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Business Law and Practice > Workshop 9: Insolvency pt. 1 - Insolvency Procedures > Flashcards

Workshop 9: Insolvency pt. 1 - Insolvency Procedures Flashcards

**Topic: Corporate Insolvency** - Introduction to Corporate Insolvency - Formal and Informal Arrangements - Administration and receivership - Liquidation - The statutory order of priorities **Topic: Personal Insolvency** - Personal Insolvency

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1
Q

What are the two main formal insolvency procedures for insolvent individuals?

A
  1. Bankruptcy
  2. Individual voluntary arrangements (‘IVAs’)
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2
Q

What kind of arrangement is an IVA?

A

Where a debtor makes a proposal for a compromise of their liabilities with their creditors

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3
Q

What are the options a debtor may propose for an IVA?

A

The debtor

  • Paying part of the contractual debt owed
  • Having a longer period to pay than the contractual period
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4
Q

Where is the debtor’s money paid out of in an IVA?

A
  • Income
  • Business
  • Assets
  • Combination of the above
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5
Q

What are the requirements to be a Supervisor of the IVA?

A

A licensed insolvency practitioner must be appointed as IVA Supervisor

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6
Q

What are the requirements to be a Supervisor of the CVA?

A

A licensed insolvency practitioner must be appointed as CVA Supervisor

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7
Q

What is the role of the IVA Supervisor?

A

They supervise

  • Debtor’s implementation and
  • Compliance with terms of IVA
  • Report to the court periodically
  • Can apply to the court for directions
  • HAs the right to petition for debtor’s bankruptcy subject to debtor’s failure of compliance with IVA terms
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8
Q

What is the general duration of an IVA?

A

3-5 years is common in practice

But they can last any time

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9
Q

What is included in the 3 steps of successfully setting up a binding IVA?

A
  1. Nominee (what the Insolvency Practitioner is known as at this stage) assists debtor with drafting proposal of compromise of liabilities and statement of their affairs
  2. Nominee submits report to court; whether proposal is reasonable in being approved
  3. Creditors approve of the proposal to become binding
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10
Q

What is the effect of the court granting an order when a debtor applies to the court for an interim order?

A

Brings about a moratorium

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11
Q

What is a moratorium?

A

A period where creditors are unable to take action to exercise their usual rights and remedies

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12
Q

How much value of a debtor’s debt must a creditor hold for them to vote and the proposal become binding?

A

At least 75%

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13
Q

When may a creditor’s vote of approval for a debtor’s IVA or CVA proposal be ineffective?

A

If more than half of the total value of creditors who are not associates of the debtors vote against it

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14
Q

What are the effects of an approved IVA?

A
  • Binds debtors and their unsecured creditors
  • Nominee becomes IVA Supervisor
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15
Q

What are some advantages of an IVA?

A
  • Alternative to bankruptcy; avoids associated stigma and restrictions
  • Binds unsecured creditors
  • Moratorium available if interim order is made
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16
Q

What are some disadvantages of an IVA?

A
  • May last longer than bankruptcy
  • Cannot bind secured or preferential creditor without their consent
  • Can be expensive
  • Can be time-consuming
  • Uncertainty as to whether creditors will approve
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17
Q

What is bankruptcy equivalent to in a business?

A

Liquidation

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18
Q

How does bankruptcy begin?

A

Presentation of a bankruptcy petition, by either debtor or creditor

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19
Q

What are the ‘grounds of petition’ for a creditor?

A
  • The debt is a debt the debtor appears unable to pay or has no reasonable prospect of paying at the time of the presentation of the petition
  • Debt owed is for an unsecured liquidated sum of over £5k
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20
Q

Can the debtor a creditor is petitioning for bankruptcy be domiciled or present anywhere?

A

No - England and Wales

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21
Q

What must the debtor accompany their petition with when filing for bankruptcy?

A

Statement of affairs

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22
Q

What is a ‘statement of affairs’?

A

Full details of assets and liabilities

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23
Q

What is the ‘bankrupt’ person prohibited/deprived from doing on the making of a bankruptcy order?

A
  • Acting as director
  • Being involved in management of company
  • Obtaining credit of over £500 without disclosing bankruptcy
  • Giving gifts
  • Practising in certain professions
  • Deprived of ownership of their property except for their reasonable domestic needs
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24
Q

What are the two ways a debtor’s inability to pay their debts evidenced?

A
  • A statutory demand that hasn’t been satisfied within 3 weeks from service of the demand or set aside by the court
  • An unsatisfied execution of a judgement or other legal process
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25
Q

What must be satisfied for a bankruptcy order to be made at the discretion of the courts?

A

Satisfaction of the petition groups and having evidence of a debtor’s inability to pay their debts

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26
Q

What is an immediate and automatic power of a Trustee upon the making of a bankruptcy order?

