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ICAS - AFin > Module 20 > Flashcards

Module 20 Flashcards

1
Q

Bankruptcy

A

Applied only to individuals and should never be applied to companies

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2
Q

Absolute insolvency

A

Case where company owes more money than it actually has (net deficit of assets on SFP)

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3
Q

Simplest way to correct absolute insolvency

A

To inject equity

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4
Q

Practical insolvency

A

Inability to pay debts as they fall due

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5
Q

Actions if lack of money to pay debts (5)

A
  • 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
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6
Q

Recovery from lack of money to pay debts should be possible if (2)

A
  • Company can move to more profitable trading

- Has bank support

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7
Q

Creditor class hierarchy > First

A

Secured creditors > eg mortgages/ term loans secured with fixed charge usually over property

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8
Q

Creditor class hierarchy > Second

A

Preferential creditors > employees and pension funds

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9
Q

Creditor class hierarchy > Third

A

Floating charge holder > only crystallises in event of insolvency eg overdrafts

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10
Q

Creditor class hierarchy > Fourth

A

Unsecured creditors

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11
Q

Creditor class hierarchy > Fifth

A

Shareholders:

1) Preference shareholders
2) Ordinary shareholders

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12
Q

Forms of corporate insolvency to rescue company (can only be used by insolvent companies) (2)

A
  • Company voluntary arrangement (CVA)

- Administration Order

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13
Q

Forms of corporate insolvency leading to end of company

A

Liquidation

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14
Q

Three types of liquidation

A
  • Member’s voluntary liquidation (MVL)
  • Creditor’s voluntary liquidation (CVL)
  • Winding up by the court (WUC)
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15
Q

Company Voluntary Arrangement (CVA)

A

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

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16
Q

When is CVA useful?

A

When reconstruction of company is possible and is best course of action

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17
Q

Who initiates CVA?

A

Directors, liquidator or administrator of a company

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18
Q

Why would creditors agree to CVA? (3)

A
  • 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)
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19
Q

Who needs to agree to CVA?

A
  • 75% of creditors by value
  • > 50% of all members
    Becomes binding on all parties
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20
Q

What is duty of nominee in CVA? (3)

A
  • Appointed once CVA proposed
  • Forms opinion as to reasonableness of CVA
  • Decides whether separate member and creditor meetings should be called
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21
Q

Potential problems in CVA

A

Creditors can begin legal proceedings before creditors meeting takes place eg present petition for winding up/ enforce security by repossessing assets

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22
Q

Effect of CVA

A
  • Binding on all members once approved
  • Petition court for changes ONLY if creditor demonstrates unfairly prejudiced or material irregularity
  • Nominee now assumes ‘supervisor’ title
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23
Q

CVA barrier to implementation

A

Vulnerable to recovery action before CVA is approved

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24
Q

Administration order

A

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

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25
Q

Once petition seeking administration order presented to the court

A

Creditors are prevented from taking any action for recovery of their debt

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26
Q

Who initiates administration order?

A

Applications to the court for administration order made by:

  • Floating charge holder
  • Company itself
  • Directors
  • One or more creditors
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27
Q

Out of court administration order application

A

Cheaper and less cumbersome but cannot be made by creditors

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28
Q

Qualifying conditions of administration order (2)

A

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
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29
Q

In court procedure for administration order (2)

A
  • 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
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30
Q

Out of court procedure for administration order (3)

A
  • 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
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31
Q

Duties of administrator in administration order

A

Managers affairs, business and property of company during entire period administration order is in force

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32
Q

Main advantage of administration order

A

Offers extremely powerful protections from company’s creditors > moratorium

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33
Q

Role of the administrator administration order (2)

A
  • Investigate the company’s affairs

- Report with proposals to shareholders and creditors of company

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34
Q

Administrator’s powers administration order (3)

A
  • Sell company’s property
  • Borrow money
  • Bring or defend legal actions
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35
Q

Administrator can require any director, officer or employee to submit

A

Statement of affairs

36
Q

If proposal for administration order declined

A

Court may discharge order

37
Q

If proposal for administration order approved

A

Creditors may establish creditors’ committee

38
Q

When does administration come to an end?

A

Earlier of:
Date the purpose of the order has been achieved
12 months from the date of the order

39
Q

Liquidation =

A

Procedure usually associated with the end of a company

40
Q

Voluntary liquidations are initiated by

A

The company

41
Q

MVL > type of company wound up

A

Solvent

42
Q

MVL > reasons (3)

A
  • Company part of group being restructured
  • Company set up for fixed period of time
  • Owner-managed business with succession difficulties
43
Q

MVL > who initiates?

