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SQE - BLP > WS9 - Insolvency (1) - Corporate Insolvency Procedure > Flashcards

WS9 - Insolvency (1) - Corporate Insolvency Procedure Flashcards

1
Q

Introduction to corporate insolvency - a) The Law: What is the main statute?

A

Insolvency act 1986

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2
Q

Introduction to corporate insolvency - a) The Law: Whhat legislation has amended the IA 1986?

A
  • Enterprise Act 2002 which aimed to promote rescue of companies
  • Small Business Enterprise and EMployment Act 2015
  • Corporate Insolvency and Governance Act 2020 which commenced on 26 June 2020

The most significant reforms been the EA 2002 and CIGA 2020.

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3
Q

Introduction to corporate insolvency - a) The Law: What were the aims of the EA 2002?

A

Came into force 15 September 2003 and this is known as the “relevant date” and aims of the act were:

  • Promote rescue culture
  • Remove stigma associated with insolvency
  • Give promience to collective insolvency procedures which are for benefit of creditors as a whole instead of enforcement procedure which is generally only benefits those creditors with security.
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4
Q

Introduction to corporate insolvency - a) The Law: What were the aims of the CIGA 2020?

A

Introduced two new insolvency procedures:
* Pre-insolvency moratorium
* Restructing plan for companies

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5
Q

Introduction to corporate insolvency - b) Meaning of Insolvency: How is it defined in the act?

A

IA 86 defines it in the context of the circumstances when a court may make a winding up order in respect of a company, with one such circumstances when a company is unable to pay its debts.

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6
Q

Introduction to corporate insolvency - b) Meaning of Insolvency: How does S123 set out the situations or tests when company unable to pay debts?

A

They are when a company:
* Unable to pay debts as they fall due (known as the cash flow test)
* Has liabilities that are greater than its assets (known as the balance sheet test)
* Does not comply with statutory demand for debt over £750 which provides evidence company is cash flow insolvent or
* Has failed to pay a creditor to satisfy enforcement of a judgement debt

First two are most important.

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7
Q

Introduction to corporate insolvency - c) Directors obligations towards company in financial difficulty: What must directors continually review and recognise?

A

Financial performance and recognise if it is facing financial difficulty:
* Company has unpaid creditors who are putting pressure on company to pay sums owed
* Company has overdraft facility which is fully drawn and bank refusing to provide further credit
* Company has loans and other debts exceeding value of assets

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8
Q

Introduction to corporate insolvency - c) Directors obligations towards company in financial difficulty: Who must take action on behalf of company?

A
  • Directors
  • In these decisions, they will need advice of duties, resposnbilities and liabilities under the act and general law as well as their options under IA 1986 and CIGA 2020.
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9
Q

Introduction to corporate insolvency - d) Options for company in financial difficulty: What options do directors have?

A
  • Do nothing - If deciding this, directors should bear in mind potential risk of personal liability under IA 1986 and potential breach of director duties uynder CA 2006.
  • Do a deal - Potential to reach informal or formal arrangement (such as voluntary arrangements, rrestructure plan) with some or all company creditors with view to rescheduling debts giving more time to pay.
  • Appoint an adminstrator - This is collective formal insolvency procedure considering interests of all creditors
  • Put company into liqudation - Collective insolvecy procedure
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10
Q

Informal agreements between company & creditors - a) Informal agreements: Why may a company consider informal agreements?

A
  • Avoids time and cost of formal insolvency arrangements or proceedings
  • As well as the consrquencys for such formal arrangements could bring life of company to an end
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11
Q

Informal agreements between company & creditors - a) Informal agreements: Are these agreements regualted?

A

While they are contractually binding, they are not regulated by IA 1986 or CIGA 2020 or any other insolvency legislation.

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12
Q

Informal agreements between company & creditors - a) Informal agreements: What is the diifculty for companies looking to informal arrangements?

A

Difficulty is in getting all creditors who the company want to bind to agree to such informal arrangements.

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13
Q

Informal agreements between company & creditors - a) Informal agreements: What may company need to do to obtain informal arrangement?

A
  • Grant new or additional security
  • Replace directors or senior employees
  • Sell failing businesses/subsidiaries or profitable ones to raise cash
  • Reduce costs such as redunadncy programme or closure of unprofitable business and/or
  • Issue new shares to the creditors
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14
Q

Informal agreements between company & creditors - b) Pre-Insolvency Moratorium: What does this allow a company?

A
  • Introduced by CIGA 2020 for financially struggling companies not in formal insolvency.
  • They can be used by company to buy itself time to reach informal agreement with some or all crediotrs or as a preliminary step to proposing a CVA, restructure plan or scheme or arrangement.
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15
Q

Informal agreements between company & creditors - b) Pre-Insolvency Moratorium: What is a pre-insolvency moratorium?

