Untitled Deck

Question 1

Describe the procedure for obtaining a pre-insolvency moratorium.

Answer 1

A company can obtain a pre-insolvency moratorium by filing documents at court, including a statement of its inability to pay debts and a statement from a licensed insolvency practitioner (Monitor) indicating that a moratorium may help rescue the company.

Question 2

How long does a pre-insolvency moratorium last initially?

Answer 2

The pre-insolvency moratorium lasts for 20 business days but can be extended by the directors for an additional 20 business days.

Question 3

What is the maximum duration of a pre-insolvency moratorium?

Answer 3

The maximum period for a pre-insolvency moratorium is one year, subject to a court order for further extension.

Question 4

What happens to the moratorium if the company enters liquidation or administration?

Answer 4

The moratorium will terminate automatically if the company enters liquidation or administration.

Question 5

Define pre-moratorium debts.

Answer 5

Pre-moratorium debts are obligations that have fallen due before or during the moratorium, which the company does not have to pay while the moratorium subsists.

Question 6

List some exceptions to the statutory repayment holiday for pre-moratorium debts.

Answer 6

Exceptions include the Monitor’s remuneration or expenses, goods and services supplied during the moratorium, rent for the period during the moratorium, wages or salary, redundancy payments, and loans under financial services contracts.

Question 7

What are moratorium debts?

Answer 7

Moratorium debts are obligations that fall due during or after the moratorium, incurred during the moratorium period, and must be paid.

Question 8

Explain the cash flow requirement during the moratorium period.

Answer 8

A company must be ‘cash flow’ solvent and capable of paying its debts as they fall due during the moratorium period.

Question 9

What role does the Monitor play during the pre-insolvency moratorium?

Answer 9

The Monitor has a supervisory function during the pre-insolvency moratorium, providing a statement on the likelihood of the moratorium aiding in the company’s rescue.

Question 10

How can further extensions of the pre-insolvency moratorium be obtained?

Answer 10

Further extensions can be obtained with the consent of a requisite majority of creditors and/or a court order.

Question 11

Describe the main advantage of a formal arrangement in insolvency procedures.

Answer 11

The main advantage is that if the requisite majorities of creditors and/or shareholders vote in favor, it becomes legally binding, even if some creditors voted against it or did not vote at all.

Question 12

Define a Company Voluntary Arrangement (CVA).

Answer 12

A CVA is a compromise between a company and its creditors, defined as a composition in satisfaction of its debts or a scheme of arrangement of its affairs.

Question 13

How is a CVA proposal initiated?

Answer 13

The directors draft a CVA proposal and appoint a Nominee, who must be an insolvency practitioner.

Question 14

What role does the Nominee play in the CVA process?

Answer 14

The Nominee considers the CVA proposal, reports to court on whether creditors and shareholders should vote on it, and supervises the CVA.

Question 15

Explain the voting requirements for a CVA proposal to be approved.

Answer 15

The CVA proposal will be approved if at least 75% in value of those voting (excluding secured creditors) vote in favor.

Question 16

What happens after the CVA proposal is approved?

Answer 16

Once approved, the CVA must be reported to court, but there is no requirement for the court to approve it.

Question 17

How long does the Nominee have to report to court on the CVA proposal?

Answer 17

The Nominee must report to court within 28 days of receiving the CVA proposal.

Question 18

What is the minimum notice period for creditors to vote on a CVA proposal?

Answer 18

The Nominee must allow at least 14 days for creditors to vote on the CVA proposal.

Question 19

What is the role of the Supervisor in a CVA?

Answer 19

The Supervisor, who is an Insolvency Practitioner, supervises and implements the CVA.

Question 20

How can CVAs be used in conjunction with other processes?

Answer 20

CVAs can be used together with administration or liquidation.

Question 21

What must happen within 5 days of the creditors’ decision on the CVA proposal?

Answer 21

A meeting of the shareholders must take place.

Question 22

What is the essence of a CVA regarding creditor payments?

Answer 22

The essence of a CVA is that creditors agree to part payment of the debts owed to them and/or a new extended timetable for repayment.

Question 23

What statutory procedures govern formal arrangements in insolvency?

Answer 23

Formal arrangements are governed by statutory procedures such as the Company Voluntary Arrangement under IA 1986 and the Restructuring Plan under CIGA 2020.

Question 24

What is the significance of the creditors’ and shareholders’ vote in a formal arrangement?

Answer 24

The vote is significant because it determines whether the arrangement becomes legally binding.

Question 25

What happens if the CVA proposal is not approved by the creditors?

Answer 25

If the CVA proposal is not approved, the company may need to consider other insolvency options such as administration or liquidation.

Question 26

Describe the role of creditors in the approval of a CVA proposal.

Answer 26

Creditors’ approval is crucial for a CVA proposal; if creditors vote in favor, their vote prevails over shareholders’ votes, even if shareholders oppose it.

Question 27

Define the term ‘CVA’.

