Insolvency (week 9) Flashcards
What are the 4 tests for insolvency?
- cash flow test (unable to pay its debts)
- balance sheet test (liabilities are greater than its assets)
- doesn’t comply with statutory demand for debt over £750
- has failed to pay creditor to satisfy enforcement of a judgment debt
What are the 5 options for a director to do when the company is facing financial difficulties?
- do nothing
- do a deal
- appoint an administrator
- request the appointment of a receiver
- put the company into liquidation
Why must directors ensure they take urgent advice and action when a company is facing financial difficulty?
Because directors may be personally liable where company is insolvent if they do not take correct steps and breach their duties under CA 2006
What is a debt for equity swap?
It is where a company issues new shares to the creditors
What are the 2 types of formal insolvency arrangements?
A company voluntary arrangement
Restructuring plan
What is a company voluntary agreement?
A composition in satisfaction of its debts or a scheme of arrangement of its affairs
The essence is that the creditors agree to part payment of the debts owed to them and/or to a new extended timetable for repayment.
Can a company voluntary agreement be used with administration and liquidation?
Yes it can
What is the effect of a company voluntary agreement - who is bound by it (what creditors)?
It is binding on all unsecured creditors, including those who didn’t vote or voted against it.
However, a secured or preferential creditor is not bound unless it specifically consented to be bound. (Major disadvantage of a volutnsry agreement)
What is a restructuring plan?
Formal insolvency agreement - it compromises a company’s creditors and shareholders and restructure its liabilities so that a company can return to solvency
What is the voting requirement for a restricting plan?
Needs to be approved by at least 75% in value of each affected class of creditors / shareholders
Sanctioned by the court
However, court may sanction the plan even if one or more classes have not approved it
What is administration?
A collective insolvency procedure meaning the administrators are required to perform their duties in the interests of the creditors as a whole rather than in the interests of a particular creditor
What are the 3 statutory objectives of administration?
- Rescue the company of going concedn, or if not reasonably achievable
- Secondly, achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up, or if that is not reasonable achievable
- Thirdly, to realise the company’s property in order to make a distribution to one or more secured or preferential creditors
Who can appoint an administrator (out of court procedure) there are 2 ways?
Directors of the company can appoint
A holder of a qualifying floating charge may appoint
What is a pre-packaged administration?
Where the business and assets of a company is prepared for sale to a selected buyer prior to the company’s entry into administration
What is the process for the appointment of administrators by directors of the company?
Directors must file a notice of intention to appoint an administrator at court and serve this on any qualifying floating charge holder (QFCH) 5 business days before they file the notice of appointment to appoint an administrator