Lecture 16 - The Insolvency Regime Flashcards
Debenture
Acknowledgement of debt to a lender. Contractual agreement setting out terms eg security arrangements, rate of interest, frequency of repayments
Security arrangements =
Charge/ mortgage. Without this security, debenture holder merely unsecured creditor
Registered debenture main features (3)
- Usually redeemable
- Registered in company books and with Registrar of Companies
- Executed under seal
Convertible debenture
Debenture granting holder option to convert shares at stated times and/ or at fixed rates
Charges over assets
Mechanism to enforce repayment debt. Borrower pledges asset to lender, enabling them to take possession if borrower defaults on terms of loan. Two main types = fixed/ floating
Fixed charge (5)
- Borrower retains possession but cannot dispose of charged asset without lender’s permission
- Only available for certain specific assets
- Must be registered at Companies House
- Best form of security > often most valuable asset in company
- Lender has priority over virtually all other creditors in event of insolvency
Floating charge (4)
- General charge over company’s assets
- Company can sell and deal with charged assets without lender’s consent
- Becomes fixed charge (crystallises) on breach of terms of loan
- Rank in priority behind fixed charge holders
Crystallisation of floating charge occurs (4)
- Company ceases business/ wound up
- Receiver/ Administrator appointed by another lender
- Default in repayment/ other terms charge document
- Whenever debenture/ charge document says it does
Case for crystallisation
Brightlife Ltd 1987 > automatic crystallisation as documented in contract
Disadvantages of floating charges (4)
- Rank behind fixed charges and certain preferential debts
- Important to check what contracts borrower has with suppliers, eg whether they actually own goods before pay for them etc
- Firm can sell/ use assets in course of business
- Lender has no control
Voidability of floating charges
Unless company solvent at the time (difficult to prove), floating charges invalid if created less than 12 months before winding up/ Administration. Extended to 2 years if charge given to connected person.
If charge not registered
Void against liquidator/ Administrator. Charge holder becomes unsecured creditor
Rights of enforcement > charges (3)
- Assets charged can be sold to repay debt
- If value of charged assets is insufficient, remaining balance is unsecured claim
- Receiver/ Administrator may be appointed
Company becomes insolvent either on (2)
- Cash flow basis > cannot pay debts
- Balance sheet basis > liabilities exceed assets
Objectives of Administration (3)
- Rescue the company as a going concern
- Achieve better result for all creditors than liquidation
- Realising property for benefit of secured/ preferential creditors
Most common way for Administrator to be appointed
Out of Court method by floating chargeholder
Administrator appointed by: (3)
- Court on application creditor
- Out of court by company
- Out of court by holder of floating charge
Administration =
Insolvency procedure
Administration invoked when (2)
- Company can’t pay debts
- Floating charge over assets becomes enforceable
Charges created after 15 September 2003
Only Administrator, not Administrative Receiver can be appointed by chargeholder
Proposals for rescue plan must be submitted by Administrator..
Within 8 weeks. Put for approval, modification or rejection to creditors meeting.
Creditors vote
By value of their debt
If rescue plan approved
Administrator runs the business and achieve relevant objective
If plans not approved by creditors/ or scheme doesn’t work
Court decides what’s best. Likely to be Order to put company into liquidation
Pre-pack administration =
Way of structuring sale of company’s assets NOT separate insolvency procedure.
Company in difficulty finds purchaser whole/ part business, does all work necessary for sale. Before deal completed, company put into Administration, sale quickly completed by Administrator, with all paperwork negotiated, agreed and prepared in advance. End result, company sold without being advertised on open market. Unsecured debt left behind in old company. Usually same managers/ owners.
Moratorium in administration=
Creditors cannot take legal action against company - breathing space > automatic
Termination of Administration
Automatically terminated after 12 months unless extended by consent/ Court Order. If objective achieved, remains of company handed back to directors, but if creditors not all paid, company goes into liquidation.
Corporate Voluntary Arrangement (CVA)
Insolvency practitioner appointed, puts proposals to creditors, if approved, become binding and achieve better result than liquidation. Usually involves creditors taking less than legal entitlement.