Answer 27

A CVA, or Company Voluntary Arrangement, is a formal agreement between a company and its creditors to pay back a portion of its debts over time.

Question 28

What happens if a CVA is successfully challenged?

Answer 28

If a CVA is successfully challenged within the 28-day period, it may not become binding on the creditors.

Question 29

Explain the challenge period for a CVA.

Answer 29

A creditor can challenge a CVA within 28 days of its approval on grounds of ‘unfair prejudice’ or material irregularity in the approval process.

Question 30

How does a CVA affect unsecured creditors?

Answer 30

A CVA is binding on all unsecured creditors, including those who did not vote or voted against it.

Question 31

What is the significance of the Nominee in a CVA process?

Answer 31

The Nominee reports to the court about the CVA’s approval and usually becomes the Supervisor who implements the CVA proposal.

Question 32

How do secured or preferential creditors relate to a CVA?

Answer 32

Secured or preferential creditors are not bound by a CVA unless they unanimously consent to it.

Question 33

What is the Supervisor’s responsibility in a CVA?

Answer 33

The Supervisor’s role includes agreeing to creditors’ claims, collecting unsecured funds for dividends, and ensuring compliance with the CVA.

Question 34

Describe a common use of CVAs in the retail sector.

Answer 34

CVAs are commonly used in the retail sector to negotiate compromises with creditors, particularly landlords, to reduce rent and allow continued trading.

Question 35

Provide examples of companies that used CVAs during the coronavirus pandemic.

Answer 35

Examples include All Saints in June 2020 and Clarks in October 2020, both of which negotiated rent reductions with landlords.

Question 36

What is a major disadvantage of the CVA procedure?

Answer 36

A major disadvantage is that secured or preferential creditors are not bound by the CVA unless they unanimously consent.

Question 37

What happens after a CVA is completed?

Answer 37

After a CVA is completed, the Supervisor sends a final report on the implementation of the proposal to all shareholders and creditors bound by the CVA.

Question 38

How does a CVA benefit a company from a management perspective?

Answer 38

From the company’s perspective, CVAs provide a structured way to manage debt and negotiate with creditors, allowing the company to continue operations.

Question 39

Describe the purpose of a Restructuring Plan introduced by CIGA 2020.

Answer 39

The purpose of the Restructuring Plan is to compromise a company’s creditors and shareholders and restructure its liabilities so that a company can return to solvency.

Question 40

Define a Restructuring Plan in relation to other restructuring mechanisms.

Answer 40

A Restructuring Plan is a hybrid of a Company Voluntary Arrangement (CVA) and a ‘scheme of arrangement’ under the Companies Act 2006, applicable to companies facing financial difficulty.

Question 41

How does a Restructuring Plan become binding on creditors?

Answer 41

A Restructuring Plan becomes binding on creditors only if it is sanctioned by the court.

Question 42

What is required for a class of creditors to approve a Restructuring Plan?

Answer 42

Each class of creditors must approve the Restructuring Plan by at least 75% on value of those voting in that class.

Question 43

Explain the concept of ‘cross-class cram down’ in a Restructuring Plan.

Answer 43

A cross-class cram down allows one rank of creditor to force the Plan on another class of creditor that has voted against it, provided certain conditions are met.

Question 44

What novel feature allows the court to exclude certain creditors from voting on a Restructuring Plan?

Answer 44

The court can exclude creditors and shareholders from voting if they have no genuine economic interest in the company.

Question 45

What happens to shareholders in a cramdown scenario under a Restructuring Plan?

Answer 45

In a cramdown of shareholders, they may be forced to accept a debt for equity swap, allowing creditors to hold new shares in the company instead of their debt claims.

Question 46

Identify the parties that can utilize a Restructuring Plan.

Answer 46

Directors, administrators, and liquidators can utilize a Restructuring Plan.

Question 47

What is a potential advantage of a Restructuring Plan over a CVA?

Answer 47

The Restructuring Plan may offer more flexibility and options for restructuring compared to a CVA.

Question 48

How does the court’s sanction affect the Restructuring Plan?

Answer 48

The court’s sanction is necessary for the Restructuring Plan to be binding on all creditors, including secured creditors.

Question 49

Describe the purpose of a standstill agreement in a company’s financial negotiations.

Answer 49

A standstill agreement allows a company to enter into informal contractually binding agreements with its creditors, where creditors agree to refrain from exercising their rights and remedies while terms are negotiated.

Question 50

How does a pre-insolvency moratorium benefit a company facing financial issues?

Answer 50

A pre-insolvency moratorium provides the company with a breathing space to seek a longer-term solution to its financial problems by filing documents at court.

Question 51

What is the limitation of a CVA regarding secured and preferential creditors?

Answer 51

CVAs do not bind secured and preferential creditors without their consent, and there is no requirement for court approval.

Question 52

Explain the Restructuring Plan in the context of company debt management.

Answer 52

The Restructuring Plan is a court-sanctioned compromise between a company and its creditors and shareholders aimed at restructuring the company’s debts.