A

The bankrupt’s estate vests in the trustee

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27
Q

What does it mean when the bankrupt’s estate vests in the Trustee?

A

The bankrupt must give up possession/give access to assets to the Trustee

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28
Q

Do assets falling into the estate after the making of a bankruptcy order count as assets that must be vested to the Trustee?

A

Yes

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29
Q

What are some of the Trustee’s statutory powers following the making of a bankruptcy order?

A
  • To sell/otherwise deal with estate assets
  • Carry on bankrupt’s business
  • Sell bankrupts assets
  • Grant security over bankrupt’s assets
  • To disclaim onerous property or contracts
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30
Q

Which order must the Trustee distribute money in the bankrupt’s estate?

A

In accordance with statutory order of priority for bankruptcies

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31
Q

TRUE OR FALSE

Trustee will ask creditors to prove their claims against the bankrupt

A

True

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32
Q

What must creditors who are claiming a dividend from the bankrupt’s estate provide evidence of?

A

Of their claim against the bankrupt to prove their claim

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33
Q

Which order must the Trustee pay dividends to creditors in?

A

In accordance with statutory order of priority

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34
Q

What must the Trustee do proposing to pay a dividend to creditors?

A

Must give notice to creditors who have proved their debts, which includes:

  • Stating amount of sale proceeds received from sale of estate assets
  • Any deductions that have been made from proceeds
  • Amount of dividend that they can expect to receive
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35
Q

Who determines the amount of the creditor’s claim?

Who has the final say on the matter if the creditor does not agree with their determination?

A

Trustee

The court

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36
Q

What is the order of priority of payments for bankruptcy?

A
  1. Secured creditors
  2. Expenses of bankruptcy (incl. Trustee’s remuneration)
  3. Two tiers of preferential creditors
  4. Ordinary unsecured creditors
  5. Statutory interest
  6. Debts of a spouse
  7. Surplus payable to bankrupt
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37
Q

What are the bankrupt’s duties to the Trustee to enable them to carry out their functions according to s. 333 of the Insolvency Act 1986? [Paraphrased]

A

a) give trustee informations of his affairs
b) attend on trustee at such times
c) do all such other things that are reasonably required

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38
Q

What is the effect of a bankruptcy discharge?

A

Bankrupt is released from most of bankruptcy debts and related restrictions (e.g., acting as director etc.)

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39
Q

Why may the Truee apply for an order to suspend the automatic discharge of the bankrupt?

A

If they fail to comply with their obligation under IA 1986

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40
Q

What is the usual time frame of a bankrupt being discharged from bankruptcy?

A

After a maximum of one year

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41
Q

When may the bankrupt be discharged in less than a year?

A

If Trustee files notice stating that the bankrupt does not required investigation

or that they have conducted such investigation within the one year period

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42
Q

What effect does a bankruptcy restriction undertaking (BRU) have?

A

Same as a bankruptcy restriction order (‘BRO’) if accepted

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43
Q

What is the effect of a ‘bankruptcy restriction order/undertaking’?

A

Having the period of time whereby bankrupcry restriction extended

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44
Q

Why may the Secretary of State, or Trustee acting on SoS direction apply to the court for a BRO?

A

If the court considers it appropriate in the circumstances of the bankrupt’s behaviour/conduct

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45
Q

What are some examples of behaviour in Schedule 4a IA 1986 the court will take into account when ordering for a BRO or BRU?

A
  • Failure to keep records
  • Entering into preferences or transactions at an undervalue
  • Fraud
  • Incurring debt without reasonable expectation of being able to pay it
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46
Q

How long will a BRO operate for?

A

Period of between 2 and 15 years

47
Q

What is the bankrupt unable to do under a BRO or BRU?

A

Act as director or obtain credit of more than £500 without disclosing that they are subject to a BRO

48
Q

When must the application for a BRO be made?

A

Within a year of the start of the bankruptcy

49
Q

What is the aim of a Trustee exercising their power to challenge voidable transactions?

A

Aim of increasing assets available to creditors

50
Q

What must the Trustee balance when challenging voidable transactions?

A

Balance costs and risks of litigation with chances of success in making recoveries for bankruptcy estate

51
Q

What is meant by the ‘Relevant Date’?

A

When the Enterprise Act 2002 came into force on 15 September

52
Q

When is the ‘Relevant Date’?

A

15 September 2003

53
Q

What for ways does s.123 Insolvency Act 1986 describe a company being ‘unable to pay their debts’ as?

A
  1. Unable to pay its debts as they fall due - known as the cash flow test
  2. Has liabilities greater than its assets known as the balance sheet test
  3. Does not comply with a statutory demand for a debt of over £750 (this provides evidence that the company is cash flow insolvent
  4. Has failed to pay a creditor to satisfy enforcement of a judgment debt
54
Q

What are the most important tests for gauging whether a company is insolvent?

