Topic 3: Insolvency Flashcards

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1
Q

Does insolvency always mean the company is going bust?

A

NO; it can also just mean that the company has to sell its bad debts and keep the good ones

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2
Q

What are the key principles of Insolvency?

A

1) Shift from shareholder perspective to creditors
2) Office-holder will take charge of assets as they are
3) Only beneficial assets in company ownership can be distributed
4) Creditors share assets collectively (NOT eqally, via equity)

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3
Q

What is the priority of the Insolvency Procedure?

A

1) Fixed charge holders
2) Insolvency expenses
3) Preferential creditors (e.g. employees)
4) Floating charge holders
5) Unsecured (Provable) creditors
6) Shareholders

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4
Q

What is the Pari Passau Principle?

A

Does not allow the parties to disrupt the hierarchy of creditors (Not even by contract)
(Re Jeavons, ex parte Mackay)

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5
Q

Is the Pari Passau Principle mandatory?

A

YES, always applies (However, IATA v Ansett)

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6
Q

Difference between cash flow and balance sheet insolvency?

A

Cash Flow = Debtor is unable to pay debts as they fall due
Balance Sheet = Debtor’s inability to pay its debts if its assets are less than its liabilities

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7
Q

What is the Anti-Deprivation principle?

A

A party cannot contract to deprive itself of an asset in the case of insolvency, such a contract will be void
(Re Harrison, ex parte Jay)

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8
Q

When does the Anti-Deprivation rule NOT apply?

A

1) Removal/deprivation of valueless assets (Money Markets v London Stock Exchange)
2) Forfeiture of a lease (Whitmore v Mason)
3) Ipso Facto clause that does not attempt to deprive asset from creditor

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9
Q

What did the case of Belmont decide regarding the Anti-Deprivation rule?

A

1) Rule may apply to any agreement that gives another party an asset due to a creditor
2) Courts should investigate whether purpose of agreement was to evade the rule
3) Commercial transactions should not be interfered with as long as made in good faith

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10
Q

Will the Anti-Deprivation rule invalidate commercially sensible transactions?

A

NO; as long as they were not intended to interfere with the insolvency regulations

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