Module 20 Flashcards
Bankruptcy
Applied only to individuals and should never be applied to companies
Absolute insolvency
Case where company owes more money than it actually has (net deficit of assets on SFP)
Simplest way to correct absolute insolvency
To inject equity
Practical insolvency
Inability to pay debts as they fall due
Actions if lack of money to pay debts (5)
- Raising additional long term debt finance
- Improving management of working capital
- Selling off assets which can be leased back
- Cutting costs to create profitable trading
- Obtaining more equity finance
Recovery from lack of money to pay debts should be possible if (2)
- Company can move to more profitable trading
- Has bank support
Creditor class hierarchy > First
Secured creditors > eg mortgages/ term loans secured with fixed charge usually over property
Creditor class hierarchy > Second
Preferential creditors > employees and pension funds
Creditor class hierarchy > Third
Floating charge holder > only crystallises in event of insolvency eg overdrafts
Creditor class hierarchy > Fourth
Unsecured creditors
Creditor class hierarchy > Fifth
Shareholders:
1) Preference shareholders
2) Ordinary shareholders
Forms of corporate insolvency to rescue company (can only be used by insolvent companies) (2)
- Company voluntary arrangement (CVA)
- Administration Order
Forms of corporate insolvency leading to end of company
Liquidation
Three types of liquidation
- Member’s voluntary liquidation (MVL)
- Creditor’s voluntary liquidation (CVL)
- Winding up by the court (WUC)
Company Voluntary Arrangement (CVA)
Proposal to convince shareholders to approve and creditors to accept x pence in the £, given the company has insufficient funds to pay out full amount owed
When is CVA useful?
When reconstruction of company is possible and is best course of action
Who initiates CVA?
Directors, liquidator or administrator of a company
Why would creditors agree to CVA? (3)
- Believe company could be turned around
- CVA could lead to better outcome than liquidation
- CVA cheaper than other forms of insolvency (more money available for creditors)
Who needs to agree to CVA?
- 75% of creditors by value
- > 50% of all members
Becomes binding on all parties
What is duty of nominee in CVA? (3)
- Appointed once CVA proposed
- Forms opinion as to reasonableness of CVA
- Decides whether separate member and creditor meetings should be called
Potential problems in CVA
Creditors can begin legal proceedings before creditors meeting takes place eg present petition for winding up/ enforce security by repossessing assets
Effect of CVA
- Binding on all members once approved
- Petition court for changes ONLY if creditor demonstrates unfairly prejudiced or material irregularity
- Nominee now assumes ‘supervisor’ title
CVA barrier to implementation
Vulnerable to recovery action before CVA is approved
Administration order
Designed to give the company a breathing space to allow a return to financial health or more advantageous realisation of assets is improvement not possible
Once petition seeking administration order presented to the court
Creditors are prevented from taking any action for recovery of their debt
Who initiates administration order?
Applications to the court for administration order made by:
- Floating charge holder
- Company itself
- Directors
- One or more creditors
Out of court administration order application
Cheaper and less cumbersome but cannot be made by creditors
Qualifying conditions of administration order (2)
Court must be satisfied:
- Company unable to pay debts AND
- Purpose of AO will rescue company as going concern and lead to better realisation of assets
In court procedure for administration order (2)
- Make presentation for court to grant AO
- During period from presentation to court and making of the order, company is given breathing space whereby: no liquidator appointed, no security may be enforced, no other legal proceedings may be commenced or continued
Out of court procedure for administration order (3)
- Lodge papers in court to notify intention to appoint administrator
- If no objection received, administrator appointed same day
- No need to wait for court to grant order > quicker and cheaper
Duties of administrator in administration order
Managers affairs, business and property of company during entire period administration order is in force
Main advantage of administration order
Offers extremely powerful protections from company’s creditors > moratorium
Role of the administrator administration order (2)
- Investigate the company’s affairs
- Report with proposals to shareholders and creditors of company
Administrator’s powers administration order (3)
- Sell company’s property
- Borrow money
- Bring or defend legal actions
Administrator can require any director, officer or employee to submit
Statement of affairs
If proposal for administration order declined
Court may discharge order
If proposal for administration order approved
Creditors may establish creditors’ committee
When does administration come to an end?
Earlier of:
Date the purpose of the order has been achieved
12 months from the date of the order
Liquidation =
Procedure usually associated with the end of a company
Voluntary liquidations are initiated by
The company
MVL > type of company wound up
Solvent
MVL > reasons (3)
- Company part of group being restructured
- Company set up for fixed period of time
- Owner-managed business with succession difficulties
MVL > who initiates?
