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Business Law Practice > Unit 7 – Corporate Insolvency > Flashcards

Unit 7 – Corporate Insolvency Flashcards

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1
Q

What are the 4 tests for corporate insolvency?

A

1) Statutory demand – Creditor has served a statutory demand for an outstanding sum of £750 or more, and the company does not pay, or come to an arrangement with the creditor within 21 days of the statutory demand

2) A creditor has obtained judgement against the company, and has tried to enforce that judgement, but the debt still has not been paid in full / or at all

3) Cash flow test – It can be proved to the court that the company is unable to pay its debts as they fall due

4) Balance sheet test – It can be proved to the court that the company’s liabilities exceed its assets.

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2
Q

What are the 3 types of liquidation?

A

1) Compulsory liquidation – where 3rd party commences insolvency proceedings against insolvent company

2) Creditors’ voluntary liquidation (CVL) – commenced by the company itself when it is insolvent, in response from pressure from creditors

3) Members voluntary liquidation (MVL) – commenced by a solvent company because it wishes to cease trading or because it is dormant and wishes to bring its affairs to an end.

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3
Q

When will the petitioner be prevented prom proceeding with a winding up petition (compulsory liquidation)?

A

– Where the company can show there is a genuine and substantial dispute in relation to money owed.

– If the petitioner has already obtained judgement, is difficult to prove this.

– Court has ultimate discretion.

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4
Q

If the petitioner has applied for a judgement against the company (for a winding up), and the company indicates they will be able to pay the debts within a reasonable time, what will the court do?

A

– Adjourn the hearing to a later date.

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5
Q

Who automatically becomes the company’s liquidator once the court orders for a winding up?

A

The official receiver. Civil servant and court official employed by the insolvency service.

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6
Q

Can the official receiver appoint a private insolvency practitioner?

A

Yes, if the company has sufficient assets to pay the insolvency practitioner’s fees.

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7
Q

When is an MVL allowed? and how do the members get an MVL?

A

– MVL = only allowed where the company is SOLVENT.

– Directors must swear a statutory declaration that the company is solvent.

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8
Q

If during an MVL the company realises the company is insolvent what should they do?

A

– Convert it into a CVL.

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9
Q

How is a CVL initiated?

A

By the company itself on agreement by the company’s directors and shareholders.

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10
Q

What is the effect of a CVL on the directorship?

A

Lose their powers and appointments TERMINATED.

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11
Q

What is the effect of compulsory liquidation on the directorship?

A

They lose their powers but their appointments continue.

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12
Q

What are the 2 main functions of a liquidator?

A

1) Preserving and increasing the assets of the company

2) Distributing those assets to creditors.

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13
Q

In relation to preserving & increasing the assets, what are liquidators and administrators under a duty to do?

A

Duty to maximise the assets available to creditors.

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14
Q

What are the 5 claims a liquidator can make? (preserving & increasing assets)

A

1) Avoidance of floating charges
2) Preferences
3) Transactions at an undervalue
4) Transactions defrauding creditors
5) Extortionate credit transactions

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15
Q

What is an avoidance of floating charges claim?

A

A charge is automatically void where, at the ‘relevant time’ before the onset of the company’s insolvency, a charge was granted without the company receiving fresh consideration in exchange for granting security.

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16
Q

When can a floating charge be avoided?

A

– If it took place within 1 year prior to the insolvency (with an unconnected person)

–It took place within the 2 years prior to the insolvency (with a connected person) AND;

– The company was insolvent at the time of the transaction or became insolvent as a result unless the transaction was with a connected person.

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17
Q

Who constitutes a person connected with the company?

A

– A director or shadow director of the insolvent company; or

– Someone who is, in effect, a close relative or business associate of a director or shadow director; or

– An associate of the company – which means a company in the same group as the company, or which is controlled by a director of the insolvent company.

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18
Q

How does the liquidator avoid the floating charge (process)?

A

– Writes to charge holder stating charge is invalid

– If charge holder tries to enforce the charge, the liquidator or administrator seeks an injunction on the basis that the charge is invalid.

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19
Q

What is the claim for preferences (compulsory insolvency)?

A

“Preference” = where the company puts the other person in a better position in the event that the company went into insolvent liquidation or administration, than they would have been otherwise.

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20
Q

When is a preference voidable?

A

A) if it took place within the 6 months prior to the insolvency (with an unconnected person); or

B) If it took place within the 2 years prior to the insolvency (with a connected person); AND

– the company was insolvent at the time of the transaction, or became insolvent as a result; AND

– The company was influenced by a DESIRE to prefer that creditor, which is presumed if the transaction is with a connected person.