A

A period during which creditors are unable to take action ot exercise their usual rights and remedies creating breathing space for a company in attempt to resolve the situation.

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16
Q

Informal agreements between company & creditors - b) Pre-Insolvency Moratorium: What actions does moratorium restrict?

A
  • No creditor can enforce its security againsts company assets
  • There is a stay of legal proceedings against the company and bar on new proceedings against it
  • No winding up procedure can be commenced (unless by directors) and no SH resolution can be passed to wind up (unless approved by directors)
  • No adminstration procedure can be commenced in respect of company (other than by the directors)
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17
Q

Informal agreements between company & creditors - b) Pre-Insolvency Moratorium - (i) Procedure to botain moratorium: What does a company need to do?

A

Must file documents at court including:
* Statement that company is or likely to become unable to pay debts as they fall due
* Statement from licensed insolvency practitioner (usually accountant) known as a monitor stating in their view, it is likely moratorium will result in rescue of company as going concern and then monitor then has supervisory function.

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18
Q

Informal agreements between company & creditors - b) Pre-Insolvency Moratorium - (i) Procedure to botain moratorium: How long does the moratorium last and can it be extended?

A
  • Lasts for 20 business day
  • But can be extended by directors for further 20 business days
  • Further exentions possible with consent of a requisdite majority of creditors and/or court order
  • Maxium period is is one year subject to a court order to extend further.
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19
Q

Informal agreements between company & creditors - b) Pre-Insolvency Moratorium - (i) Procedure to botain moratorium: When will moratorium terminate?

A

Automatically if:
* Company enters liquidation or adminstration
* If CVA is approved or
* Court sanctions a restructuring plan or scheme of arrangement

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20
Q

Informal agreements between company & creditors - b) Pre-Insolvency Moratorium - (ii) Pre-moratorium debts: Does the company have to pay debts from pre-moratorium during it?

A
  • It does not while the moratorium subsists and this is known as statutory repayment holiday.
  • These are debts which fell due before or during it but by reason of an obligation incurred before hte moratorium
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21
Q

Informal agreements between company & creditors - b) Pre-Insolvency Moratorium - (ii) Pre-moratorium debts: What pre-moratorium debts does the staatory repayment holiday not apply to?

A
  • Monitors remuneration or expenses
  • Wages or salary or redundancy payment
  • Loans under a contract involving financial services so company remains liable to pay all sums due to bank which made a loan before it obtained the moratorium.
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22
Q

Informal agreements between company & creditors - b) Pre-Insolvency Moratorium - (iii) Moratorium debts: What are these debts?

A

Debts which fall due during or after moratrium by reason of an obligation incurred during the moratorium such as:
* Payment of goods or services ordered by company during it.
* Rent in respect of period during it.

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23
Q

Informal agreements between company & creditors - b) Pre-Insolvency Moratorium - (iii) Moratorium debts: What does this mean in practice?

A

A company must be cash flow solvent i.e to pay its debts as and when they fall due so is capable of paying its way during moratorium period.

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24
Q

Formal Arrangements (Statutory Procedure) - a) Intro: What is the main advantage of a formal arrangement?

A
  • Requiste majorities of creditors vote in favour of it
  • Legally binding on all creditors, even if some of those creditors voted against or not at all or did not receive notice of relevant procedure
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25
Q

Formal Arrangements (Statutory Procedure) - a) Intro: What are the two types we will cosnider?

A
  • Company Voluntary Arrangement - S1-7 IA 1986
  • Restructuring plan under CIGA 2020 the provisions of which are in S26AQ CA 2006.
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26
Q

Formal Arrangements (Statutory Procedure) - b) CVA: What is this arrangement?

A

Compromise between company and its creditors in which CVA’s are defined as “a compnsition in satisfaction of its debts or a scheme of arrangement of its affairs.

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27
Q

Formal Arrangements (Statutory Procedure) - b) CVA: What is basic essence of a CVA?

A
  • Creditors agree to part payment of debts owed and/or to a new extended timetable for repayment.
  • CA proposal once approved in accordance with IA 1986, must be reported to court but there is no requirement for court to approve.
  • CVA is supervised and implemented by supervisor who is an insolvency practitioner.
  • During CVA, company directors remain in office and run the company subject to terms of CVA.
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28
Q

Formal Arrangements (Statutory Procedure) - b) CVA - (i) Setting up a CVA (1) What must directors begin with?

