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Insolvency Procedures Flashcards

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1
Q

What is the main statute dealing with corporate insolvency?

A

The main statute is the Insolvency Act 1986 (IA 1986).

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2
Q

What significant legislation amended the IA 1986?

A

The IA 1986 has been amended by the Enterprise Act 2002, the Small Business Enterprise and Employment Act 2015, the Insolvency (England and Wales) Rules 2016, and the Corporate Insolvency and Governance Act 2020 (CIGA 2020).

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3
Q

What were the aims of the corporate insolvency reforms in the Enterprise Act 2002?

A

The aims were to promote a rescue culture and to increase entrepreneurship by favoring collective insolvency procedures over enforcement procedures.

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4
Q

What new insolvency procedures were introduced by CIGA 2020?

A

CIGA 2020 introduced the pre-insolvency moratorium and the restructuring plan for companies.

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5
Q

How is insolvency defined under IA 1986?

A

Insolvency is defined as a company’s inability to pay its debts, as per section 122(1)(f) IA 1986.

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6
Q

What are the four tests for insolvency under IA 1986?

A

The four tests are: cash flow test, balance sheet test, non-compliance with a statutory demand, and failure to pay a creditor enforcing a judgment debt.

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7
Q

What obligations do directors have towards companies in financial difficulties?

A

Directors must monitor the company’s financial performance and decide on actions to take in response to financial difficulties.

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8
Q

What options do directors have if a company is facing financial difficulties?

A

Options include doing nothing, reaching a deal with creditors, appointing an administrator, requesting a receiver, or placing the company into liquidation.

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9
Q

What is an informal arrangement in the context of insolvency?

A

An informal arrangement is a negotiated agreement with creditors that is not governed by IA 1986 or CIGA 2020.

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10
Q

What is a pre-insolvency moratorium?

A

A pre-insolvency moratorium is a period during which creditors cannot take action against a company, allowing it time to negotiate informal agreements.

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11
Q

What debts must still be paid during a pre-insolvency moratorium?

A

Debts that must be paid include the Monitor’s remuneration, goods and services supplied during the moratorium, rent, wages, and loans under financial services contracts.

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12
Q

What is a Company Voluntary Arrangement (CVA)?

A

A CVA is a compromise between a company and its creditors, allowing for part payment of debts or a new repayment timetable.

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13
Q

What is the approval process for a CVA?

A

The CVA proposal must be approved by at least 75% in value of creditors voting in favor, and a simple majority of shareholders.

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14
Q

What is the role of the Supervisor in a CVA?

A

The Supervisor, usually an Insolvency Practitioner, oversees the implementation of the CVA and ensures compliance with its terms.

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15
Q

What is a Restructuring Plan?

A

A Restructuring Plan is a formal agreement to compromise a company’s creditors and restructure its liabilities, requiring court approval.

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16
Q

What is required for a Restructuring Plan to be binding?

A

The Plan must be approved by at least 75% in value of creditors voting in each class.

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17
Q

What is the purpose of a Restructuring Plan?

A

A Restructuring Plan allows a company to return to solvency.

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18
Q

Who can use a Restructuring Plan?

A

Only companies that have or are likely to encounter financial difficulty can use a Restructuring Plan.

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19
Q

What is required for a Restructuring Plan to be effective?

A

A Restructuring Plan requires court approval, known as a ‘sanction’.

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20
Q

How must creditors and members be organized for a Restructuring Plan?

A

Creditors and members must be divided into classes, and each class must vote to approve the Plan.

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21
Q

What is the approval threshold for a Restructuring Plan?

A

At least 75% in value of those voting in each class must approve the Plan.

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22
Q

When does a Restructuring Plan become binding?

A

The Plan becomes binding only if the court sanctions it.

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23
Q

What is a cross-class cram down?

A

A cross-class cram down allows one rank of creditor to force the Plan on another class that has voted against it.

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24
Q

What are the advantages of a Restructuring Plan over a CVA?

