Introduction to Corporate Insolvency Flashcards
What is the primary legislation governing corporate insolvency?
The Insolvency Act 1986
What is the meaning of insolvent?
A company is insolvent when it is unable to pay its debts
What are the tests for insolvency?
1) Cash flow test
2) Balance sheet test
3) Statutory demand test
4) Judgement enforcement test
What do courts primarily rely on for testing insolvency?
Cash flow test and balance sheet test
What is the cash flow test?
Company cannot pay debts as they fall due
What is the balance sheet test?
Liabilities exceed assets
What is the statutory demand test?
Company fails to pay a debt over £750 within 21 days of a statutory demand
What is the judgement enforcement test?
Company fails to pay a creditor following court enforcement
What is a director’s responsibilities in financial difficulty?
1) Monitor financial health
2) Consider creditor interests
3) Avoid wrongful trading
What is wrongful trading?
Continuing business when insolvent
What is the effect of a director failing to act when insolvent?
May lead to personal liability and breach of director’s duties
What are the options for a company in financial difficulty?
1) Do nothing
2) Negotiate a deal with creditors
3) Appoint an administrator
4) Request appointment of a receiver
5) Place the company into liquidation
What is the risk of doing nothing in the face of financial difficulty?
Directors may be personally liable
When is doing nothing best suited in the face of financial difficulty?
If there are temporary financial challenges (e.g. cash flow issues)
What are the types of agreements that can be agreed with creditors?
1) Direct negotiation to reschedule payments
2) Company Voluntary Arrangement (CVA)
What is a Company Voluntary Arrangement?
Legally binding agreement between company and creditors to restructure debts
What is the purpose of appointing an administrator?
Collective insolvency considering interests of all creditors
What is the aim of an administrator in formal insolvency procedure?
1) Restructure the company
2) Sell assets to pay creditors
3) Maximise returns for creditors before liquidation
What is requesting the appointment of a receiver?
Secured creditors only can appoint a receiver to seize and sell secured assets. Does not consider unsecured creditors
What is placing the company into liquidation?
Company ceases trading and assets are sold to pay creditors
What are the two types of liquidation?
1) Creditors’ Voluntary Liquidation (initiated by directors)
2) Compulsory liquidation (ordered by court when winding-up petition is filed)