A
  • Draft CVA proposal and appoint a nominee (who must be insolvency pracitioner)
  • If company in liquidation or adminstration, then adminstrator/liquidator will draft proposal and act as nominee.
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29
Q

Formal Arrangements (Statutory Procedure) - b) CVA - (i) Setting up a CVA (2) Where must directors submit CBA proposal?

A

Directors must submit CVA proposal and statement of company affairs to nominee (although in practice it is nominee who drafts CVA proposal).

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30
Q

Formal Arrangements (Statutory Procedure) - b) CVA - (i) Setting up a CVA (3) What must nominee then do and by when?

A
  • Nominee must consider CVA proposal
  • Within 28 days, must report to court on whether in their opinion, company creditors and SH’s should be asked to vote on CVA proposal
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31
Q

Formal Arrangements (Statutory Procedure) - b) CVA - (i) Setting up a CVA (4) What must nominee then allow for?

A
  • Allow at least 14 days for creditors to vote on CVA proposals
  • Meeting of SH’s must then take place within 5 days of creditors decision
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32
Q

Formal Arrangements (Statutory Procedure) - b) CVA - (i) Setting up a CVA (5) What are the voting requirements for CVA to be approved?

A
  • At least 75% in value (of debts owed) of those voting on CBA proposals (excluding secured creditors) must vote in favour.
  • If thos majority obtained, decision of those ciredtors will be invalid if those who voted against it included more than half of the total value of creditors unnconnected with the company (SO NOT A RELATED COMPANY, SH, or DIRECTOR OF COMPANY PROPOSING CVA.)
  • A simple majority of SH’s/members vote in favour.
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33
Q

Formal Arrangements (Statutory Procedure) - b) CVA - (i) Setting up a CVA (6) What is the position in practice?

A

Only the vote of the creditors which matters, if they vote in favour and members against, creditors vote will prevail.

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34
Q

Formal Arrangements (Statutory Procedure) - b) CVA - (i) Setting up a CVA (7) What must nominee then report on and what will they become?

A
  • Reports to corut that CVA has been approved
  • Nominee usually then becomes supervisor and they will implement the CVA proposal.
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35
Q

Formal Arrangements (Statutory Procedure) - b) CVA - (ii) Effect of CVA: Who is CVA binding on?

A
  • All unsecured creditors, including those who did not vote or voted against it.
  • However, a secured or preferantial creditor is not bound unless it specifically consented to be bound which is a major disadvantage of CVA procedure.
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36
Q

Formal Arrangements (Statutory Procedure) - b) CVA - (ii) Effect of CVA: Can a CVA be challenged?

A
  • Creditor can challenge CVA within 28 days of CVA’s approval by creditors being reported to court on grounds of unfair prejudice.
  • The basis is that it treated one creditor unfairly compatred to another or material irregualrity relating to the proceudre which company has followed in seeking approval such as the way creditors votes calaculated.
  • Subject to that, CVA bnecomes binding on all creditors at end of 28 day challnge period.
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37
Q

Formal Arrangements (Statutory Procedure) - b) CVA - (ii) Effect of CVA: What is the supervisors role?

A
  • Agree creditors claims
  • Collect in unsecured funds to pay dividends to creditors and generally ensures company complies with obligaitons under CVA.
  • Once completed, supervisor will send final report on implemntation of proposal to all SH’s/Creditors.
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38
Q

Formal Arrangements (Statutory Procedure) - b) CVA - (ii) How are CVA’s used: What are the advantages?

A
  • Directors remain in control of the company
  • Company can continue to trade subject to proposals
  • Company has propsect of surviving as a going concern
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39
Q

Formal Arrangements (Statutory Procedure) - b) CVA - (ii) How are CVA’s used: What are the disadvantages?

A

CVA cannot bind a secured or prefeetnail creditor without their consent - Major disadvantgae and potential Q.

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40
Q

Formal Arrangements (Statutory Procedure) - b) CVA - (ii) How are CVA’s used: Why do trade creditors support?

A
  • Likely to recover more than if company goes in adminstration or liquidation.
  • For LL’s, CVa may reult in heavingly discounted rents and loss of income but retail proporties are not easy to relet so LL may prefer to have reduced rents under CVA rather than no rent at all.
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41
Q

Formal Arrangements (Statutory Procedure) - c) Restructing Plans: What is the purpose of a plan?

A

Purpose is to compromise a company creditors and SH’s and restrcture its liaiblities so that a company can return to solvency.

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42
Q

Formal Arrangements (Statutory Procedure) - c) Restructing Plans: What does plan require?

A

Court approval known as a sanction.

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43
Q

Formal Arrangements (Statutory Procedure) - c) Restructing Plans: How does voting take place?

