, as the petition was issued prior to the administration.
The winding-up petition proceedings would be stayed but the creditor could issue could proceedings for recovery of the debt.
The winding-up petition proceedings would be stayed and would require the consent of the administrator or the court to continue.
Correct. The proceedings would be stayed due to the moratorium on creditor action which comes into force upon the company entering into administration. The moratorium prevents a winding-up order being made against the company. As a qualifying floating charge holder, the appointment of the administrator made by the bank takes effect immediately and cannot be superseded by any other party.
The liquidator of an insolvent manufacturing company wishes to make payments to various parties following the collapse of the company. A bank has a fixed and floating charges over the assets of the company. There are several employees who are owed a small amount in unpaid salaries, as well as a number of unsecured trade creditors. HMRC is also owed money for outstanding PAYE contributions.
Which statement best describes the order in which the liquidator should distribute the monies after payment of their costs?
The fixed and floating charge assets are sold and distributed as follows (1) the bank (2) preferential creditors – the employees followed by HMRC (3) set aside the prescribed part (4) the unsecured creditors, who will benefit from the prescribed part fund as well as any remaining floating charge assets.
The bank will receive payment from the fixed charge fund. The floating charge assets are then sold and distributed as follows (1) set aside the prescribed part (2) preferential creditors – the employees followed by HMRC (3) the bank receives any further payment required from the floating charge assets (4) the unsecured creditors, who will benefit from the prescribed part fund as well as any remaining floating charge assets.
The bank will receive payment from the fixed charge fund. The floating charge assets are then sold and distributed as follows (1) set aside the prescribed part (2) preferential creditors – HMRC followed by the employees (3) the bank receives any further payment required from the floating charge assets (4) the unsecured creditors, who will benefit from the prescribed part fund as well as any remaining floating charge assets.
The bank will receive payment from the fixed charge fund. The floating charge assets are then sold and distributed as follows (1) preferential creditors – the employees followed by HMRC (2) set aside the prescribed part (3) the bank receives any further payment required from the floating charge assets (4) the unsecured creditors, who will benefit from the prescribed part fund as well as any remaining floating charge assets.
The bank will receive payment from the fixed charge fund. The floating charge assets are then sold and distributed as follows (1) preferential creditors – HMRC followed by the employees (2) set aside the prescribed part (3) the bank receives any further payment required from the floating charge assets (4) the unsecured creditors, who will benefit from the prescribed part fund as well as any remaining floating charge assets.
The bank will receive payment from the fixed charge fund. The floating charge assets are then sold and distributed as follows (1) preferential creditors – the employees followed by HMRC (2) set aside the prescribed part (3) the bank receives any further payment required from the floating charge assets (4) the unsecured creditors, who will benefit from the prescribed part fund as well as any remaining floating charge assets.
Correct. The employees and HMRC are both preferential creditors, but the employees are tier 1 and HMRC tier 2. The bank may receive payment out of the fixed charge assets and the floating charge assets but may not benefit from the prescribed part fund.
You act for a private limited company in financial difficulty which is thinking about proposing a company voluntary arrangement to its creditors (the CVA Proposal). The company has one secured creditor, which is a bank, plus a number of general unsecured creditors.
The client seeks your advice as to who will need to approve the CVA Proposal and the effect of the CVA Proposal if it is approved.
Which one of the following is the correct advice?
The CVA Proposal, if approved by 75% in value of creditors and a simple majority of shareholders, will bind all the unsecured creditors. The bank will not be bound since a CVA Proposal is not able to compromise loans made by banks.
The CVA Proposal, if approved by a simple majority of creditors and a simple majority of shareholders, will bind all the unsecured creditors and the bank.
Incorrect. A debt owed to a bank is capable of being compromised by a CVA. What is important is not whether the creditor is a bank but what type of debt the company owes the bank. CVAs can compromise unsecured debt but not secured debt without the secured creditor’s consent; s.4 Insolvency Act.
The CVA Proposal, if approved by 75% in value of creditors and a simple majority of shareholders, will bind all the unsecured creditors. However, the bank will not be bound unless they consent.
The CVA Proposal, if approved by 75% in value of creditors and a simple majority of shareholders, will bind all the creditors, including the bank.
The CVA Proposal, if approved by 75% in value of creditors and a simple majority of shareholders, will bind all the unsecured creditors. However, the bank will not be bound unless they consent.
Correct. A CVA can compromise unsecured debt but not secured debt without the secured creditor’s consent; s.4 Insolvency Act.
Question 1
Assume that it is 30 January 2023. A company’s up- to- date balance sheet shows current
assets of £25,000, current liabilities of £16,000 and net assets of £500. On 9 January 2023,
a creditor served a statutory demand on the company relating to a debt of £1,500. The
debt remains unpaid.
