Insolvency

Question 1

What is a pre-insolvency moratorium? (2) How long does it last?

Answer 1

1. a period which creditors cannot exercise their usual rights and remedies
2. company does not have to pay debts incurred before moratorium
3. 20 business days. Directors can extend for further 20 business days. Any further must be made by court

Question 2

What documents must you file at court to get a pre-insolvency moratorium? (2)

Answer 2

1. statement that company is likely going to become unable to pay debts as they fall due
2. statement from licensed insolvency practitioner that a moratorium is likely to result in a rescue of the company as a going concern

Question 3

What informal arrangements can you make following insolvency? (2)

Answer 3

1. negotiation with each creditor
2. pre-insolvency moratorium

Question 4

When is a company deemed insolvent? (4)

Answer 4

1. cash flow test
2. balance sheet test
3. statutory demand
4. unable to meet judgement order

Question 5

What formal arrangements can you make following insolvency? (2)

Answer 5

1. company voluntary arrangement (CVA)
2. restructuring

Question 6

What is the major disadvantage of a CVA?

Answer 6

cannot bind secured or preferential creditors without consent

Question 7

What is the major advantage of a CVA?

Answer 7

company can still carry on trading and therefore, generate income to be able to pay off some debts

Question 8

What is the process to set up a CVA? (4)

Answer 8

1. directors draft CVA proposal and appoint Nominee
2. directors submit CVA proposal + statement of affairs to Nominee
3. Nominee must report to court within 28 days on whether there should be a vote
4. vote!

Question 9

What is the major advantage of restructuring? What is the contingency on this advantage? Name another advantage

Answer 9

1. “cross class cram down” - will bind classes of creditors/SH who voted against and/or did not achieve requisite majority
2. if it is just and equitable
3. courts can exclude those who do not have a genuine economic interest from voting

Question 10

What is a disadvantage of restructuring?

Answer 10

can be costly and time consuming

Question 11

What is the requisite vote to push through a CVA or restructuring? Where does this vote take place?

Answer 11

i. at least 75% in value of each class (excluding secured creditors) vote in favour

ii. must not be more than 50% of unconnected creditors

ii. simple majority SH vote in favour

2. at a GM

Question 12

What is a CVA?

Answer 12

A legally binding agreement between the business and its creditors

It sets out how repayments of company debt should be made to creditors

Question 13

What benefits does a full moratorium provide in administration? (5)

Answer 13

1. no winding up order
2. no admin receiver
3. cannot enforce security
4. no legal proceedings
5. cannot forfeit lease

Question 14

What must an administrator produce within 8 weeks? What are the 2 potential outcomes?

Answer 14

a report that must be approved by creditors

1. approved + achieved = exit admin
2. rejected or not achieved = liquidation

Question 15

Who are the 3 entities that can appoint an administrator?

Answer 15

1. court
2. directors of company
3. holder of a QFC

Question 16

What steps must directors take to appoint an administrator? (3)

Answer 16

1. file notice of intention
2. send notice to any QFC and give them 5BD to appoint own choice
3. file notice of appointment

Question 17

How does a QFC holder appoint an administrator? (3)

Answer 17

1. enforce in acc with terms of the QFC
2. seek consent of higher ranking QFC
3. file notice of appointment

Question 18

Mention the 3 ways a company can be placed in liquidation

Answer 18

1. Compulsory
2. MVL
3. CVL

Question 19

How is a company placed in compulsory liquidation? Name the 2 statutory grounds

Answer 19

relevant person applies for a winding up petition on one of the statutory grounds:

1. inability to pay debts
2. just and equitable

Question 20

Who can apply for a winding up petition? (4)

Answer 20

1. creditor
2. directors
3. company
4. administrator

Question 21

What is the process to place company in MVL (solvent)? (3)

Answer 21

1. declare solvency
2. SH SR to enter liquidation
3. OR to appoint liquidator

Question 21

What is the process to start a CVL?

Question 22

What is the process to place company in CVL (insolvent)? (4)

Answer 22

1. SH SR to place company in CVL
2. OR to appoint liquidator
3. Within 14 days ask creditors to approve put forward own choice of liquidator
4. Directors send statement of company affairs to creditors

Question 23

What is the statutory order of entitlement for liquidation? (8)

Answer 23

1. liquidator’s fees in selling fixed charge assets
2. fixed charge holders
3. two tiers of preferential (tier 1 in full first)
4. prescribed part fund from floating charge assets (% of company’s net assets)
5. floating charge holders
6. unsecured

• preferential and floating charge holders can collect shortfalls here

7. interest owed to unsecured creditors
8. shareholders

Question 24

What are the 2 options for personal insolvency?

Answer 24

1. IVA 2. bankruptcy petition

Question 25

Name 4 features of the IVA

Answer 25

1. cannot bind secured/preferential creditors without their consent 2. 14 day moratorium available 3. same process as setting up a CVA (proposal, interim order, vote) 4. can last for any length of time

Question 26

Who can bring a bankruptcy petition? (2) On what grounds?

Answer 26

1. creditor - unable to pay debt of £5000 or more 2. debtor - unable to pay debts

Question 27

Restrictions on debtor following court order include (2)

Answer 27

1. unable to take credit up to £500 without disclosing bankruptcy 2. cannot act as director in company or be involved in management

Question 28

What is the order of priority for the bankrupt? (7)

Answer 28

1. secured creditors 2. expenses (ie. Trustee renumeration) 3. two tiers of preferential creditors 4. unsecured 5. statutory interest 6. debts of a spouse 7. any surplus back to bankrupt