A
  • Creditors and SH’s must be divded into classes and each class which votes on the plan must be asked to approve it.
  • The plan must be approved by at least 75% in value of those voting in each class.
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44
Q

Formal Arrangements (Statutory Procedure) - c) Restructing Plans: When does a plan only become binding?

A

Plan only becomes binding if the court sanctions it and if they do, plan binds all creditors including secured!!

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45
Q

Formal Arrangements (Statutory Procedure) - c) Restructing Plans - (i) Advantages: What are important features?

A
  • Court can exclude creditors and SH’s from voting even if affected by plan if they have no genuine econimic interest in company.
  • Court can sanction a plan which brings about a cross-class cram down if it is just an quitable to do so, even if one or more classes do not vote to approve.
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46
Q

Formal Arrangements (Statutory Procedure) - c) Restructing Plans - (i) Advantages: What is a cross class cramdown?

A

It means one rank of creditor can force the plan on another class who voted against it and a cramdown of SH’s means forcing SH’s to accept a debt for equity swap in which creditors are able to hold new shares in company in place of their debt claims.

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47
Q

Formal Arrangements (Statutory Procedure) - c) Restructing Plans - (i) Advantages: How is it used?

A
  • Directors may use alongside pre-insolvency moratorium.
  • Plan may be better than CVA as comprise the rights and claims of secured creditors and SH’s whereas CVA cannot.
  • Another advantage is that it can be sanction by creditors to bind all creditors, even where requiste majority approval not obtained in every voting class.
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48
Q

Formal Arrangements (Statutory Procedure) - d) Comparison of the formal arrangements: See Table

A
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49
Q

Adminstration - a) Introduction: What is adminstration?

A

This is a collective insolvency procedure which means:
* adminstrators are required to perform their duties in the the interests of the creditors as a whole rather than in the interests of a particular creditor.
* They are also officers of the court (even if appointed outside of it) and owe duties to the court as well as creditors.
* Sch B1 of IA 1986 deals with adminstration

50
Q

Adminstration - a) Introduction: Who must individuals appointed as adminstrators be?

A

Licensed insolvency practitioner.

51
Q

Adminstration - b) Statutory objective of adminstration: What does Sch B1 set regarding objectives?

A

Adminstrators must perform their functions with objective of acheiving on of three objectives which are in a specific order and are:
* First - To rescue the company as a going concern, or if that is not reasonable acheiveable, then
* Secondly - to achieve a better result for company’s creditors as a whole than would be likely if company wound up or if that is not reasonably achieveable
* Thirdly - To realise the company property to make a distrbution to one or more secured or preferential creditors

52
Q

Adminstration - b) Statutory objective of adminstration: Why are these objectives important?

A

Extremely important as they guide actions of adminstrators and objective b is one most likely to be achieved.

53
Q

Adminstration - c) Appointment of adminstrator: How can adminstrators be appointed?

A

Two Ways:
* Court procedure
* Out of court procedure

54
Q

Adminstration - c) Appointment of adminstrator - (i) Court Procedure: When may court appoint?

A

Where company is or likely to become unable to pay its debts, on application of:
* The company
* Directors
* A creditor
* Supervisor of a CVA
* Liquidator

55
Q

Adminstration - c) Appointment of adminstrator - (i) Court Procedure: What must court consider when deciding to make an adminstration order?

A

Whether the appointment is reasoably likely to achieve the purpose of the adminstration.

56
Q

Adminstration - c) Appointment of adminstrator - (i) Court Procedure: What comes into effect on application to court?

A

Interim moratorium temporaily freezing creditor action comes into effect and last until either amdinstration order is made or court dismisses the application.

57
Q

Adminstration - c) Appointment of adminstrator - (i) Court Procedure: When ais court procedure used?

A
  • Appointment by court order is uncommon
  • These appointment seen where creditor begun winding up proceedings and directors want to appoint adminstrators before court made winding up order and in this case, out of court order not possible and must apply to court and if court make order, pending winding up proceedings automatically dismissed.
58
Q

Adminstration - c) Appointment of adminstrator - (i) Court Procedure: Summary of Court procedure appointment

A
59
Q

Adminstration - c) Appointment of adminstrator - (ii) Out of Court Procedure: What are the two ways of appointment out of court?

A
  • Firstly, directors may appoint adminstrator out of court - Sch B1 Para 22
  • Secondly, a holder of a “qualfying floating charge (QFC) may appoint an adminstrator out of court. - Sch B1 Para 14
60
Q

Adminstration - c) Appointment of adminstrator - (ii) Out of Court Procedure: What is a QFC?

