Module 15 Corporate Insolvency

Question 1

Absolute insolvency

Answer 1

• company owes more money than it actually has, that is, where a company has a net liability position on its statement of financial position

Question 2

Practical insolvency

Answer 2

• The inability to pay debts as they fall due

Question 3

Actions to correct practical insolvency

Answer 3

• raising additional long-term debt finance
• changing and improving the management of working capital
• selling off assets which can be leased back
• obtaining more equity finance

Question 4

What does the late payments of commercial debts act 1998 allow

Answer 4

• Creditors to charge intrest on any amount unpaid after credit default period of 30 days at base rate plus 8%

Question 5

Company Voluntary Arrangements

Answer 5

• attempts to convince the company’s creditors to accept part payment and to write off the remainder of the debt
• necessary to persuade 75% of creditors by value and more than 50% of all shareholders to agree

Question 6

What is the purpose of a moratorium

Answer 6

During an administration order:

• no liquidator can be appointed
• no security over the company’s assets may be enforced
• no other legal proceedings may be commenced or continued

Question 7

Members Voluntary Liquidation

Answer 7

• Used to wind up a company which is solvent
• the company is part of a group which is being restructured
• the company was set up for a fixed purpose or period
• the company is an owner managed business and there are succession difficulties

Question 8

Creditors’ Voluntary Liquidation

Answer 8

• wind up insolvent companies
• company passes a special resolution indicating that it cannot continue to trade
• call a meeting of its creditors, who decide on the liquidator

Question 9

Winding-up by the Court

Answer 9

• initiated by a creditor of a company who is owed more than £750
• court hearing where the court grants a winding-up order if it is satisfied
• creditors will then vote to decide on the liquidator

Question 10

Corporate Insolvency and Governance Act 2020 introduced moratorium period whay are the key features?

Answer 10

• Directors can obtain a moratorium by application through the courts for an initial period of 20 business days
• The directors remain in charge of the company, but an insolvency practitioner is asked to ‘monitor’ the company’s affairs
• Main objective for directors is to rescue and restructure the business
• 20 business day window can be extended if requested

Question 11

Statement of Affairs

Answer 11

• restatement of the statement of financial position of the company, but showing the assets at their expected realisable values and the liabilities classified into a strict order of ranking for payment
• liabilities are ranked for payment,

Question 12

5 lists of Assets

Answer 12

• List A - Assets not specifically secured
• List B - Assets specifically secured and secured creditors
• List C - Preferential creditors
• List D - Creditors with a floating charge
• List E - Unsecured creditors

Question 13

Order in which creditors are paid

Answer 13

• Secured creditors (List B)
• Preferential creditors (List C)
• Floating charge holders (List D)
• Unsecured creditors (List E)

Question 14

Preferential creditors

Answer 14

• Any outstanding sums due to pension schemes
• Unpaid wages due to employees within four months prior to the insolvency and capped to a monetary limit set by the Secretary of State (currently £800 per employee)
• Accrued holiday pay, due up to the date of insolvency (no monetary limit)

Question 15

Why may directors be disqualified?

Answer 15

• General misconduct (in connection with companies)
• Persistent breaches of companies legislation
• Fraud
• Disqualification for unfitness

Question 16

Disqulification penitlies

Answer 16

• can avoid court proceedingsby voluntarily agreeing to a period of disqualification
• If this is breached, the director faces a fine and/or imprisonment.
  
  • The minimum period of disqualification is two years and the maximum is 15.

Question 17

Wrongful trading

Answer 17

• we can think of wrongful trading as trading while knowingly insolvent.

Question 18

Restriction on Use of Company Name

Answer 18

• A director or shadow director of an insolvent company is debarred, except with the permission of the court, from being a director of a company with the same or similar name.