A

Cash flow and balance sheet tests

55
Q

When is a company designed as being insolvent?

A

When a company is unable to pay its debt

56
Q

Who is responsible for continually reviewing the financial performance of a company in recognising it is facing financial difficulties?

A

Directors

57
Q

What are some examples of ‘financial difficulty’ that directors must be aware of?

A

Where the company has

  • Many unpaid creditors putting pressure to pay owed amounts
  • Full drawn overdraft facility and bank is refusing further credit provisions by increasing the overdraft
  • Company has loans and liabilities exceeding the value of its assets
58
Q

Who is responsible for taking action on behalf of the company when facing financial difficulties?

A

Directors

59
Q

What are the options directors have when faced with a company in financial difficulty?

A
  1. Do nothing
  2. Do a deal and reschedule debts with company creditors to allow less to pay or more time to pay
  3. Appoint an administrator
  4. Request appointment of a receiver
  5. Place the company into liquidation
60
Q

Can directors incur personal liability when the company they are directing becomes insolvent under the provisions of the Insolvency Act 1986?

A

Yes

61
Q

What are examples of informal agreements following the insolvency of a company?

A
  • Grant new or additional security
  • Replace directors or senior employees
  • Sell failing or profitable businesses to raise cash
  • Reduce costs
  • Issue new shares to creditors
62
Q

What is issuing new shares to creditors also known as?

A

Debt for equity swap

63
Q

What happens in a Standstill Agreement?

A

The creditors agree not to enforce their rights/remedies for a period of time to allow the company time to negotiate an agreement with them to resolve company’s financial issues

64
Q

Are informal arrangements regarding the solving of insolvency issues contractually binding or regulated by insolvency-related statutes?

A

They are contractually binding and not regulated by insolvency-related statutes

65
Q

What does a moratorium do against a creditor in an IVA?

A

Freezes some of the following:

  • Existing, proposed bankruptcy or proceedings
  • Legal processes e.g., execution, landlord’s right of peaceable re-entry and/or distress for rent
66
Q

What are some actions a pre-insolvency moratorium can restrict against companies?

A
  • Enforcing security against company’s assets
  • Stay of legal proceedings against the company
  • Bar against bringing new proceedings
  • No commencement of winding up procedures
  • No commencement of administration
67
Q

Who can commence administration or winding up or approve of shareholder’s votes to wind up the company whilst the company is in a pre-insolvency ‘moratorium’?

A

Directors only

68
Q

What is the procedure for obtaining a pre-insolvency moratorium?

A

Filing documents at court

69
Q

What documents must be filed at court when requesting a pre-insolvency moratorium?

A
  • Statement that the company is or is likely to unable to pay its debts as they fall due
  • Statement from licensed insolvency practitioner that a moratorium is likely to rescue company as a going concern
70
Q

What is a ‘Monitor’?

A

A licensed insolvency practitioner for the purposes of pre-insolvency moratorium

71
Q

How long does the pre-insolvency moratorium last for?

A

20 business days

72
Q

How many days can the initiaul 20 business day pre-insolvency moratorium be then extended to?

A

By a further 20 business days by directors

73
Q

How can a pre-insolvency moratorium be extended beyond 40 business days?

A

Consent of requisite majority of creditors and/or court order

74
Q

What is the maximum period of a pre-insolvency moratorium subject to court order?

A

One year

75
Q

When will a pre-insolvency moratorium terminate automatically?

A
  • If the company enters liquidation or administration
  • When a Company Voluntary Arrangement is approved
  • When a court sanctions restructuring plan or scheme of arrangement
76
Q

What is the ‘statutory repayment holiday’?

A

The period during the pre-insolvency moratorium where a company does not have to pay its pre-moratorium debts

77
Q

What are pre-moratorium debts defined as?

A

Debts that had fallen due before or during the moratorium by obligation incurred before moratorium

78
Q

What payments are to still be paid, even during the statutory repayment holiday?

A
  • Monitor’s remuneration or expenses
  • Goods and services supplied during the moratorium
  • Rent of a period during moratorium
  • Wages, salary or redundancy payments
  • Loans involving financial services
79
Q

What is a CVA?

A

A compromise between a company and its creditors where creditors agree

  • To part payment of debts owed and/or
  • To new extended timetable for repayment
80
Q

What must be done with the CVA proposal following its approval in accordance with IA 1986?

A

Be reported to court

81
Q

TRUE OR FALSE

A CVA proposal must be approved by the court

A

False

It only needs to be reported to the court, there is no requirement for the court to approve it

82
Q

Who is the CVA supervised and implemented by?

A

A Supervisor

83
Q

Can a CVA be used in conjunction with administration or liquidation?

A

Yes

84
Q

What are the 5 steps of setting up a CVA?

