Law - Chapter 8 Insolvency law corporate and personal Exam Questions with Complete Solutions.

Law - Chapter 8: Insolvency law: corporate and personal Exam Questions with Complete Solutions The role of the 'administrator' is to carry out the following, in the order set out: (3) - Correct Answers: 1) To rescue the company as a going concern 2) If this is not reasonably practicable, to achieve a better result for the company's creditors as a whole than would be likely with a winding-up 3) If neither is reasonably practicable, and provided the administrator does not unnecessarily harm the interests of the creditors as a whole, then to realise the company's assets to make a distribution to one or more preferential or secured creditors (The term 'unnecessarily harm' is not defined). Where there are no funds available for the unsecured creditors, the administrator will realise the company's assets and make payments to preferential creditors, and fixed and floating chargeholders, and will arrange for the company to be placed into creditors' voluntary liquidation An administrator is appointed either by the court or out of court. A court must be satisfied that the company is, or is likely to become, (?....) - Correct Answers: ... unable to pay its debts and that the order is reasonably likely to achieve the purpose of the administration If a company (via ordinary resolution) or its directors (via majority decision) apply for the appointment of an administrator, what are the requirements for appointment by court? (2) - Correct Answers: Apply to the court and show that: - The company is or is likely to be unable to pay its debts - An administration order is reasonably likely to achieve the purpose of administration Must give notice of application to QFCH (Qualifying Floating Charge Holder) who may intervene If a company (via ordinary resolution) or its directors (via majority decision) apply for the appointment of an administrator, what are the requirements for appointment out of court? (2) - Correct Answers: Cannot appoint in specified circumstances, including where the company is already in liquidation or administration or where applications are pending Otherwise must give 5 days' prior notice to any QFCH (Qualifying Floating Charge Holder). Must file at the court: - Notice of the intended appointment and actual appointment - Statutory declarations that the company is likely to become unable to pay its debts and as to the appointment being lawfully and properly made - Statement from administrator that purpose of administration reasonably likely to be achieved and that they consent to the appointment If one of more creditors apply for the appointment of an administrator, what are the requirements for appointment by court, and is appointment out of courts possible? - Correct Answers: They may apply to the court Not applicable If a QFCH (Qualifying Floating Charge Holder) (ie, at least one QFCH which on its own or together with other fixed/floating charges amount to a charge over the whole or substantially the whole of the company's property. The floating charge must contain power to appoint an administrator, or administrative receiver) applies for the appointment of an administrator, what are the requirements for appointment by court? (2) - Correct Answers: Must show that: - The floating charge is a qualifying floating charge - It is enforceable A QCFH may apply even if the company is in liquidation Must notify any other QFCH If a QFCH (Qualifying Floating Charge Holder) applies for the appointment of an administrator, what are the requirements for appointment out of court? (3) - Correct Answers: Must give 2 days' prior notice to any prior QFCH before any appointment is made Must file in court: - Notice of appointment - Statutory declaration as to lawfulness of appointment and enforceability of the charge - Statement by administrator that purpose of administration likely to be achieved, and that they consent to the appointment No appointment can be made out of court if the company is in liquidation or administration (or administrative receivership) When an administrator takes office, they must take a number of steps, including the following: (3) - Correct Answers: Within 7 days: - File notice of their appointment with the Registrar of Companies - Require any of the company's officers and employees to provide a statement of affairs (who have 11 days to comply with any such request) Within 8 weeks: - Submit a statement of their proposals for achieving the aim of administration to: - The Registrar - The company's creditors - The company's members - The administrator should seek creditor acceptance of their proposals by the deemed consent procedure or another authorised consent method. The administrator is also required to invite creditors to form a creditors' committee and to ask for nominations for this One year after appointment: - The administrator's appointment is terminated unless extended by the court or (once only) by a prescribed majority of the creditors The administrator takes on the powers previously enjoyed by the directors, these powers specifically include: (6) - Correct Answers: Remove or appoint a director Call a meeting of members or creditors Apply to court for directions regarding the carrying out of their functions Make payments to secured or preferential creditors Make payments to unsecured creditors, if the administrator feels that to pay the unsecured creditor will help the achievement of the administration (e.g., to ensure the continuation of supplies), and otherwise with the permission of the court Present or defend a petition for the winding up of the company Any creditor or member of the company may apply to the court if they feel the administrator (?...) - Correct Answers: ... has acted or will act in a way that has harmed or will harm their self interest. The courts may take various actions against the administrator During the period of administration and from the presenting of a petition for an administration order, the following consequences take effect: (6) - Correct Answers: Moratorium: - There can be no resolution or court order to wind up the company - There can be no enforcement of fixed charges or other security over the company's property (except with the consent