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21
Q

What are the requirements for the term “desire” in relation to preferences?

A

– A desire to prefer, rather than just an intention to prefer them.

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22
Q

Where a company decides to enter into a preferential charge because it would not survive if it lost the financial support of the creditor, and has no other choice, will the preference be valid?

A

Yes. I.e., this is not a desire to prefer, but an intention to save the company.

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23
Q

Where the preference is given to a person connected to the company, is the desire to prefer presumed?

A

Yes but this is rebuttable.

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24
Q

Where a preference is proven, what can the court do?

A
  • Order the release of any security given by the company,
  • The return of any property transferred as part of the transaction, or
  • The payment of the proceeds of sale of property forming part of the transaction to the company.
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25
Q

What is a claim for a transaction at an undervalue?

A

A gift or sale for significantly less consideration that that provided by the company.

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26
Q

When is a transaction at undervalue voidable?

A

– It took place 2 years prior to the insolvency AND;

– The company was insolvent at the time of the transaction or became insolvent as a result of it.

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27
Q

What is the defence for a transaction at an undervalue?

A

If the company can prove they entered into the transaction in good faith and for the purpose of carrying on its business, where there were reasonable grounds for believing that the transaction would benefit the company.

E.g., where the property needs to be sold quickly, and only the buyer found is one which would pay at an undervalue.

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28
Q

What is an extortionate credit transaction?

A

“Extortionate” = Requires grossly exorbitant payments to be made, or must otherwise grossly contravene ordinary principles of fair dealing.

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29
Q

When can an extortionate credit transaction be challeneged?

A

Liquidator can challenge an extortionate credit transaction made in 3 years prior and ending with the day on which the company went into administration or liquidation.

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30
Q

What is a transaction to defraud creditors?

A

A transaction at an undervalue which the company entered into in order to put assets beyond the reach of someone making a claim against it, or to prejudice the interests of that person in relation to any claim they might make.

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31
Q

How are challenges to transactions defrauding creditors brought?

A

At the discretion of the court;

Either by the court

Or by creditors as a victim.

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32
Q

Is there a time limit for challenging a transaction defrauding creditors?

A

No.

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33
Q

Before distributing the remaining assets to creditors what do liquidators do?

A

“prove the debt” by sending a form to unsecured creditors.

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34
Q

Are small sums which do not exceed £1,000 admitted automatically?

A

Yes.

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35
Q

What order are assets distibuted in during liquidation?

A
  1. Expenses of winding up (liquidators’ fees and professional advisers fees);
  2. Preferential debts, which rank and abate equally;
  3. Money which is the subject of floating charges, in order of priority; and
  4. Unsecured creditors, who rank and abate equally.
  5. Any money remaining is distributed between the shareholders.
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36
Q

What does rank and abate equally mean?

A

“Rank and abate equally” = Means that all of the creditors in a particular category will share the available money between them.

– Do not necessarily receive equal amounts. They’ll receive the same percentage of the outstanding debt that they are owed.

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37
Q

Who are the preferential debtors?

A

1) Employees’ wages / salaries for work carried out in the 4 months immediately preceding the date of the winding up order (maximum of £800 per employee)

– Employees’ accrued holiday pay is also preferential debt.

2) HMRC ranks as a secondary preferential debtor for PAYE / VAT but not in relation to corporation tax.

38
Q

WHat is ring fencing?

A

Statutory procedure of setting aside a portion of the available money for floating charge holders (where the security was created on or after 15 Sept 2003) for the benefit of unsecured creditors (not secured creditors).

39
Q

How much should be set aside under ring fencing?

A

– 50% of the first £10,000 of money received from the property which is subject to floating charges; and

– 20% of the remaining money.

  • Up to a limit of £800,000.
40
Q

What are the alternatives to liquidation?

A

(a) Administration

(b) Company voluntary arrangements

(c) Schemes of arrangement

(d) Restructuing plans

(e) Free standing moratorium

(f) Informal agreements with creditors

41
Q

What is administration?

A

Administration = Process whereby an administrator (independent insolvency practitioner) is appointed to run the company and make whatever changes are necessary to improve its financial performance.

42
Q

What is the primary aim of administration?

A

1) Rescue – To rescue the company as a going concern. If not possible, then;

2) Sell – Aim to get the company where it can be sold as a going concern; then if not possible:

3)Best result creditors – Must try to achieve a better result for the company’s creditors than if the company were simply wound up.

43
Q

Who does the administrator have a duty to?

A

Creditors of the company.

44
Q

What are the 2 ways administration occurs?