- Shareholders
- Directors must sign ‘declaration of solvency’
CVL > type of company wound up
Insolvent
CVL > reason
Company cannot continue to trade because of size of liabilities
CVL > who initiates
Company passes special resolution saying it should be wound up
MVL > procedure (2)
- Company appoints liquidator who will help to realise and distribute company’s assets
- If company does not pay debts within 12 months in MVL, becomes CVL
CVL > procedure (4)
- Creditors’ meeting must be called
- Statement of affairs produced
- Members can appoint liquidator when resolution passed (must be approved by creditors)
- Creditors have right to appoint liquidation committee to represent them
WUC > reason
Creditors have lost patience with company (only form of liquidation which can be initiated by creditor)
WUC > who initiates? (4)
- Company
- Directors
- Creditor (any creditor owed > £750)
- Secretary of State
WUC > once court petition is presented (2)
- Court order to pay debt is served on company, if not paid, forms basis for winding-up petition
- OR creditor can serve written demand for payment if not made creditor can commence proceedings for winding up
WUC > procedure (5)
- Company appoints liquidator
- Court may appoint provisional liquidator
- Official receiver appointed
- Creditors have write to appoint liquidation committee
- Registrar of Companies must be notified when winding-up order granted
All persons carrying out insolvency work must be
Qualified and authorised to do so
Late Payment of Commercial Debts Act 1998 (3)
- All businesses have statutory right to claim interest on overdue commercial debts
- Interest charged at base rate + 8% after credit default period of 30 days
- Little implementation
Statement of Affairs (SOA)
Restatement of the SFP but showing assets at expected realisable values and liabilities classified in strict order of ranking for payment
Material omission from SOA =
Offence
SOA assumes assets sold on
Break-up basis
SOA > List A
Assets not specifically secured
SOA > List B
Assets specifically secured and creditors fully or partly secured
SOA > List C
Preferential creditors (employees and pension schemes)
SOA > List D
List of holders of debentures secured by floating charge
SOA > List E
Unsecured creditors eg unsecured employee creditors
Goods purchased on hire purchase and factored debts treated as
Secured asses for SOA
Surplus of list B >
Add to list A
If VALID retention of title (ROT) claim
Trade payables and inventory reduced
Unpaid wages SOA
Must be due to employees within four months and limit of £800 per employee
Unsecured employee creditors (4)
- Unpaid wages in excess of £800 limit
- Payment due in lieu of notice
- Redundancy payment due
- Outstanding expenses, bonuses or other payments
Prescribed part
50% of first £10,000
20% of next £2,975,000
Maximum pool of £600,000
Practical problems in preparation of SOA (3)
- Date of statement (info not available)
- Responsibility for preparation (directors)
- Insolvency Service (becomes creditor of company)
Insolvency service
Government agency that pays out redundancy payments to employees as a result of corporate insolvency
SOA Step 1
Consider completion of list A
SOA Step 2
Consider completion of list B
SOA Step 3
Consider any preferential creditors
SOA Step 4
Calculate the prescribed part of net property
SOA Step 5
Consider floating charge holders
SOA Step 6
Unsecured creditors
SOA Step 7
Record list totals on summary statement
Director’s primary duty of care (2)
- Members of the company
- When becomes aware insolvent, also to creditors
Public examination
Directors can be publicly examined under oath > expensive and infrequent
Malpractice
Liable to fine and/ or imprisonment
Company Directors Disqualification Act 1986
Statutory duty on insolvency practitioners to report on conduct of every director, can be disqualified. Can avoid court proceedings by voluntarily agreeing to period of disqualification. Min period of disqualification = two years. Max = 15 years
Reasons for director disqualifications (4)
- General misconduct
- Fraud etc in winding up
- Persistent breached of companies legislation
- Disqualification for unfitness
Wrongful trading
Trading while knowingly insolvent. Very rare.
Director’s defence of wrongful trading
All possible steps to minimise any potential loss were taken
Transactions at undervalue
Company disposes of assets for less than full value > application can be made for recovery of goods or compensation for loss
Preferences
If one creditor has benefitted at the expense SOA of another, application to court can be made to restore position or grant compensation
Restriction on the use of company name
‘Phoenix syndrome’
Disbarred directors banned from being director of a company with same or similar name