of the administrator or the court) - There can be no recovery of property which the company has on a HP or leasing arrangement or enforcement of retention clauses (without the consent of the administrator or the court) - There can be no other legal proceedings (including of a lease) can be commenced against the company (except with the consent of the administrator or the court) Assets subject to a floating charge: - Administrator can sell property which is subject to a floating charge and use the proceeds for the business without obtaining the chargee's consent Assets on HP or subject to fixed charge: - Administrator can sell such assets with approval of the court and proceeds must be used to pay off the owner or chargee Directors: - Directors' powers are suspended but they remain in office. The administrator may choose to remove existing directors or appoint new ones Employees: - Employees are not automatically dismissed (since the administrator is the agent of the company which continues to be the employer) but the administrator may terminate contracts of employment Transactions at an undervalue and preferences: - These may be avoided Administration may be preferable to liquidation for the following reasons: (3) - Correct Answers: For the company, it does not necessarily cease to exist at the end of the process, and it also provides temporary relief from creditors to allow breathing space to formulate rescue plans For the members, as they will continue to have shares in the company. If the administration is successful, regenerating the business should enhance share value and will restore any income from the business For the creditors, who should obtain in relation to their past debts. Any creditor may apply to the court for an administration order and qualifying floating chargeholders may appoint an administrator without reference to the court. It may also be in the interests of the creditors to have a continued business relationship with the company once the business turns around What is an administrative receiver? - Correct Answers: Someone appointed by a floating chargeholder and is essentially a manager with control over the whole, or a substantial part, or the company's property and wide powers over its business Subject to any conflicting provision contained in the charge document, their powers are extensive an include the power to borrow, to take legal proceedings, to appoint advisers, to pay off creditors with preferential rights With some exceptions, administrative receivers can no longer be appointed by holders of floating charges created on or after (?...) - Correct Answers: ... 15 September 2003. As a result, administration and company voluntary arrangements are much more likely to be adopted in the case of company insolvency, as alternatives to liquidation What is a 'non-administrative receiver', 'LPA receiver' or 'fixed charge receiver'? What is their role? Who are they usually? What is their main concern? Other relevant information (2) - Correct Answers: They all mean a receiver appointed by the holder of a fixed charge over land in the event of the borrower's default Their role is to collect rent and/or sell the property A receiver does not need to be a qualified insolvency practitioner, and in practice, will often be a surveyor or other property specialist Their main concern is to realise the property for the benefit of the lender, but they also owe a duty of care to the borrower to act prudently and to have regard to their interests The appointment of a receiver may provide a relatively quick and inexpensive remedy for a lender, and may be attractive where a straightforward exercise of their power of sale is not appropriate The appointment of a receiver will normally cause floating charges to crystallise and become fixed charges (although they are still ranked as floating charges on winding up, as they were created as such) Where a company is in administrative receivership, an administrator can only be appointed by the court, and only in specific circumstances. The appointment of an administrator automatically (?...) - Correct Answers: ... dismisses the administrative receiver, and prevents and future appointment of one Where a LPA (fixed charge) receiver has been appointed, an administrator can still be appointed. In such cases, the administrator is entitled to (?...) - Correct Answers: ... require the LPA receiver to vacate office. Once a company is in administration, fixed chargeholders cannot enforce their security, except with the consent of the administrator or the court What is a CVA (Company Voluntary Arrangement)? - Correct Answers: Can be one or both of the following: - A 'composition of debts', where the company agrees to pay a proportion of its total debt - A 'scheme of arrangement', where the company agrees to pay its debts over a defined period, typically 3-5 years What is the procedure when implementing a CVA (Company Voluntary Arrangement)? - Correct Answers: Company may appoint a nominee, who will be a qualified insolvency practitioner, to consider its proposals for a CVA (at any time, insolvent or not) If insolvency proceedings have already commenced, procedure may be initiated by an administrator or liquidator, who will then act as nominee Creditor approval of a CVA is required, either by deemed consent or another approved method If approved, the CVA becomes binding on all unsecured creditors. Preferential creditors, retain their priority, and secured creditors remain entitled to enforce their security against the company Approval of the CVA must be reported to the court, and the court may discharge any administration or winding up order previously made Any creditor entitled to vote may also challenge the approval of a CVA within 298 days of the court being notified of the results of the creditors' and members' meetings. Such a challenge must be on the grounds: - That the CVA unfairly prejudices their interests - That there has been some material irregularity at or in relation to the meetings at which the proposed CVA was considered In the event of a successful challenge, the court may revoke or suspend the approval of the CVA and/or give directions regarding further meetings to consider a revised proposal or to reconsider the original proposal Once