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Company Law > Insolvency Procedures > Flashcards

Insolvency Procedures Flashcards

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1
Q

What is the principle statute for corporate insolvency?

A

The Insolvency Act 1986

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2
Q

Which pieces of legislation significantly amended the IA 1986?

A
  • Enterprise Act 2002
  • Small Business Enterprise and Employment Act 2015
  • Insolvency Roles 2016
  • CIGA 2020
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3
Q

What is CIGA 2020?

A

Corporate Insolvency and Governance Act 2020

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4
Q

What 2 key procedures were introduced by the IA ‘86 to achieve objective of corporate rescue?

A

1) Company voluntary arrangements (CVAs)

2) Administration

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5
Q

What is a CVA?

A

Company voluntary arrangement

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6
Q

Where is the meaning of ‘insolvency’ found?

A

s 122(1)(f) IA 1986

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7
Q

s 122(1)(f) IA 1986 states insolvency is?

A

A company will be wound up “…..if it is unable to pay its debts”.

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8
Q

What are the FOUR tests for insolvency?

A

1) The Cash Flow test: An inability to pay debts as they fall due
(s 123(1)(e))
2) The Balance Sheet test: The company’s liabilities are greater than its assets (s 123(2))
3) Failure to comply with a statutory demand for a debt of over £750 (s 123(1)(a))
4) Failure to satisfy enforcement of a judgment debt (s 123(1)(b))

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9
Q

Which are the more commonly used insolvency tests?

A

Cash Flow Test

Balance Sheet Test

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10
Q

What is the Cash Flow Test?

A

An inability to pay debts as they fall due

= s 123(1)(e)

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11
Q

What is the Balance Sheet Test?

A

The company’s liabilities are greater than its assets s 123(2)

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12
Q

Why must Directors review financial performance?

A

So they can recognise when a company is in financial difficulty

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13
Q

What are examples of financial difficulty?

A
  • Many unpaid creditors putting pressure for repayment
  • A fully drawn overdraft facility and the bank will not provide further credit
  • Loans/other liabilities that exceed value of assets
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14
Q

How many options are there to take once Directors have recognised financial difficulty ?

A

Five

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15
Q

What are the five options for Directors when the company is facing financial difficulty?

A

1) Do nothing - the directors risk personal liability under IA 1986 and breach of directors’ duties under the Companies Act 2006.
2) Apply for a pre-insolvency moratorium – this gives the company some “breathing space”.
3) Do a deal - reaching either an informal or formal agreement with the company’s creditors with a view to rescheduling debts.
4) Appoint an administrator - this is a collective formal insolvency procedure (a procedure which considers the interests of all creditors) which aims, if possible, to rescue the company
5. ) Liquidation - this a collective insolvency procedure under which a company’s business is wound up and its assets transferred to creditors and (if there is a surplus of assets over liabilities) to its members.

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16
Q

What is a collective formal insolvency procedure?

A

A procedure which considers the interests of all creditors

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17
Q

What is the advantage of informal agreements with creditors?

A

Avoids time and cost of formal proceedings

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18
Q

Disadvantage of informal agreements?

A

Very hard to get all creditors to agree

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19
Q

Examples of informal agreements?

A

1) Make additional payments or offer the bank additional security;
2) Reschedule outstanding debts; and/or reduce or hold over employees’ salaries for a set period.

20
Q

What is a Standstill Agreement?

A

Agree not to take enforcement action for a certain period of time to give the company a breathing space to reach agreement with its other creditors.
However, it is anticipated that the use of Standstill Agreements will decline with the introduction of the pre-insolvency moratorium under CIGA 2020.

21
Q

Which Act introduced pre-insolvency moratorium?

A

CIGA 2020

22
Q

What is Pre-insolvency Moratorium?

A

A “moratorium” is a period during which creditors are unable to take action to enforce their debts, any existing court proceedings are stayed and the company may not be wound up

23
Q

What is the point of a PIM?

A

It creates a breathing space for the company to attempt to resolve the situation.

24
Q

How long does the PIM last?

A

20 business days but can be extended by the directors for a further 20 business days.
Further extensions are possible with the consent of a requisite majority of creditors and/or court order.
Maximum period is one year subject to a court order to extend further

25
Q

How to obtain the PIM

A

Directors must apply to court - sA3 IA ‘86

26
Q

What must accompany a director application for a PIM under sA6 of IA ‘86?

A
  • Statement company unlikely able to pay debt

- Statement from an accountant (known as a Monitor)

27
Q

What must the statement of the monitor (usually accountant) say for the purposes of obtaining a PIM?

A
  • The company is eligible (Schedule ZA1)

- It is likely the moratorium will rescue the company

28
Q

When will a PIM come into force?

A

When the documents are filed at court - sA7(1) a

29
Q

Where is the definition of a CVA?

A

s1(1) Insolvency Act 1986

30
Q

How does s1(1) IA 1986 define a CVA?

A

A composition in satisfaction of its debts or a scheme of arrangement of its affairs.

31
Q

What is the essence of a CVA?

A

Creditors agree to part payment of the debts or to a new timetable for repayment

32
Q

Does a CVA need to be approved by the court?

A

No, but it must be reported - s4(6) IA 1986

33
Q

Do the Directors remain in post with a CVA?

A

Yes, but an Insolvency Practitioner supervises and implements

34
Q

What is the number of creditors a CVA must be approved by?

A

75% (excluding secured) and a majority in value of unconnected creditors

35
Q

How many members must approve a CVA?

A

Simple majority

36
Q

What is the effect of a CVA?

A

A CVA is binding on all unsecured creditors, including those who did not vote or voted against it

37
Q

Secured/preferential creditors and CVAs?

A

Are not bound unless they unanimously consent to the CVA (s 4 IA 1986) – this is a major disadvantage of the CVA procedure

38
Q

Advantage of CVAs?

A

Director retain control

Company can continue trading

39
Q

Which Act introduced Restructuring Plans?

A

CIGA 2020

40
Q

Major advantage of Restructuring Plans over CVAs>

A

Can bind secured creditors = likely to displace CVAs entirely

41
Q

Where are the provisions on RPs found in law?

A

Part 26A Companies Act 2006

42
Q

Features of a RP?

A
  • Creditors and members must be divided into classes and each class which votes on the Plan must be asked to approve it. The Plan must be approved by at least 75% in value of each class voting.
  • The court must sanction the Plan and it will then bind all creditors.
43
Q

Who can apply to the court for sanction of an RP?

A

The company
Any creditor
Any member
The liquidator (if the company is in liquidation)
The administrator (if the company is in administration).

44
Q

Main advantage of RP?

A

Court can sanction a plan if it is just an equitable to do so, even if there is no majority

45
Q

When can a court sanction a plan even if it is not agreed?

A
  • If one or more classes do not vote to approve the plan;
  • If it brings about a cross class cramdown
  • If it brings about a cramdown of shareholders
46
Q

What is a cross class cramdown?

A

Where a class of creditor can force the Plan on another class of creditor who has voted against the Plan;

47
Q

What is a cramdown of shareholders?

A

This means forcing shareholders to accept the Plan, diluting equity, creating debt for equity

Company Law (12 decks)

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