A

A Restructuring Plan can compromise the rights of secured creditors and bind all creditors even without majority approval.

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25
Q

What is a CVA?

A

A CVA is an arrangement agreed by the company’s unsecured creditors to restructure the company’s unsecured liabilities.

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26
Q

What is administration in insolvency?

A

Administration is a collective insolvency procedure where administrators act in the interests of all creditors.

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27
Q

What are the statutory objectives of administration?

A
  1. Rescue the company as a going concern. 2. Achieve a better result for creditors than liquidation. 3. Realise the company’s property for distribution.
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28
Q

Who can apply for an administration order?

A

The company, directors, a creditor, the supervisor of a CVA, or a liquidator can apply for an administration order.

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29
Q

What is an interim moratorium in administration?

A

An interim moratorium temporarily freezes creditor action upon application to court.

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30
Q

What are the two out-of-court procedures for appointing an administrator?

A
  1. Directors appointing an administrator under Sch B1 Para 22. 2. A holder of a qualifying floating charge appointing an administrator under Sch B1 Para 14.
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31
Q

What is the role of an administrator?

A

The administrator acts in the interests of all creditors and manages the company’s affairs.

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32
Q

What is a pre-packaged sale in administration?

A

A pre-packaged sale involves preparing a business for sale to a selected buyer before entering administration.

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33
Q

What are the types of receivership?

A
  1. Administrative receivers. 2. Fixed charge receivers. 3. Court-appointed receivers.
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34
Q

What is the difference between administration and receivership?

A

Administration is a collective procedure for all creditors, while receivership is an enforcement procedure for a secured creditor.

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35
Q

What is liquidation?

A

Liquidation is the process by which a company’s commercial life comes to an end.

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36
Q

What does a liquidator do?

A

The liquidator collects the company’s assets, sells them, identifies creditors, determines amounts owed, and pays creditors a ‘dividend’ from the sale proceeds.

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37
Q

What happens if there is a surplus after paying creditors?

A

The surplus is paid to the company’s shareholders according to their rights under the Articles of Association.

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38
Q

What is another term for liquidation?

A

Liquidation is often referred to as ‘winding up.’

39
Q

Can solvent companies be liquidated?

A

Yes, solvent companies can also be wound up, often due to fulfilling their specific purpose or corporate restructuring.

40
Q

What does ‘pari passu’ mean?

A

Creditors of the same rank share on an equal and proportionate basis in relation to the assets available for distribution.

41
Q

How does the pari passu principle work?

A

If a liquidator has £100 to distribute among creditors A (£80), B (£20), and C (£100), they will each receive 50p for each pound owed to them.

42
Q

What are the two types of liquidation?

A

The two types of liquidation are compulsory liquidation and voluntary liquidation.

43
Q

What are the subtypes of voluntary liquidation?

A

Voluntary liquidation is further divided into Members’ voluntary liquidation and Creditors’ voluntary liquidation.

44
Q

What happens upon the completion of liquidation?

A

The company’s life as a legal person is generally brought to an end by dissolution.

45
Q

What is compulsory liquidation?

A

Compulsory liquidation is a court-based process for placing a company into liquidation.

46
Q

Who can apply for a winding up order?

A

A creditor, the company, directors, an administrator, an administrative receiver, the supervisor of a CVA, or the Secretary of State can apply.

47
Q

What are the key grounds for a winding up order?

A

The company is unable to pay its debts or it is just and equitable for the company to be wound up.

48
Q

What is the most common ground for a winding up petition?

A

The company’s inability to pay its debts.

49
Q

What is a statutory demand?

A

A statutory demand is a written demand requiring the company to pay a specific debt exceeding £750.

50
Q

What happens if a company fails to comply with a statutory demand?

A

The creditor has the right to petition the court to wind up the company.

51
Q

What are the consequences of a compulsory winding up order?

A

An automatic stay on proceedings, automatic dismissal of employees, and directors lose their powers.