A
  1. Directors (or administrator or liquidator if company in administration or liquidation) draft CVA proposal and appoint a Nominee
  2. Directors submit CVA Proposal and statement of company’s affairs to Nominee
  3. Nominee considers CVA proposal and reports to court as to whether creditors and shareholders should be asked to vote on proposal in 28 days
  4. Nominee must allow at least14 days for creditors to vote
  5. Approval of CVA if
    - at least 75% in value of debts owed of those voting vote in favour
    - or simple majority
  6. Nominee reports to court CVA has been approved
  7. Nominee becomes Supervisor and Supervisor implements CVA proposal
85
Q

Whose vote will prevail in a vote for CVA, if a dispute arises?

A

Creditors

86
Q

Who is a CVA binding on?

A

All unsecured creditors, including those who did not vote or voted against it

87
Q

What is the time period a creditor can challenge a CVA on the grounds of unfair prejudice or material irregularity?

A

Within 28 days of the CVA’s approval

88
Q

What are the grounds a CVA can be challenged?

A
  • Unfair prejudice; the CVA treats one creditor unfairly compared to another
  • Material irregularity relating to the procedure (e.g., the way creditor’s votes were calculated)
89
Q

What is the role of a CVA Supervisor?

A
  • Agree to creditor’s claims
  • Collect unsecured funds to pay dividends
  • Ensure company complies with its CVA obligations
  • Send final report on CVA implementation to shareholders and creditors
90
Q

What are the advantages of a CVA?

A
  • Directors remain in control of the company
  • Company can continue to trade subject to terms of CVA proposal
91
Q

What are the disadvantages of a CVA?

A

Can’t bind secured or preferential creditors without their consent

92
Q

What may a CVA result in for landlords?

Is this a good result or not?

A

Heavily discounted rents and loss of income

Preferable than having empty properties with no income

93
Q

Why may trade creditors tend to support CVAs?

A

Likely to recover more than if the company goes into administration or liquidation

94
Q

What is the purpose of a ‘Restructuring Plan’ that was introduced by Corporate Insolvency and Governance Act 2020?

A
  • To compromise company’s creditors and shareholders and
  • Restructure its liabilities so company can return to solvency
95
Q

Who is the Plan only to be used by?

A

By companies which have or are likely to encounter financial difficulty

96
Q

What is the name of the court approval required for a Plan?

A

A sanction

97
Q

How is a Plan to be approved?

A

By at least 75% in value of those voting in each class

98
Q

TRUE OR FALSE

Creditors and members must vote together

A

False

They are to be divided into classes and each class must be asked to approve the Plan

99
Q

When does the Plan become binding?

A

When the court sanctions the Plan

100
Q

Who does the Plan become binding on when the court sanctions it?

A

Binds all creditors, including secured creditors

101
Q

What are the advantages of a Plan?

A
  • Court can exclude creditors and shareholders from voting if they have no genuine economic interest in the company, even if affected by the Plan
  • Can be used alongside pre-insolvency moratorium, administration and liquidation
  • Can compromise the rights and claims of secured creditors and shareholders
  • Binds all creditors, even if every class of creditor hasn’t been included in majority approval
102
Q

What groups can initiate a Plan?

A
  • Company
  • Creditor
  • Member
  • Liquidator
  • Administrator
103
Q

Can the court sanction the Plan even if one or more classes haven’t approved it?

A

Yes

104
Q

What is meant when administration is describe as a ‘collective’ insolvency procedure?

A

Because administrators are required to perform their duties in interests of the creditors as a whole rather than in the interest of a particular creditor

105
Q

Who does an administrator owe their duties to?

A

Courts and creditors of the company

106
Q

What qualifications must an appointed administrator have?

A

A licensed insolvency practitioner

107
Q

What is the usual case of an appointment of administrator via the court procedure?

A

Where creditor has begun winding up proceedings against company and directors wish to appoint administrators before court has made a winding up order

108
Q

When does the interim moratorium come into effect during application of administration?

How long does it last for?

A

On application to court

Last until either
- Administration order is made
- Court dismissed the application

109
Q

What are the two ways an administrator may be appointed?

Which one is more common than the other?

A
  1. Court procedure
  2. Out of court procedure

Out of court more common

110
Q

When may a court appoint an administrator?

A

When a company is or is likely to become insolvent, on application of company directors, creditor, supervisor of a CVA or a liquidator

111
Q

What are the two ways an appointment of administrator can be done using an out of court procedure?

A
  1. Directors appoint
  2. Holder of a qualifying floating charge appoint
112
Q

What is a Qualifying Floating Charge (‘QFC’)?

A

Floating charge which

a) relates to the whole (or substantial amount) of company’s property and
b) gives power to the holder to appoint an administrator

113
Q
A

Business Law and Practice (6 decks)

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