Which of the following best describes whether the company can now be placed into
compulsory liquidation?
A No, because the company is currently solvent on the balance sheet test.
B No, because the creditor is owed over £750.
C Yes, because the statutory demand was served 21 days ago and remains unpaid so
the creditor will be entitled to petition for the compulsory liquidation of the company.
D Yes, because the company is currently insolvent on the cash flow test.
E Yes, because the statutory demand was served 21 days ago and remains unpaid so
the company will now automatically go into compulsory liquidation.
Answer
Option C is correct. The fact that the company is solvent on the balance sheet test (option
A) is not relevant: under s 123(1)(a) of the Insolvency Act 1986 (‘IA 1986’), failure to pay
the sum owed within three weeks of service of a statutory demand means that a company
is deemed unable to pay its debts so the court can wind up the company. This is not an
automatic process: a creditor must issue a winding up petition (s 124 IA 1986), so E is
wrong. B is also wrong – it is only where the creditor is owed over £750 that they can issue
a winding up petition. On the information given, D is wrong too, because the company may
well be insolvent on the cash flow test but liquidation does not automatically follow.
Question 2
A client is owed £30,000 by a company in liquidation. The company has assets of
£150,000 and liabilities of £325,000. All of its five creditors are unsecured and there are no
preferential creditors.
Which of the following best describes how much the client will receive?
A £1
B £0.46
C £2.16
D £13,800
E £64,800
Answer
Option D is correct. You need to divide total assets by total liabilities (150,000/
325,000 = £0.46). This gives the amount every creditor should receive for each pound they
are owed. Then multiply the amount per pound (£0.46) by the amount the client is owed
(£0.46 x 30,000) making a total of £13,800.
Question 3
A client has been served with a bankruptcy petition. Her bank has written to her saying that
she will lose her home (in which she lives with her two young children) if she does not pay
the amounts she owes.
Assuming the bankruptcy order is made and the client’s trustee in bankruptcy writes to
her stating his intention to seek possession of her home unless she pays her debts and
the costs and expenses of bankruptcy, which of the following best describes whether
the client will lose her home?
A She will not lose it because the interests of young children outweigh the interests of
creditors.
B She will not lose it because a bankrupt is entitled to keep their family home, everyday
household items and the tools of their trade, unless the circumstances are exceptional.
C She is likely to be able to stay in the home for a year, after which the creditors’
interests outweigh those of any occupants of the house, unless the circumstances are
exceptional.
D She will not lose her home if she pays the credit card debt which was the subject of the
petition, as that creditor was putting the most pressure on the client.
E She is likely to be able to stay in the home until her youngest child is 18, after which
point the creditors’ interests outweigh those of any occupants of the house.
Answer
Option C is correct. After one year, creditors’ interests will prevail over the interests of any
other person living at the property unless exceptional circumstances can be shown (s 335A(3)
Insolvency Act 1986). There is nothing in these facts to indicate exceptional circumstances so
options A, B and E are wrong. Option D is wrong because insolvency is a class remedy and it
is not enough just to pay one creditor and leave others if you want to annul the order and so
keep the house. All creditors have to be paid, together with interest in full, and the costs and
expenses of the bankruptcy.
You act for a private limited company in financial difficulty. The company is thinking about proposing a company voluntary arrangement to its creditors (the CVA Proposal). The company has a bank loan worth £100,000 which is secured by way of fixed and floating charges, and a number of general unsecured creditors.
The company seeks your advice as to the effect of the CVA Proposal if it is approved by the requisite majority of the company’s creditors. Can the CVA Proposal bind the unsecured creditors and the bank?
Select one alternative:
The CVA Proposal, if approved by all the unsecured creditors, will bind all the creditors, including the bank.
The CVA Proposal, if approved by the requisite majority of creditors, will bind all the creditors, including the bank.
The CVA Proposal, if approved by the requisite majority of creditors, will bind all the unsecured creditors. CVA Proposals cannot bind secured creditors such as banks.
The CVA Proposal, if approved by the requisite majority of creditors, will bind all the unsecured creditors. The bank will not be bound unless it consents.
The CVA Proposal, if approved by the requisite majority of creditors, will bind those creditors who approved it only.
The CVA Proposal, if approved by the requisite majority of creditors, will bind all the unsecured creditors. The bank will not be bound unless it consents.
This is a BLP question. This question concerns the effect of a CVA proposal if approved by the requisite majority of creditors. A CVA will bind all unsecured creditors if approved by the requisite majority of unsecured creditors. CVAs cannot bind secured creditors unless they consent (which would be rare). A debt owed to a bank is capable of being compromised by a CVA. What is important is not whether the creditor is a bank but what type of debt the company owes the bank. CVAs can compromise unsecured debt but not secured debt without the secured creditor’s consent. A CVA does not give rise to an automatic moratorium.