A

This is a floating charge which:
* (i) Together with any other security that the holder of the floating charge holds relates to the whole or substantially the whole f the company’s property
* The document that creates it provides that either Sch B1 Para 14 IA 1986 applies or that the holder has the power to appoint an adminstrator

Note - Most floating charges held by creditors will be QFC

61
Q

Adminstration - c) Appointment of adminstrator - (ii) Out of Court Procedure: What if directors appoint under Para 22 and no granted QFC?

A

They must file notice of itnention to appoint (NOI) at court and not less than 10 business days later file a notice of appointment at court and the adminstrators appoin tment takes effect when second notice is filed.

62
Q

Adminstration - c) Appointment of adminstrator - (ii) Out of Court Procedure: What is the position for directors appointing if company had previously granted QFC?

A
  • When directors file NOI at court, must also send NOI to holder of QFC
  • Holder than has 5 business day to appoint its own choice of adminsstrator.
  • If holder does not, directors can file notice of appointment in usual way and directors choice of adminstrator appointed.
63
Q

Adminstration - c) Appointment of adminstrator - (ii) Out of Court Procedure: What if QFC holder wants to appoint?

A
  • Must firs tenroce its security in accordance with terms of QFC
  • The appointment will take effect when it has filed a notice of appointment with the court.
64
Q

Adminstration - c) Appointment of adminstrator - (ii) Out of Court Procedure: What if there is more than one holder of QFC?

A
  • If QFC holder ranks below another in priority (normally determined by priority agreement entered by the holders), it must first five two business days notice to holders of a GFC which have priority and can only proceed with appointment if higher rank QFC consents.
65
Q

Adminstration - c) Appointment of adminstrator - (ii) Out of Court Procedure: Summary of both procedures

A
66
Q

Adminstration - d) Role of the adminstrator: Who does adminstrator owe their duties to?

A
  • They are adminstrator of the court.
  • Has uty to act in interests of all creditors to achieve purposes of adminstration.
67
Q

Adminstration - d) Role of the adminstrator: What is the position for directors and the adminstrator?

A

If adminstrator in office, directors unable to exercise any management powers without consent of adminstrator.

68
Q

Adminstration - d) Role of the adminstrator: What power do adminstratorss have?

A
  • Power to carry on the business of the company
  • Take possesion of and sell company property (only with consent of fixed charge holder or court if propery subject to fixed charge)
  • Borrow money and execute documents in company name
  • Generally no power to pay dividend to unsecured creditors without court permission
    *
69
Q

Adminstration - d) Role of the adminstrator: What must adminstraytor do once appointed?

A
  • They have up to 8 weeks to produce report setting out proposals for the conduct of the adminstration.
  • This is sent to all creditors for their approval.
  • If rejected, company will usually be placed into liquidation.
  • If accepted, adminstrators will proceed with proposals and if proposals achieved, company will exit from adminstration.
70
Q

Adminstration - d) Role of the adminstrator: What is time limited for completion of adminstration?

A

Fixed time limited of 12 months, but it is possible to obtain extensions.

71
Q

Adminstration - e) Adminstrative moratorium: What is the key benefit of adminstration?

A

During the adminstration, company has benefit of a full moratorium.

72
Q

Adminstration - e) Adminstrative moratorium: What does a full moratorium mean during adminstration?

A

During moratorium, except with consent of court or adminstratior:
* No order or resolution to wind up company may be made or passed.
* No adminstrative receive of the company may be appointed
* No steps may be taken to enforce any security over the company’s property or to repossess goods subject to security, hire purchases or renetion of tile
* No legal proceedings, execution, or other process may be commenced or cotninued against the company or its property
* A landlord may not forfeit a lease of company’s premises

73
Q

Adminstration - e) Adminstrative moratorium: What is the difference for the interim moratorium?

A
  • 1, 3, and 5 above apply but only court can consent to creditor taking step in question.
  • In addition, an interim moratorium does not rpevent holder of QFC apopointing an adminstrator.
74
Q

Adminstration - f) Powers of an adminstrator: How are their powers defined under IA 1986?

A
  • Wide powers to “do all syuch things as may be necessary for the management of the affairs, business and property of the company”
75
Q

Adminstration - f) Powers of an adminstrator: What do these powers include?

A
  • Remove and appoint directors
  • Dipose of property subject to a floating charge
  • Dispose of property subejct to a fixed charge (with courts consent)
  • Bring proceedings against directors for fruadulent and wrongul trading.
76
Q

Adminstration - g) Pre-Package sales in adminstration: What is a pre-packaged sale?

