Introduction to corporate insolvency Flashcards
What is the main statute dealing with corporate insolvency?
The Insolvency Act 1986.
What legislation has amended the Insolvency Act 1986?
*The Enterprise Act 2002
*The Small Business Enterprise and Employment Act 2015
*The Insolvency (England and Wales) Rules 2016
*The Corporate Insolvency and Governance Act 2020.
When did the EA 2002 come into force?
15 September 2003. This is known as the ‘Relevant Date’.
What are the aims of the EA 2002?
To promote the rescue culture removing the stigma associated with insolvency and therefore encourage an entrepreneurial culture; and
To increase entrepreneurship by giving prominence to collective insolvency procedures (conducted for the benefit of creditors as a whole) over enforcement procedures (which generally only benefit the creditor holding security).
How did the EA 2002 achieve those aims?
The EA 2002 achieved these aims by streamlining the administration procedure to encourage company rescue and restricting the use of administrative receiverships on or after the Relevant Date.
What did the CIGA 2020 do?
It introduced two new insolvency procedures which are:
- The pre-insolvency moratorium
- The restructuring plan for companies.
What is the aim of the CIGA?
The aim of the new processes was to increase the likelihood of a company successfully restructuring its debts to avoid a formal insolvency like administration or liquidation.
What is the ‘cash flow test’
A company is unable to pay its debts as they fall due.
What is the ‘balance sheet test’
The company has liabilities that are greater than its assets.
What are examples of financial difficulty?
- The company has many unpaid creditors who are putting pressure on the company to pay the amounts paid to them.
- The company has an overdraft facility that is fully drawn, and the bank is refusing to provide further credit by increasing the facility.
- The company has loans and other liabilities that exceed the value of its assets
Who needs to decide what action to take when the company is in financial difficulty?
The directors.
What are the options for a company facing financial difficulties?
- Do nothing - the directors should, when deciding to do nothing, bear in mind the potential risk of personal liability under IA 1986 and a potential breach of their directors’ duties under the Companies Act 2006.
- Do a deal - reaching either an informal or formal arrangement with some or all of the company’s creditors with a view to rescheduling debts so the company has less to pay and/or more time to pay.
- Appoint an administrator - this is a collective formal insolvency procedure (which considers the interests of all creditors).
- Request the appointment of a receiver - this is an enforcement procedure where a secured creditor enforces its security by appointing a receiver who then sells the secured assets with a view to paying the sale proceeds (subject to certain prior claims) to the secured creditor.
- Place the company into liquidation - this a formal collective insolvency procedure.