approved, and if not successfully challenged, the nominee acts as the supervisor and implements the CVA Where the directors of a small company wish to propose a CVA (Company Voluntary Arrangement), they may apply for a short moratorium, during which they can prepare and submit a proposal to their creditors (allowing some 'breathing space') If a moratorium is applied for, the prescribed documents must be submitted to the court. What are these? (3) Once these documents are filed, a moratorium of (?) days will come into effect, subject to extension of up to (?) months with the agreement of both the members' and creditors' meetings. The existence of the moratorium must be advertised and stated on all business documents, and notified to the Registrar of Companies - Correct Answers: Prescribed documents: - Proposed CVA - A statement of the company's affairs - Confirmation that the nominee believes the proposal to have a reasonable prospect of being approved and implemented 28 days 2 months The effects of a moratorium (can be applied for if directors of a small company wish to propose a Company Voluntary Arrangement) include: (6) - Correct Answers: No winding up or other insolvency proceedings can be commenced during the moratorium period No security over the company's property be enforced, or any legal process undertaken Any winding up petitions presented before the moratorium will be stayed and a floating charge cannot crystallise The company cannot requisition or hold any meeting without the consent of the nominee of the court Other than in the ordinary course of the business, the company can only sell property or pay off pre-moratorium debts, with the approval of the nominee or creditors' committee (if there is one) and, if the property is charged, the consent of the chargeholder or court The nominee must monitor the company's affairs during the moratorium and the moratorium will be terminated if the nominee withdraws their consent to act, provided they do so properly and on specified grounds Subject to the requirement for a declaration of solvency, the members may resolve to wind up the company through what? (2) - Correct Answers: Ordinary resolution: - Where the articles provide for dissolution on the expiry of a fixed term or the happening of a specified event (this is rare) Special resolution - For any reason whatsoever When is the winding up of a company deemed to commence? - Correct Answers: When the resolution is passed, and notice must be given in the 'Gazette' within 14 days A voluntary winding up is a members' voluntary winding up only if (?...) - Correct Answers: ... the directors make and deliver to the Registrar a declaration of solvency What is a declaration of solvency? - Correct Answers: A statutory declaration that the directors have made full enquiry into the affairs of the company and are of the opinion that it will be able to pay its debts in full, together with interest, within a specified period note exceeding 12 months (It is a criminal offence punishable by fine or imprisonment for a director to make a declaration of solvency without having reasonable grounds for it A declaration of solvency must... (4) - Correct Answers: The declaration must: - Be made by all directors, or, if more than 2, a majority - Include a statement of the company's assets and liabilities as at the latest practicable date before the declaration is made The declaration must be: - Made not more than 5 weeks before the resolution to wind up is passed - Delivered to the Registrar within 15 days after the meeting The company may appoint a liquidator by passing an ordinary resolution to that effect. If the liquidator later concludes that the company will be unable to pay its debts, (?...) - Correct Answers: ... they must call a meeting of creditors and lay before them a statement of assets and liabilities In a members' voluntary winding up the creditors play no part, as it is assumed that their debts will be paid in full. However, a members' voluntary liquidation may become (?...) - Correct Answers: ... a creditors' voluntary liquidation where the liquidation process is not progressing to the satisfaction of the company's creditors What is a creditors' voluntary liquidation? - Correct Answers: Where a company intends to wind up voluntarily, but the directors are unable to make a declaration of solvency., the liquidation proceeds as a creditors' voluntary winding up, even if in the end the company pays its debts in fill (despite its label, this type of liquidation is not initiated by the creditors) In a creditors voluntary liquidation, what is the process for nominating a liquidator? (3) - Correct Answers: Directors must nominate a liquidator and deliver to the creditors a notice seeking their decision on the nomination of a liquidator - Either by 'deemed consent' (if less than 10% of creditors in value object, it is approved) - Or by one of a number of alternative consent methods, such as correspondence, electronic voting, virtual meetings, etc Date for decision of the creditors on the nomination of the liquidator must be after 3 working days following delivery of the notice, but within 14 working days of the resolution to wind up the company Creditors must be sent a statement of the company's affairs within 7 working days of the decision to wind up the company. It must be received no later than the business day before the decision date. They are also entitled to request that a meeting is held What is compulsory liquidation? - Correct Answers: A company may be obliged to wind up by the court on the petition of, usually, a creditor or member. Tends to be more time-consuming, less straightforward, and more expensive than a voluntary winding-up. Around 90% of all compulsory liquidations follow a creditor's petition, and most of these are on the grounds of the company's insolvency A petition may be brought for a compulsory winding-up on one of 7 statutory grounds, the most significant of which are: (2) - Correct Answers: That the company is unable to pay its debts: - The creditor (in petitioning on the grounds that the company is unable to pay its debts) must show: - That they are owed more than £750 and has served on the company at its registered office demand for payment and the company neglected to