A
  • A pre-package adminstration is where business and assets of company is prepared for sale to selcted buyer prior to company entry into adminstraiton.
  • Terms are agreed and negoaited before admisntrators appoi9ntment and adminstrator complete sale with buyer immediately after appointment.
77
Q

Adminstration - g) Pre-Package sales in adminstration: What are advantages of pre-packaged sale?

A
  • Goodwill and continuity of the business are no damage by adminstration and certainty of result achieved for creditors
78
Q

Adminstration - g) Pre-Package sales in adminstration: How are these sales restricted?

A

Adminstration (restrictions on disposal to connected person _ Regs 2021 rrstrict the ability of an adminstrator to enter pre-packaged sale with comapny SH’s or directors and connected persons to them unless sale has been approved in advance by creditors or buyer has obtained evaulators report which if obtained, must be sent to CH and all creditors.

79
Q

Receivership - a) Intro: What is the difference from adminstration

A

Adminstration is collective procedure, whereas receivership is an enforcement procedure which is conducted in interests of a secured creditor.

80
Q

p

Receivership - a) Intro: What are the types of receivership?

A
  • Administrative receivership (Note now a rare procedure and prohibited in msot cases)
  • Fixed charge receivership
  • Court-appointed receivership
81
Q

Receivership - b) Adminstrative receivership: What is the positoon if adminstrative receivership is applicable?

A
  • A secured creditor with a fixed and floating charges over all company assets may appoint an AR.
  • The AR will take control fo the secured assets, sell them and us proceeds to repay the debt owed to the secured creditor.
  • Therefore, an enforcement procedure carried out in the interests of the secured creditr who appointed the AR rather than a collective procedure.
82
Q

Receivership - b) Adminstrative receivership: Who can be involved as AR?

A

Only licensed insolvency practitioner.

83
Q

Receivership - b) Adminstrative receivership: Can QFC holders appoint an AR?

A

Only in two cases:
* Where the floating charge created before 15 September 2003 or
* Where one of the statutory exceptions applies

84
Q

Receivership - c) Fixed charge receivership: What is the position for this receivership?

A
  • Most common
  • Receiver does not have to be licensed insolvency pracitioner.
85
Q

Receivership - c) Fixed charge receivership: How are these receivers appointed?

A
  • By holders of a fixed charged pursuant to terms of relevant security document.
  • Appointed to enforce the security, manage and sell the secured assets and out of sale proceeds, repay the debt owed to the appointer.
86
Q

Receivership - c) Fixed charge receivership: Who do these receives owe duties to?

A
  • Primarily and exclusively to the appointer (often the chargee or mortgagee)
  • They owe limited duty to the debtor to act in good faith in the course of their appointment
87
Q

Receivership - c) Fixed charge receivership: What is the type of relationship with debtor?

A

Their pwoers usually act as an agent for chargor/mortgagor which is legal anomaly but facilites the conduct of relationship.

88
Q

Receivership - c) Fixed charge receivership: Where can their powers be found?

A
  • Set out in security document and some limited powers under LPA 1925 such as ability to sell, mortgage and collect rent.
89
Q

Receivership - c) Fixed charge receivership: When can they not be appointed?

A

While a pre-insolvcy maoratorium subsits or if company is in adminstration.

90
Q

Receivership - d) Court appointed receivership: How are they appointed?

A
  • Relatively rare.
  • Appointed by the corut and pwoers and duties set out in court order.
91
Q

Receivership - d) Court appointed receivership: When is this often used?

A
  • If SH’s are locked in dispute.
  • Or under proceeds of crime act given the move towards imposing criminal sanctions for corporate misconduct,.
92
Q

Liquidation (Winding up) - a) Introduction: What does this process mean?

A
  • The process by which a company’s commercial life comes to an end.
  • Liquidator has task of collecting in company assets and selling them, identifying creditors and determining amounts owed and paying them a dividend out of the funds obtained from sale of assets.
  • Any surplus after liquidator settled claims in full, they will apy surplus to SH’s in accordance with their rights in articles.
93
Q

Liquidation (Winding up) - a) Introduction: What is it important to note?

A

Not only insolvent companies which are wound up, solvent may be and it is not uncommon and this could be for various reasons such as:
* Incorproated for specific purpose now fufilled.
* Company assets and business sold and now a cash shell which is not needed

94
Q

Liquidation (Winding up) - a) Introduction: What is the function of liquidator?

A

Realise companys assets for cash, determine the identity of the company’s creditors and the amount owed to each of them and then pay a dividend to the creditors on a proportionate basis relative to dize of their determined claims.

95
Q

Liquidation (Winding up) - a) Introduction: How do creditors on same level rank?

A

“Pari Passu” with each other, so sharing on equal and proportionate basis in relation of assets available.

