Insolvency (week 9) Flashcards

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1
Q

What are the 4 tests for insolvency?

A
  • 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
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2
Q

What are the 5 options for a director to do when the company is facing financial difficulties?

A
  • do nothing
  • do a deal
  • appoint an administrator
  • request the appointment of a receiver
  • put the company into liquidation
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3
Q

Why must directors ensure they take urgent advice and action when a company is facing financial difficulty?

A

Because directors may be personally liable where company is insolvent if they do not take correct steps and breach their duties under CA 2006

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4
Q

What is a debt for equity swap?

A

It is where a company issues new shares to the creditors

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5
Q

What are the 2 types of formal insolvency arrangements?

A

A company voluntary arrangement
Restructuring plan

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6
Q

What is a company voluntary agreement?

A

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.

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7
Q

Can a company voluntary agreement be used with administration and liquidation?

A

Yes it can

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8
Q

What is the effect of a company voluntary agreement - who is bound by it (what creditors)?

A

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)

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9
Q

What is a restructuring plan?

A

Formal insolvency agreement - it compromises a company’s creditors and shareholders and restructure its liabilities so that a company can return to solvency

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10
Q

What is the voting requirement for a restricting plan?

A

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

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11
Q

What is administration?

A

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

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12
Q

What are the 3 statutory objectives of administration?

A
  1. Rescue the company of going concedn, or if not reasonably achievable
  2. 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
  3. Thirdly, to realise the company’s property in order to make a distribution to one or more secured or preferential creditors
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13
Q

Who can appoint an administrator (out of court procedure) there are 2 ways?

A

Directors of the company can appoint
A holder of a qualifying floating charge may appoint

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14
Q

What is a pre-packaged administration?

A

Where the business and assets of a company is prepared for sale to a selected buyer prior to the company’s entry into administration

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15
Q

What is the process for the appointment of administrators by directors of the company?

A

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

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16
Q

Who does a fixed charge receiver owe their duties to?

A

Primarily to its appointer

17
Q

What is the consequence of a winding up order on employees and directors?

A

Employees are automatically dismissed and directors lose their powers

18
Q

What shareholder votes are needed for putting a company into members voluntary winding up?

A

Special resolution to place company into a voluntary winding up and an ordinary resolution to appoint a liquidator. The winding up commences when the special resolution is passed

19
Q

What shareholder votes are needed to place a company into a creditors voluntary winding up procedure?

A

Shareholders pass a special resolution to place the company in a voluntary winding up and an ordinary resolution to appoint a nominated liquidator

20
Q

What is a individual voluntary agreement?

A

Arrangement under which debtor makes a proposal for a compromise of their liabilities with their creditors

21
Q

What is the voting threshold for an individual voluntary agreement?

A

An IVA must be approved by more than 75% in value of all creditors

22
Q

What are the grounds for the presentation of a bankruptcy petition?

A

Debtor appears unable to pay its debts as evidence by an unsatisfactory statutory demand that has been outstanding for 3 weeks from date of service of the statutory demand
Debt owed is for an unsecured liquidated sum exceeding £5,000
Debtor must be domiciled or present in England and Wales

23
Q

What is the relevant time for the transaction to have taken place where a trustee in bankruptcy is seeking to bring a claim for a transaction at an undervalue?

A

Transaction must take place within 5 years preceding the date of the presentation of the bankruptcy petition