A
  • Shareholders

- Directors must sign ‘declaration of solvency’

44
Q

CVL > type of company wound up

A

Insolvent

45
Q

CVL > reason

A

Company cannot continue to trade because of size of liabilities

46
Q

CVL > who initiates

A

Company passes special resolution saying it should be wound up

47
Q

MVL > procedure (2)

A
  • 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
48
Q

CVL > procedure (4)

A
  • 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
49
Q

WUC > reason

A

Creditors have lost patience with company (only form of liquidation which can be initiated by creditor)

50
Q

WUC > who initiates? (4)

A
  • Company
  • Directors
  • Creditor (any creditor owed > £750)
  • Secretary of State
51
Q

WUC > once court petition is presented (2)

A
  • 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
52
Q

WUC > procedure (5)

A
  • 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
53
Q

All persons carrying out insolvency work must be

A

Qualified and authorised to do so

54
Q

Late Payment of Commercial Debts Act 1998 (3)

A
  • 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
55
Q

Statement of Affairs (SOA)

A

Restatement of the SFP but showing assets at expected realisable values and liabilities classified in strict order of ranking for payment

56
Q

Material omission from SOA =

A

Offence

57
Q

SOA assumes assets sold on

A

Break-up basis

58
Q

SOA > List A

A

Assets not specifically secured

59
Q

SOA > List B

A

Assets specifically secured and creditors fully or partly secured

60
Q

SOA > List C

A

Preferential creditors (employees and pension schemes)

61
Q

SOA > List D

A

List of holders of debentures secured by floating charge

62
Q

SOA > List E

A

Unsecured creditors eg unsecured employee creditors

63
Q

Goods purchased on hire purchase and factored debts treated as

A

Secured asses for SOA

64
Q

Surplus of list B >

A

Add to list A

65
Q

If VALID retention of title (ROT) claim

A

Trade payables and inventory reduced

66
Q

Unpaid wages SOA

A

Must be due to employees within four months and limit of £800 per employee

67
Q

Unsecured employee creditors (4)

A
  • Unpaid wages in excess of £800 limit
  • Payment due in lieu of notice
  • Redundancy payment due
  • Outstanding expenses, bonuses or other payments
68
Q

Prescribed part

A

50% of first £10,000
20% of next £2,975,000
Maximum pool of £600,000

69
Q

Practical problems in preparation of SOA (3)

A
  • Date of statement (info not available)
  • Responsibility for preparation (directors)
  • Insolvency Service (becomes creditor of company)
70
Q

Insolvency service

A

Government agency that pays out redundancy payments to employees as a result of corporate insolvency

71
Q

SOA Step 1

A

Consider completion of list A

72
Q

SOA Step 2

A

Consider completion of list B

73
Q

SOA Step 3

A

Consider any preferential creditors

74
Q

SOA Step 4

A

Calculate the prescribed part of net property

75
Q

SOA Step 5

A

Consider floating charge holders

76
Q

SOA Step 6

A

Unsecured creditors

77
Q

SOA Step 7

A

Record list totals on summary statement

78
Q

Director’s primary duty of care (2)

A
  • Members of the company

- When becomes aware insolvent, also to creditors

79
Q

Public examination

A

Directors can be publicly examined under oath > expensive and infrequent

80
Q

Malpractice

A

Liable to fine and/ or imprisonment

81
Q

Company Directors Disqualification Act 1986

A

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

82
Q

Reasons for director disqualifications (4)

A
  • General misconduct
  • Fraud etc in winding up
  • Persistent breached of companies legislation
  • Disqualification for unfitness
83
Q

Wrongful trading

A

Trading while knowingly insolvent. Very rare.

84
Q

Director’s defence of wrongful trading

A

All possible steps to minimise any potential loss were taken

85
Q

Transactions at undervalue

A

Company disposes of assets for less than full value > application can be made for recovery of goods or compensation for loss

86
Q

Preferences

A

If one creditor has benefitted at the expense SOA of another, application to court can be made to restore position or grant compensation

87
Q

Restriction on the use of company name

A

‘Phoenix syndrome’

Disbarred directors banned from being director of a company with same or similar name

ICAS - AFin (21 decks)

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