Mechanics of insolvency & officeholder actions Flashcards
Difference between CVL and MVL?
Normally company seeking MVL is solvent, so MVL will be accompanied by statutory declaration of solvency. or Directors can wind up insolvent company through CVL or compulsory liquidation. Creditors can also wind up a company through compulsory liquidation.
What’s the main ground for compulsory liquidation?
Being unable to discharge their debt. S122 and S123 of Insolvency Act 1986. Can be done by director but is most often done by a creditor.
What is the priority of distribution in insolvency and administration?
- Fixed charge holders.
- Liquidators’ fees and expenses.
- Preferred creditors. (i.e wages/pensions, pensions, FCSC).
- Prescribed Part & Expenses for Prescribed Part (it’s a pool for unsecured creditors)
- Floating charge holders. (postponed to expenses of administration para 115 of 1986 act, postponed to expenses of receivership S60 but nowhere in statute does it say that they’re postponed to the expenses of liquidation – In 2008 S176ZA which says in England and Wales, expenses are paid before the floating charge, but this isn’t applicable in Scotland.
- Unsecured creditors.
- Interest on preferential debts
- Interest on all unsecured debts
What’s the most common type of floating charge holder?
A financial institution. If a bank has been granted a floating charge, it will very, very likely meet all the qualifying conditions Schedule B 1 to Insolvency Act (Paragraph 14).
What was proposed change announced by the Chancellor of the Exchequer on 29 October 2018 in his Budget Speech?
HMRC will jump from being an unsecured creditor to a secondary preferential creditor for taxes held on behalf of employees and customers. This means the crown preference will get paid after unpaid wages and pension contributions etc.
MacDonald v Carnbroe Estates 2018 SLT 205
Question of valuation- company knew it was going into insolvency and sold a piece of property at about 40% of value. At first instance, argument succeeded that quick sale was needed.
*Has been granted permission to appeal to UKSC)
Nordic Travel v Scotprint?
Liquidator sought to reduce the 11 payments made by Nordic to Scotprint as fraudulent preferences, as they had shared directors, Scotprint was shareholder and Nordic and Scotprint had “intimate knowledge” of Nordic’s finances.
Held an insolvent debtor in funds was entitled to pay, in cash and in the ordinary course of business, debts which were due and payable.
Knowledge of the debtor’s absolute insolvency and an agreement that the creditor should be paid a debt due and payable as and when funds became available did not necessarily take the payments outwith the ordinary course of business; and reclaiming motion refused.
Can a court decide that the ranking is unfair?
No. Re Nortel (Supreme Court case) held that it’s not open to the court to deviate from ranking.
Why is the proposed 2020 change more important for Scots Law?
Making the crown debts preferential removes HMRC from the prescribed part and puts them above floating charge holders. This is more of an issue in Scotland than it would be in English law because Scot’s law doesn’t have a real alternative to a floating charge in a lot of circumstances, we don’t have a non-possessory security over moveables. All you can do is pledge, nobody uses it as it’s commercially insensible.
In England, they have equitable charges and equitable mortgages- we don’t have these.
Who can apply for a court order that puts a company into administration?
An application for a court order can be made by creditors of the company, the company itself, its directors or a liquidator.
Common law ground for reducing a transaction?
Fraud on the creditors. There’s no time limit, the only rules would be prescription and limitation which don’t really arise with fraud.
Does HMRC receive taxes an insolvent company is holding for them?
No, many creditors other than HMRC have a higher priority claim on the assets of an insolvent company – even for taxes paid by employees and customers that the business holds temporarily before passing them onto the government. This doesn’t include things like corporation taxes etc. as these aren’t collected by the company on behalf of others.
Where can we find ranking?
New Scotland- Insolvency (Scotland) Receivership Rules
What types of transaction might confer a preference?
Granting a security or paying only one debtor.
What’s more common- voluntary or involuntary liquidation?
Voluntary liquidations are twice as common, and it’s a company being proactive and recognizing that continuing to trade won’t be viable. It means the company isn’t incurring debts that it knows it won’t be able to pay.
Do you need a court order to put a company into administration?
No, there’s an ‘out of court route’ whereby floating charge holders can appoint an administrator by lodging a series of documents at court. In order for this to happen, the floating charge must explicitly give them the power to appoint an administrator (in practice theyll almost always have this).
They must also meet qualifying conditions in Schedule B1 of Insolvency Act.
Why is the proposed 2020 change from Chancellors speech being brought in ?
If a business temporarily holding taxes paid by employees and customers before passing them to HMRC goes into insolvency, they often go towards paying the company’s debts to other creditors. From April 2020, more of the taxes held in trust will go to fund public services.
Why do we need common law fraud on creditors if we have Insolvency Act 1986?
it’s useful if outside time limits set out in statute.
English law has distinct statutory provision on transactions that defraud creditors but we dont.
If a transaction is challenged, where do the recovered proceeds go?
Proceeds of recovery when its challenged go to expenses or preferential debts as they cant go to floating charge holders (S176ZB NOT TO THE FLOATING CHARGE HOLDER)
Who do directors owe a duty to?
In happy times, to company and shareholders.
S172(3) of the Companies Act states that directors in some circumstances will have to act in the interests of the company’s creditors.
When a company in on the verge of insolvency, there’s a shift as shareholders rank below creditors in insolvency.
Is it a good idea to have time limits on when we can avoid transactions under statutory rules?
Yes, it creates certainty and means entering into transactions with company you don’t need to question too much to whom duties are owed, but still protects against giving one creditor an advantage over others.
Other argument- short look back period cam lead to unfairness.
Actio pauliana
A remedy that allows a creditor to have a transaction avoided if it was carried out by the debtor in order to diminish the assets available to creditors by passing the assets onto a third party (Defined by AG Bobek in Feniks case)
What is the purpose of administration?
Rescuing the company as a going concern, or
achieving a better result for the company’s creditors as a whole or realising property in order to make a distribution to one or more secured or preferential creditors.
What are the advantages of administration?
Administration imposes a moratorium on enforcement which gives the company breathing space.