96
Q

Liquidation (Winding up) - b) Types of Liquidation: Waht are the two types?

A

(a) Compulsory Liquidation
(b) Voluntary - Which is subdivded into:
* Memebrs voluntary liquidation
* Creditors voluntary liquidation

97
Q

Liquidation (Winding up) - b) Types of Liquidation: What happens at end of liquidation and time period for each type?

A

Once completed, company life as legal person brought to end by disollution and for each type it occurs:
* Compulsory - three months after liqudator filed a notice with companies registry stating winding up completed.
* Voluntary - Dissolution occurs three months after liquidator filed final accounts and return with registrar of companies at CH.

98
Q

Liquidation (Winding up) - b) Types of Liquidation - (i) Compulsory: What tpye of process is this and how does it begin?

A
  • Court based process
  • To begin, an applicant presents winding up petition to court under which they request court to make a winding up order.
99
Q

Liquidation (Winding up) - b) Types of Liquidation - (i) Compulsory: What if court makes the order?

A
  • Usually, official receiver (goverment employee) will become first liquidator and continues until another person appointed.
  • Official receiver notifys registrat of companies and all known creditors of the liquidation.
  • They have pwoer to summon seperate meetings of company creditors and contrbutories for purpose of choosing person to becoe liquidator in their place.
  • Creditors can request official receive to convene creditors meeting for appointment of replacement.
100
Q

Liquidation (Winding up) - b) Types of Liquidation - (i) Compulsory: What are principal function of liquidator in compulsory?

A
  • Secure and realise the assets of company and then distrbute to company creditors and
  • Take into their custody or udner their control all property of the company
101
Q

Liquidation (Winding up) - b) Types of Liquidation - (i) Compulsory: (1) Who can apply to corut for winding up petition?

A
  • Creditor
  • Company (acting by SH’s which would happen if insufficient assets to fund creditors voluntary liquidation.)
  • Directors, again same as above
  • Adminstrator
  • Adminstrative receiver
  • Supervsior of a CVA and
  • Secrtary of state for business, energy and industrial stategy on public polciy grounds.
102
Q

Liquidation (Winding up) - b) Types of Liquidation - (i) Compulsory: (2) What are the key grounds court can order company to be wound up?

A

Set out in S122 Ia and include:
* (1) Company is unabel to pay its debts
* (2) It is just an equitable for company to be wound up

103
Q

Liquidation (Winding up) - b) Types of Liquidation - (i) Compulsory: (3) How can ground of company unable to pay its debt be evidenced?

A

Most common ground for petition and can be evidenced by:
* (a) Failure by company to comply with creditors statutory demand - This is written demand in prescribed form requiring company to pay specific debt and can only be used if it exceeds £750 and not disputed on substantial grounds and company then has 21 days from receipt of the demand to pay the debt, failing which creditor has right to petition court to wind up the company
* (b) Creditor sues the company, obtains judgement and fails in an attempt to execute the judgement debt
* (c) Proof to the satisfaction of court that company is unable to pay debts as they fall due (cash flow test) and usually evidenced by going through part a, but not essential
* (d) Proof value of comapny assets is less than amount of liabiities, taking into account contingent and propsective liabiltiies (balance sheet tesT)

104
Q

Liquidation (Winding up) - b) Types of Liquidation - (i) Compulsory: (4) What are the consequences of a winding up order?

A
  • Disposition of company proporty or transfer of shares will be void if made after presentation fo winding up petition and if company wishes to after this, it must seek making of validation order from court.
  • There is limited statutory moratorium udbner which no legal proceedings can be commenced against company or any proceedings commenced, stayed.
  • All employees are automatically dismossed; and
  • Directors lsoes their powers
105
Q

Liquidation (Winding up) - b) Types of Liquidation - (ii) Voluntary: When can a company be wound up without a court order?

A
  • Where comapny purpose according to articles has expired and resolution of the SH’s - RARE
  • Where SH’s of company resolve by SR to wind up company after directors have made a decleration of solvency but company must be solvent - MEMBERS VOLUNARY LIQUIDATION (MVL)
  • Where the SH’s of company resolve by SR to wind up company because it is unable to pay debts which is insolvent type of liquidation - CREDITORS VOLUNTARY LIQUIDATION (CVL)
106
Q

Liquidation (Winding up) - b) Types of Liquidation - (ii) Voluntary - (1) MVL: When can Members voluntary winding up (MVL) be used?

A
  • May only be used for solvent companies.
  • To enter MVL, directors must swear a declaration of solvency stating they made full enquiry into company affairs and made opinion company will be able to pay creditors in full, together with interest at official rate within period not exceeding 12 months from commencment of winding up.
  • Declaration must also contain statement of company’s assets and liabilities as at latest practicable date.
107
Q

Liquidation (Winding up) - b) Types of Liquidation - (ii) Voluntary: (1) In MVL, what is position for director and their grounds of opinion?