52
Q

What is Members’ voluntary winding up (MVL)?

A

MVL is used for solvent companies where directors declare solvency and state they can pay creditors in full within 12 months.

53
Q

What is Creditors’ voluntary winding up (CVL)?

A

CVL is an insolvent liquidation controlled by creditors who choose the liquidator.

54
Q

What is the role of the liquidator?

A

The liquidator secures and realises the company’s assets and distributes them to creditors.

55
Q

What powers does a liquidator have?

A

The liquidator can sell company property, execute documents, raise money, and manage the company’s affairs.

56
Q

What transactions can liquidators avoid?

A

Liquidators can avoid transactions at undervalue, preferences, extortionate credit transactions, and fraudulent transactions.

57
Q

What is the statutory order of priorities in liquidation?

A
  1. Liquidator’s fees and expenses, 2. Fixed charge creditors, 3. Liquidator’s other remuneration, 4. Preferential creditors, 5. Prescribed part fund for unsecured creditors, 6. Floating charge creditors, 7. Unsecured creditors, 8. Interest owed to unsecured creditors (MVL only), 9. Shareholders (MVL only).
58
Q

What happens to fixed charge assets during liquidation?

A

Proceeds from fixed charge assets are used first to pay the liquidator’s costs and then the fixed charge creditors.

59
Q

What are preferential debts?

A

Preferential debts include employee claims for unpaid remuneration and certain Crown debts.

60
Q

What is the ‘relevant date’ in insolvency?

A

The ‘relevant date’ generally refers to the date of the winding up resolution or petition, subject to a maximum of £800 per employee plus accrued holiday pay.

61
Q

What constitutes Crown debts?

A

Crown debts include PAYE and employee national insurance deductions made by the company from employee salaries not paid over to HMRC, and VAT received on supplies not paid over to HMRC.

62
Q

What happened to Crown debts after the EA 2002 reforms?

A

Crown debts were removed from the list of preferential debts but have since had their preferential status restored by the Government.

63
Q

What is the order of payment priority for preferential debts?

A

Tier 1 preferential debts must be paid in full before tier 2 preferential debts are paid.

64
Q

What is the ‘prescribed part’ fund?

A

The ‘prescribed part’ fund is a reserve for unsecured creditors introduced by the Enterprise Act 2002 to increase their chance of being paid in a liquidation.

65
Q

How is the amount of the prescribed part fund determined?

A

The fund is 50% of the first £10,000 and 20% thereafter, up to a maximum of £600,000 for floating charges created before 6 April 2020 and £800,000 for those created after that date.

66
Q

What happens to floating charge creditors after the prescribed part fund?

A

After payment under previous steps, remaining realisations from assets subject to floating charges are paid to the floating charge holders according to their priority.

67
Q

Who are considered unsecured creditors?

A

Unsecured creditors include ordinary trade creditors who have not been paid and secured creditors to the extent that their security is invalid or insufficient.

68
Q

What is the ‘pari passu’ rule?

A

The ‘pari passu’ rule states that all unsecured creditors rank and abate equally in the distribution of assets.

69
Q

What is an Individual Voluntary Arrangement (IVA)?

A

An IVA is an arrangement where a debtor proposes a compromise of their liabilities with creditors, often involving partial debt payment or extended payment periods.

70
Q

What is required for an IVA to bind creditors?

A

An IVA must be approved by creditors holding at least 75% (by value) of the total debt owed to bind all unsecured creditors.

71
Q

What are the advantages of an IVA?

A

Advantages include avoiding bankruptcy stigma, binding all unsecured creditors, and the availability of a moratorium.

72
Q

What are the disadvantages of an IVA?

A

Disadvantages include potentially lasting longer than bankruptcy, inability to bind secured or preferential creditors without consent, and being an expensive process.

73
Q

What is the ground for a bankruptcy petition?

A

A bankruptcy petition can be brought if the debtor is unable to pay their debts, with the debt exceeding £5,000.

