Insolvency - informal arrangements Flashcards
What is the Cash Flow test for insolvency?
An inability to pay debts as they fall due (s 123(1)(e))
This test assesses the company’s liquidity.
What does the Balance sheet test indicate?
The company’s liabilities are greater than its assets (s 123(2))
What is a failure to comply with a statutory demand?
Failure to comply with a statutory demand for a debt of over £750 (s 123(1)(a))
What are the four tests for insolvency?
- Cash flow test
- Balance sheet test
- Failure to comply with a statutory demand for a debt over £750
- Failure to satisfy enforcement of a judgment debt (s 123(1)(b))
What obligation do directors have regarding financial performance?
Directors are obliged to continually review the financial performance of a company and recognise when it is facing financial difficulty
What are the options for directors when a company faces financial difficulties?
- Do nothing - the directors risk personal liability under IA 1986 and breach of directors’ duties under the Companies Act 2006
- Apply for a pre-insolvency moratorium for breathing space
- Do a deal
- Appoint an administrator
- Request the appointment of a receiver
- Put the company in liquidation
What is the purpose of applying for a pre-insolvency moratorium?
This gives the company some ‘breathing space’
It allows time to restructure without immediate pressure from creditors.
What does it mean for the directors to ‘do a deal’ in the face of financial difficulties?
Reaching either an informal or formal agreement with the company’s creditors with a view to rescheduling debts
What is the role of an administrator in insolvency?
An administrator is appointed to manage a collective formal insolvency procedure aimed at rescuing the company
What is the function of a receiver?
A secured creditor enforces its security by appointing a receiver who sells secured assets to pay the creditor
What happens when a company goes into liquidation?
The company’s business is wound up and its assets are transferred to creditors and, if a surplus exists, to its members
Liquidation is a collective insolvency procedure.
What are informal agreements?
Informal agreements may be contractually binding and can avoid the time and cost of formal proceedings.
What challenges do informal agreements face?
It can be difficult to get all creditors to agree at the same time.
What may a company need to do to obtain agreement from creditors?
A company may need to:
* grant new security
* replace directors or senior employees
* sell businesses
* reduce costs
* issue new shares to creditors (maybe as a debt for equity swap)
What is a preliminary step that may be taken in informal agreements?
A preliminary step may be a standstill agreement.
What is a pre-insolvency moratorium?
A pre-insolvency moratorium is a period during which creditors cannot enforce their debts and the company may not be wound up.
How long does a pre-insolvency moratorium last?
It lasts for 20 business days and can be extended by directors for a further 20 business days.
How can a pre-insolvency moratorium be further extended?
It can be extended with the requisite majority of creditors or by court order, up to 1 year.
Can be more than 1 yr with via court order
When does a pre-insolvency moratorium automatically terminate?
It terminates if the company enters liquidation or administration, or when a CVA is approved or when the court sanctions a restructuring plan or scheme of arrangement
What is a stay of legal proceedings?
A stay of legal proceedings against a company is part of the pre-insolvency moratorium.
What is required to apply for a pre-insolvency moratorium?
- A court application application is needed
- With a statement that the company is unable to pay its debts
- Ane a statement from a licensed insolvency practitioner (monitor) that the moratorium will save the company
What does the statutory repayment holiday NOT apply to?
It does not apply to:
- monitor’s expenses
- goods and services supplied
- rent
- wages
- loans under financial services contracts
- moratorium debts.