A

1) Court route

2) Out of court route

45
Q

1) Court route (administration)

A

Court can make an administration order only if it is satisfied that the company is likely to:

1) Become unable to pay its debts and

2) Administration reasonably likely to achieve one of the 3 purposes of administration

46
Q

After making the court application for administration what must the applicant do?

A

– notify anyone who is entitled to appoint an administrative receiver including qualifying floating charge holders.

47
Q

2) Out of court route (administration) – appointment by directors / company

A

Purpose = to make it easier to rescue a company.

48
Q

What is the process of applying for an out of court route administration?

A

First stage = Serve notice of intention of administration on:

– The court; and

– Any QFCH; and

– Any lender who is entitled to appoint an administrative receiver.

49
Q

What must the directors file at court for out of court route administration? (directors / company)

A

a statutory declaration that the company is unable to pay its debts and is not in liquidation.

50
Q

When does the moratorium come into effect for an out of court administration by directors?

A

Moratorium comes into effect as soon as the notice of intention to appoint is filed at COURT.

51
Q

When can out of court toute - appointment is by a qualifying floating charge holder take place?

A

Qualifying floating charge holder (QFCH) = a floating charge where the charge document states that paragraph 14 of schedule B1 to the IA 1986 applies to it and:

1) The charge document purports to empower the holder of the floating charge to appoint the administrator; or

1 a) The charge document purports to empower the holder of the floating charge to appoint an administrative receiver within the meaning of the IS 1986.

And

2) The charge document relates to the whole or substantially the whole of the company’s property (or does so when added to other security held by the same lender).

52
Q

If there is another qualifying floating charge holder who would have priority what should the lender do?

A

The lender must notify them in advance to give them the opportunity to appoint the administrator if they wish.

53
Q

Who is the administrators’ duty to?

A

All company’s creditors.

54
Q

Who is official receiver’s duty to?

A

Party who appointed them.

55
Q

For a qualifying floating charge holder to bring the administration, what must the file at court?

A

A notice of appointment which includes a statutory declaration by the lender stating that:

  • The lender is a holder of a QFC in relation to the company’s property;
  • The floating charge is enforceable; and
  • The appointment complies with the IA 1986, Sch B1
56
Q

When does the moratorium come into effect for administration?

A

Once administration has started.

57
Q

When will an administrators’ proposals be approved?

A

if a majority in value of the creditors, present and voting, vote in favour of them, provided that those who vote against the proposals do not constitute more than 50% in value of the creditors who are unconnected to the company.

58
Q

What is the effect of the administration order?

A

 Directors’ powers cease however they remain in office;

 Administrator is in control of the company’s assets (does not own them);

 Administrator carries out the proposals approved by the creditors.

 Throughout the administration, moratorium continues.

59
Q

When does administration automatically end?

A

1 year from the date the administration took effect. (Can be extended).

– Can be ended earlier by application to court by creditor or administrator if it isnt going well.

60
Q

When can a CVA be entered into?

A

– CVAs only used when company’s business is potentially fundamentally sound, however has a temporary cash flow difficulty.

– CVA aim = prevent liquidation.

– Cheaper than administration and simple to undertake. Is available to liquidators, administrators and the company itself.

61
Q

In a CVA, proposals put forward for payment of creditors must be approved by…

A

– 75% or more in value of the company’s creditors; and

– 50% or more of non-connected creditors.

62
Q

Are secured creditors allowed to vote in the CVA?

A

No, unless they also have unsecured debt.

63
Q

Is a CVA proposal which has been approved binding on future debts?

A

No. Just past debts.

64
Q

Does a CVA affect the rights of secured creditors / preferntial creditors?

A

No.

65
Q

Who supervises a CVA?

A

Insolvency practitioner.

66
Q

What is a restructuring plan under CIGA 2020?

A

Effectively a court-supervised agreement or compromise between the company and all of its creditors (secured / unsecured) and shareholders.

67
Q

How is the restructuing plan under CIGA implemented?

A

2 court hearings.

68
Q

How does approval under restructuring plan under CIGA 2020 work?

A

1) Creditors and shareholders are divided into classes.

2) Each class is deemed to have approved the plan if 75% by value of that class vote in favour (differs from schemes of arrangement, which require an overall majority in number to approve the scheme.

69
Q

What is a cram class down provision and how does it work?

A

– Enables a dissenting class of creditors to be ‘crammed down’ so that they cannot block otherwise viable plans.

– This must be sanctioned by the court.

– Court will only sanction it where it is satisfied that no member of the dissenting classes would be any worse off under the plan than they would be if the court were not to sanction the plan.

