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