Module 15 - Corporate Insolvency

Question 1

Absolute insolvency

Answer 1

A case where a 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 which can be taken 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; and
• obtaining more equity finance.

Question 4

CVA

Answer 4

• must be insolvent with insufficient funds to pay creditors
• convinces creditors to accept part payment and write off remainder of debt
• appoint supervisor to ensure it is followed but running remains in director’s control
• requires shareholder and creditor approval (75% of creditors by value and more than 50% of all shareholders) before binding

Question 5

What is the major problem with CVA

Answer 5

in the period before the CVA becomes binding,
there is nothing to prevent a creditor taking proceedings against the company for
satisfaction of their debt

Question 6

Administration orders

Answer 6

• rescue procedure
• designed to give company breathing space to return to financial health
• administrator manages affairs, business and property
• breathing space = moratorium
• during this: no liquidator can be appointed, no security may be enforced and no other legal proceedings may be commenced

Question 7

When does an administration order end

Answer 7

earliest of:

• date of purpose of order has been achieved
• 12 months from the date of the order

Question 8

Three forms of liquidation

Answer 8

MVL
CVL
WUC

Question 9

MVL

Answer 9

• used by company which is solvent
• appoints liquidators who helps realise and distribute company’s assets

usually used for:

• company part of group restructure
• companies set up for fixed purpose
• company is an owner managed business with succession difficulties

Question 10

CVL

Answer 10

• company passes special resolution
• call meeting of creditors
• creditors decide on liquidator to oversee winding up

Question 11

WUC

Answer 11

• initiated by creditor
• creditor must be owed more than £750
• court presented with petition
• court hearing where the court can grant Winding up order
• creditors vote to decide on liquidator

Question 12

Statement of Affairs

Answer 12

• SoA as at date of insolvency
• restatement of financial position of company but showing assets as expected realisable values and liabilities classified into a strict order of ranking for payment

Question 13

The SoA assumes assets on sold on ___

Answer 13

break up basis so book value is not directly relevant

Question 14

5 lists in SoA

Answer 14

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

Question 15

What is any surplus remaining after unsecured creditors are paid in full used for?

Answer 15

Paying any interest to creditors at statutory rates

Question 16

What can be included in preferential creditors

Answer 16

• any outstanding sums to pension schemes
• unpaid wages due to employees within four months prior (capped at £800 per employee)
• accrued holiday pay due up to date of insolvency (no monetary limit)

Question 17

Primary duty of care of director’s when company is insolvent

Answer 17

company’s creditors

Question 18

Reason’s for a director’s disqualification

Answer 18

General misconduct (in connection with companies)
• Persistent breaches of companies legislation
• Fraud etc., in a winding-up
• Disqualification for unfitness

Question 19

How can a director avoid court proceedings

Answer 19

By voluntarily agreeing to a period of disqualification - minimum 2 years max 15

Question 20

wrongful trading

Answer 20

, if the court forms the opinion that a director knew or ought to have concluded
that there was no reasonable prospect of the company avoiding liquidation, but
continued to trade and incur credit, then it can make a declaration that the director is
guilty of wrongful trading

Question 21

Phoenix syndrome

Answer 21

Directors of an insolvent company seek to start a new company, carrying on the same business with the same or a similar name while leaving their debts in the old company