70
Q

What is the effect of a moratorium under CIGA 2020?

A

– Moratorium only available for English companies with no outstanding winding up petitions against them.

– In the moratorium, the company is protected from actions by creditors relating to pre-moratorium debts.

– It must still pay debts incurred during the moratorium in full.

– Company’s directors remain in control but a qualified insolvency practitioner acts as an independent monitor who has oversight of the moratorium and can terminate it in certain circumstances.

71
Q

When is a moratorim unavailable?

A

– A moratorium is not possible if the company has already entered into a moratorium during the previous 12 months.

72
Q

What debts are not suspended during the moratorium?

A

1) employees’ wages or salary arising under a contract of employment,

2) the monitor’s remuneration or expenses, and

3) goods or services supplied during the moratorium.

73
Q

How long does a moratorium last? When does it come into effect?

A

– Moratorium lasts 20 business days beginning with the business day after the moratorium comes into force.

– Moratorium comes into force on the date of filing of the documents at court or the court order.

– Extension = can be extended for a further 20 business days by applying to court.

– Can be extended by directors for a period of up to one year if the creditors who are not going to get paid because of the payment holiday consent to this.

74
Q

Where a secured creditor appoints a receiver to deal with the fixed asset / charge and there is not enough to pay in full after realising the asset, what happens to the remainder of the sum?

A

Creditor becomes an unsecured creditor for the remainder.

75
Q

Where the amount realised is higher than needed to repay a secured creditor, what happens to the remainder?

A

Surplus returned to company and used for unsecured creditors.

76
Q

What is a ‘possessory’ security?

A

Involves the lender having physical possession of the asset.

A pledge is a form of possessory security.

77
Q

What is a non-possessory security?

A

Involves the lender having security over the asset but the borrowe retains possession.

E.g., – Fixed charge

– Charge by way of legal mortgage
– Floating charge

78
Q

In a CVL, do the directors continue the running of the company?

A

The directors will remain in office however their powers will cease as the liquidator takes over the running of the company.

79
Q

What happens to a companys’ assets in a CVL?

A

Any assets or money belonging to the business should be safeguarded and not be sold or otherwise moved out of the company. The liquidator will be responsible for any such decisions, not the directors.

80
Q

What is the effect of the directors when a company enters a CVL?

A

Although directors are still in office, decisions will be taken by the liquidator once the CVL is established. Were directors to take action on behalf of the company once the insolvency proceedings have commenced, they would be vulnerable to actions for misfeasance, wrongful or fraudulent trading

81
Q

Who can bring a claim for wrongful trading?

A

1) Liquidator

2) Administrator

3) This right can be assigned to a third party like a creditor but he creditor does not automatically have this right.

82
Q

When can a claim for wrongful trading be brought?

A

1) Company has gone into insolvent liquidation or insolvent administration

2) Before commencement of the winding up of the company, the director knew or ought to have concluded there was no reasonable prospect that the company would avoid insolvent liquidation; and

3) That person was a director of the company at the time.

83
Q

What is the only defence to wrongful trading?

A

If they took every step with a view to minimising the potential loss to the company;s creditors as they ought to have taken.

84
Q

What 2 parts to this defence are there?

A

The standard expected of a director is that of a reasonably diligent person having both:

1) General knowledge, skill & experience that may be expected of a person carrying out the same functions as are carried out by that director in relation to the company; and

2) Specific knowledge, skill and experience that particular director has.

85
Q

What constitutes minimising the potential loss to the company’s creditors?

A
  • Seek professional advice from solicitors and/or accountants at the first sign of problems;
  • Limit spending;
  • Check the company’s accounts regularly;
  • Keep records of their own actions.

As a remedy, the court may order the director to make a contribution ot the company’s assets, increasing the amount available to creditors.

86
Q

What is a claim for fraudulent trading?

A

A director will be liable for fraudulent trading if, in the course of the company being wound up, it appears that the company’s business has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose.

87
Q

When can a fraudulent trading claim be broguht?

A

1) Where the company is in insolvent liquidation or insolvent administration.

88
Q

Who can bring a fraudulent trading claim?

A

Only liquidator or administrator.

89
Q

Is fraudulent trading a crime?

A

Yes – criminal conviction likely.

90
Q

What is a misfeasance?

A

Breach of any fiduciary duty by directors..

91
Q

What is the effect of a misfeasance claim?

A

1) Directors may be ordered to contribute to the company’s assets

2) May be ordered to repay, restore or account for any money or property or any part of it that has been misapplied in breach of duty.

Business Law Practice (10 decks)

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