CVA approval
Meeting of members and creditors called. Simple majority members needed, but 75% creditors (in value) needed. Creditors prevail.
If CVA approved
Insolvency practitioner becomes supervisor, proceeds to implement plan. Binding on all creditors regardless vote.
CVA plan does not affect
Secured creditors, can still take action to enforce security, therefore needs their consent.
Small company moratorium CVA
Allows small companies (audit exempt) to obtain moratorium on creditor action whilst proposals being considered. Must apply to court.
If CVA moratorium allowed by Court
Meetings must take place within 28 days. Ends when CVA approved.
If CVA only partly works
Deal is off and creditors can either accept or apply for winding up
Right to appoint Administrative Receiver arises out of
Floating charge
AR’s primary duty is to
Appointing chargeholder
AR acts as agent for company BUT (+ case)
Personally liable for negligent mis-management > Medforth v Blake 1999 > pig farm, AR didn’t take advantage large discounts from suppliers whilst running firm on behalf bank/
LPA Receiver (Received appointed under Law of Property Act 1925)
Appointment under fixed charge over property if default on terms. Function is to take property, receive any income on behalf lender and sell at best time and best price reasonably available.
If LPA Receiver gets offer less than value but NOT unreasonable..
Must accept
LPA Receiver and running of company by directors
Directors not legally affected, still have full powers. But difficult for firm to operate if their main asset sold/ taken control of.
Winding up and liquidation =
Way in which company brought to an end. Dealt with by liquidator. Company is dissolved and struck off Register of Companies - no longer exists.
Members’ voluntary liquidation
NOT insolvency procedure. Company must be solvent and able to pay debts. Merely method bringing existence of company to an end. Enables members to realise investment.
Requirements for Members’ voluntary liquidation (2)
- Special resolution
- Declaration of Solvency
Members’ voluntary liquidation > debts cannot be paid
Becomes creditors’ voluntary liquidation
Members’ voluntary liquidation > assets collected in and debts paid
Liquidator prepared formal account (sent to Registrar) and calls meeting members. Company dissolved and struck off Register.
Creditors’ voluntary liquidation
Company decides insolvent and cannot continue trading. Passes special resolution to go into CVL. Court not involved
CVL steps (4)
1) Liquidator appointed
2) Creditors’ meeting called
3) Statement of affairs prepared for creditors
4) Creditors can nominate/ appoint own choice liquidator
Duty of liquidator CVL
Collect in assets and apply in correct priority
Compulsory liquidation
Winding up pursuant to court order. Official Receiver automatically appointed Liquidator. Legal action cannot continue
234 and 235 Insolvency Act 1986
Liquidator has power to obtain such information and documentation as may be required from anyone who can assist. Backed by power to obtain court order to force compliance.
Liquidator report on directors
Must prepare report on conduct of directors. Whether any criminal offences have been committed.
Liquidator previous transactions (4)
Liquidators review previous transactions to see if action can be taken to increase assets available to creditors:
- Wrongful/ fraudulent trading
- Breach of duty
- Preferences to specific creditors
- Transactions at undervalue
Proofs of debt
All creditors must inform Liquidator how much owed and submit written proof. If accepted, amounts to admission of debt, but doesn’t mean will be paid
Secured creditors and Liquidation
Largely unaffected by liquidation, still have right to enforce security
Distribution of assets general principle
Creditors of each class get equal percentage of their debt if insufficient funds to pay in full
Order of priority
1) Fixed charges
2) Expenses of liquidation
3) Preferential creditors (unpaid employees wages etc)
4) Floating charges
5) Unsecured creditors
Anything left - to members (unlikely)
Dissolution
Once assets distributed, Liquidators prepare final account filed with Registrar. Company then dissolved and struck off Register.
Restoration
Possible for company to be restored eg if assets found like land not known about during liquidation/ not dealt with. Apply to Court, restoration usually permitted and asset sold. Company then struck off again.
