Module 15 - Corporate Insolvency Flashcards
Absolute insolvency
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
Practical insolvency
The inability to pay debts as they fall due
Actions which can be taken to correct practical insolvency
- 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.
CVA
- 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
What is the major problem with CVA
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
Administration orders
- 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
When does an administration order end
earliest of:
- date of purpose of order has been achieved
- 12 months from the date of the order
Three forms of liquidation
MVL
CVL
WUC
MVL
- 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
CVL
- company passes special resolution
- call meeting of creditors
- creditors decide on liquidator to oversee winding up
WUC
- 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
Statement of Affairs
- 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
The SoA assumes assets on sold on ___
break up basis so book value is not directly relevant
5 lists in SoA
A -assets not specifically secured B - assets specifically secured and secured creditors C - preferential creditors D - creditors with a floating charge E - unsecured creditors
What is any surplus remaining after unsecured creditors are paid in full used for?
Paying any interest to creditors at statutory rates
What can be included in preferential creditors
- 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)
Primary duty of care of director’s when company is insolvent
company’s creditors
Reason’s for a director’s disqualification
General misconduct (in connection with companies)
• Persistent breaches of companies legislation
• Fraud etc., in a winding-up
• Disqualification for unfitness
How can a director avoid court proceedings
By voluntarily agreeing to a period of disqualification - minimum 2 years max 15
wrongful trading
, 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
Phoenix syndrome
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