74
Q

What happens upon the making of a bankruptcy order?

A

The Official Receiver becomes the first trustee in bankruptcy, and the bankrupt is prohibited from acting as a director or obtaining credit over £500 without disclosure.

75
Q

What are the duties of a bankrupt to the Trustee?

A

The bankrupt must provide information and assistance to the Trustee as required for carrying out their functions.

76
Q

What is the bankruptcy order of priority for payments?

A

The order is: secured creditors, expenses of bankruptcy, two tiers of preferential creditors, ordinary unsecured creditors, statutory interest, debts of a spouse, and any surplus to the bankrupt.

77
Q

What is the duration of a Bankruptcy Restriction Order (BRO)?

A

A BRO operates for a period of between two and 15 years, restricting the bankrupt from acting as a director or obtaining credit over £500 without disclosure.

78
Q

What are voidable transactions in bankruptcy?

A

Voidable transactions include transactions at an undervalue, preferences, and transactions defrauding creditors, which the Trustee can challenge to increase assets available to creditors.

79
Q

What must the Trustee balance in litigation?

A

The costs and risks of litigation with the chances of success in making recoveries for the bankruptcy estate.

80
Q

What are the principles for voidable transactions for individuals?

A

They are similar to corporate insolvencies but may involve different time periods and sections of IA86.

81
Q

What are the types of voidable transactions?

A
  1. Transactions at an undervalue (s 339 IA86)
  2. Preferences (s 340 IA86)
  3. Transactions defrauding creditors (s 423 IA86)
82
Q

What can the court do if the requirements for voidable transactions are met?

A

The court can make an order to restore the position to what it would have been but for the transaction or preference.

83
Q

What does ‘associate’ refer to in this context?

A

An associate as defined in s 435 IA 1986.

84
Q

What does insolvency mean in the context of s339 and s340 IA 1986?

A

Insolvency means either cash flow or balance sheet insolvency.

85
Q

What are the requirements for transactions at an undervalue (s 339 IA86)?

A
  1. Transaction for an undervalue
  2. Within 5 years preceding the day of presentation of bankruptcy petition
  3. Individual insolvent at time / as a result (presumed with associates)
86
Q

What are the requirements for transactions defrauding creditors (s 423 IA86)?

A
  1. Must be a transaction for an undervalue
  2. Need intention to defraud creditors or to put assets beyond their reach
  3. No need for individual to be insolvent and no relevant time to consider
87
Q

What are the requirements for preferences (s 340 IA86)?

A
  1. Individual puts creditor in better position influenced by desire to prefer
  2. Within 6 months preceding the day of presentation of bankruptcy petition
  3. Within 2 years preceding the presentation of bankruptcy petition if an associate and presumption of preference if with an associate
  4. Individual insolvent at time / as a result
88
Q

What is an IVA?

A

An IVA is often an alternative to bankruptcy allowing an individual to propose repayment and reach a binding agreement with creditors under the supervision of an insolvency practitioner.

89
Q

Who can file a bankruptcy petition?

A

A creditor or the debtor themselves can file a bankruptcy petition on specified grounds, most likely that the debtor is unable to pay its debts.

90
Q

What happens after a bankruptcy order is made?

A

The Official Receiver or an insolvency practitioner is appointed as Trustee to gather in and distribute the bankruptcy estate according to the statutory order of priority.

91
Q

What is the duty of the Bankrupt towards the Trustee?

A

The Bankrupt has a duty to cooperate with the Trustee.

92
Q

When is a Bankrupt discharged from their debts?

A

The Bankrupt is automatically discharged and released from their bankruptcy debts after one year from the date of the bankruptcy order, provided they have complied with their duties to the Trustee.

93
Q

What claims can the Trustee bring?

A

The Trustee can bring claims for TUV’s, TDCs, and preferences, and the court can make a restoration order on such terms as it thinks fit.

Business Law (9 decks)

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