A
  • If they do not have reasonable grounds for opinion then liable for fine or imprisonment and if debts not paid within specifed period, it will be presumed the director did not have reasonable grounds for their opinion.
108
Q

Liquidation (Winding up) - b) Types of Liquidation - (ii) Voluntary - (1) MVL: (1) What must members then do for MVL?

A
  • Pass a SR to place company into MVL.
  • Pass ordinary resolution to appoint nominated liqudator.
  • Note - Windinh up commences when special resolution passed.
109
Q

Liquidation (Winding up) - b) Types of Liquidation - (ii) Voluntary - (1) MVL: What happens if liqudator considers company ubnable to pay its debts?

A

Must convert MVL into creditors voluntary liqudation.

110
Q

Liquidation (Winding up) - b) Types of Liquidation - (ii) Voluntary - (2) CVL: What is CVL?

A
  • Most common form of liqudation.
  • It is commenced by resolution of SH’s and it is SH’s who appoint the liquidator.
  • If no directors declaration of solvency made, then it will be a CVL.
111
Q

Liquidation (Winding up) - b) Types of Liquidation - (ii) Voluntary - (2) CVL: What is the procedure?

A
  • SH’s pass SR to place company into CVL
  • SH’s pass OR to appoint nominated liquidator.
112
Q

Liquidation (Winding up) - b) Types of Liquidation - (ii) Voluntary - (2) CVL: What must done with 14 days of SR?

A
  • Directors must ask company creditors either to approve the nominated liquidator or put forward their own choice
  • If creditors choice differs from company SH’s, then creditors nomination takes precedence.
  • Direcors must also draw up statement of companys affairs and send to company creditors.
113
Q

Liquidation (Winding up) - c) Role of Liquidator for all types: What is the effect of the appointment of a liquidator and what is requirement to be one?

A
  • Terminates the management powers of the company’s directors and these are transferred to the liquidator.
  • Must be qualfied insolvency pracitioner other than official receiver.
114
Q

Liquidation (Winding up) - d) Liquidators power to manage the company: What are these powers?

A
  • Sell any company property
  • Execute deeds and other docs in name of company
  • Raise money on secuirty of company assets
  • Do all other things necessary to wind up
  • Carry on the business of company but only to extent needed for winding up
  • Commence or defend court proceedings in name of company such as recover fdebts or dispute debts alleged to be owed
  • Pay debts and compromise claims
115
Q

Liquidation (Winding up) - d) Liquidators power to avoid certain transactions: How does IA aid their duty to preserve company property and maximise the value?

A

It confers power on liqduiadtors and adminstrators to challenge certain antecedent transactions and apply for court order to set aside such as:
* Transaction at an undervalue
* A preference
* An extorionate credit transaction
* A transaction drfauding creditors

116
Q

Liquidation (Winding up) - d) Liquidators power to avoid certain transactions: What happens if floating charge granted in certain time period before liquidation?

A

Void except to the extent company granted fresh cosideration for the floating charge - s245

117
Q

Liquidation (Winding up) - d) Liquidators power to avoid certain transactions: What can liquidators disclaim?

A
  • Onerous property under s178 IA in roder to bring companies liabilties to an end, usually long term contractors.
  • Most common example would be in resepct of leases of land/property.
118
Q

The statutory order of priority - a) Intoduction: What may liquidator/adminstrator may need to do to distrbute?

A
  • They may required to distrubte assets of company to its creditors in specified order of priority in payment in accordance with complex rules.
  • These rules have no single source and found in different parts of IA, Insolvency rules 206 and general law.
119
Q

The statutory order of priority - a) Intoduction: What is the order and what does it assume?

A
  • Step 1 - Liquidators fees and expenses of preserving and relaising assets subject to fixed charges
  • Step 2 - Amount due to the fixed charge creditor out of the proceedings of selling assets subject to fixed charge
  • Step 3 - Liquidators other remuneration, costs and expenses
  • Step 4 - Preferantial creditors (the first tier and then secondary tier)
  • Step 5 - Creation of the prescribed part fund (if avialbale) for unsecured creditors
  • Step 6 - Amount due to creditors with floating charges
  • Step 7 - Unsecured creditors such as trade creditors including payment of prescribed part
  • Step 8 - Interests owed to unsecured creditors
  • Step 9 - Shareholders

See example in book - We may need to add in additional notes

120
Q
A

SQE - BLP (14 decks)

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