Module 15

Question 1

What is absolute insolvency?

Answer 1

a case where a company owner more money than it has. i.e. net liability position

Question 2

What is practical insolvency?

Answer 2

inability to pay debts as they fall due

Question 3

What is the simplest way to correct absolute insolvency?

Answer 3

inject equity

Question 4

What actions can be taken to correct practical insolvency?

Answer 4

• raise additional long term debt finance
• improve working capital
• sell off assets which can be leased back
• obtain more equity finance

Question 5

What are creditors legally permitted to do after a default period of 30 days?

Answer 5

charge interest at base rate plus eight

Question 6

What is a company voluntary arrangement?

Answer 6

a company must be insolvent with insufficient funds to pay creditors. The procedure attempts to convince the company’s creditors to take partial payment at a number of pence to the pound.

Question 7

Who must approve a CVA?

Answer 7

shareholders and creditors. 75% of creditors by value.

More than 50% of shareholders.

Question 8

What is the major disadvantage of CVA?

Answer 8

before it biomes binding, there is nothing to prevent creditors form take proceedings against the company. e.g. winding up
enforce security.

Question 9

What is an administration order?

Answer 9

designed to give companies breathing space. the administrator manages the affairs, business and property of the company.

Question 10

What is a moratorium?

Answer 10

legal breathing space where
-no liquidator can be appointed
0no security may be enforced
-no other legal proceedings

Question 11

How long does administration last?

Answer 11

12 months or

the date the purpose of the order has been achieved.

Question 12

What is liquidation?

Answer 12

winding up

Question 13

What are the three kinds of liquidation?

Answer 13

Members voluntary liquidation
creditors voluntary liquidation
winding up by the court

Question 14

What is MVL?

Answer 14

For solvent businesses.
e.g. due to 
restructuring 
end of the companies fixed purpose or period
succession problems

Question 15

What is CVL?

Answer 15

used towing up insolvent companies

passes a special resolution then calls a meeting with creditors who decide the liquidator.

Question 16

What is winding up by the court?

Answer 16

initiated by a creditor owed more than £750.

Question 17

What is a statement of affairs?

Answer 17

shows the assets at their realisable values and liabilities ordered by priority.

Question 18

What are the lists of the SOA?

Answer 18

A- assets not specifically secured
B- assets specifically secured and secured creditors
C- Preferential creditors
D - creditors with floating charge 
E - unsecured creditors

Question 19

What happens if there is surplus after paying creditors?

Answer 19

pays interest to creditors

any further surplus goes to shareholders

Question 20

Who are preferential creditors?

Answer 20

• pension schemes
• unpaid wages for time worked within four months prior to insolvency and capped at £800 per employee
• accrued holiday pay

Question 21

Who is responsible for preparing the SOA?

Answer 21

directors

Question 22

How is the SOA prepared?

Answer 22

as at

Question 23

Why may a director be disqualified?

Answer 23

• general misconduct
• persistent breaches of companies legislation
• fraud
• unfitness

Question 24

How can a director avoid court proceedings?

Answer 24

voluntary disqualification. 2-15 years

Question 25

What is the Phoenix syndrome and how is it combatted?

Answer 25

where directors of an insolvent company start new company with similar name and leaving debts behind.
director or shadow director is disbarred from using name.