pay the debt or to offer reasonable security for it within 21 days - That they attempted to enforce a judgement against the company by execution on the company's property but it has failed to satisfy that debt - That, taking into account the contingent and prospective liabilities of the company, it is unable to pay its debts as they fall due or that its assets are less than its liabilities That it is just and equitable to wind up the company: - Usually relied upon by a member who is dissatisfied with the directors or controlling shareholders over the management of the company (e.g., where there is management deadlock) - It must be shown that NO other remedy is available If a member wishes to petition for the wind up of a company on the grounds that it is just and equitable to do so, what conditions apply? (2) - Correct Answers: Company must be solvent (else there would be nothing to gain from the winding up) The member must have been a registered shareholder for at least 6 or the last 18 months before the petition (subject to some exceptions) The BEIS (Department for Business, Energy, and Industrial Strategy) may petition for the compulsory winding up of a company, if: (2) - Correct Answers: A public company has not obtained a trading certificate within one year of incorporation Following a report by BEIS inspectors that it is in the public interest and just and equitable for the company to be wound up On a compulsory winding up, the court will usually appoint the official receiver (an officer of the court) as liquidator, although they may be replaced by an insolvency practitioner at a later date. The official receiver must investigate the causes of the failure of the company, and generally, its promotion, formation, business dealings, and affairs. The liquidation is deemed to have commenced at the time (possibly several months earlier) when the petition was first presented, with the following consequences: (7) - Correct Answers: Any disposition of the company's property and any transfer of its shares subsequent to the commencement of liquidation is void unless the court orders otherwise Any legal proceedings in progress against the company are halted (and none may be commenced) unless the court gives leave Any seizure of the company's assets after commencement of liquidation is void The employees of the company are automatically dismissed and the liquidator assumes the powers of management previously held by the directors Any floating charge crystallises The assets of the company may remain the company's legal property but under the liquidator's control, unless the court orders the assets to be vested in the liquidator The business of the company may continue, but it is the liquidator's duty to continue it with a view only to realisation, for instance by sale as a going concern Once a liquidator is appointed, whether in a voluntary or a compulsory winding up, their role is to: (4) - Correct Answers: Settle the list of contributories (ie, members who have a liability to contribute in the event of a winding up) Collect and realise the company's assets Discharge the company's debts Redistribute any surplus to the contributories according the entitlement rights attached to their shares On the appointment of the liquidator, the powers of the directors cease save to the extent that they are permitted to continue by the liquidator or (in a voluntary winding up) by the company or creditors as appropriate. Once the liquidation is complete, the liquidator must act as follows: (2) - Correct Answers: In a voluntary winding up, they must prepare an account showing how the winding up has been dealt with and lay it before a meeting of the members and/or creditors. Within the following week they should then file details with the Registrar who will enter the details on the company's file and the company will be deemed to be dissolved 3 months thereafter In a compulsory winding up, the liquidator must go back to the court which then makes an order dissolving the company. They then file the order and the Registrar records on the company file that the company is dissolved as from the date of the order In certain cases, during the process of liquidation, charges or transactions entered into or debts incurred by the company may be invalidated, as follows: - Correct Answers: Charges: - Charges not registered within 21 days are void against the liquidator and creditors (and chargee becomes an unsecured creditor) Transactions at an undervalue: - A transaction 'at an undervalue' is a gift or a transaction in the two years before liquidation (or administration), by which the company gives consideration of greater value than it receives, unless the company enters into it: - In good faith - For the purpose of carrying on its business - Believing, reasonably, company will benefit Preferences: - A company 'gives preference' to a creditor or guarantor of its debts if it does anything: - By which their position will be benefited if the company goes into insolvent liquidation - With the intention of producing that result - Six months before the commencement of liquidation with a person unconnected with the company or two years in the case of a connected person (meaning director, associate etc) Floating charge: - A floating charge created within 12 months before winding up (or 2 years if given to a connected person) may be void or voidable A liquidator in a compulsory winding up MUST, and in a voluntary winding up is LIKELY TO, adhere to the following prescribed order for distributing the company's assets: (6) - Correct Answers: 1) Costs: - Including the costs of getting in the assets, liquidator's remuneration, and all costs incidental to the liquidation procedure 2) Preferential debts: - Employees' wages (for a prescribed period and subject to a prescribed maximum) - Accrued holiday pay - Contributions to an occupational pension fund 3) Floating charges: - Subject to an amount ring-fenced (protected for unsecured creditors) 4) Unsecured ordinary creditors: - Certain percentage of assets is "ring-fenced" for unsecured creditors where there is a minimum fund for distribution of £10,000, namely 50% of the first £10,000 of floating charge realisations and 20% of the floating charge realisations thereafter (subject to a prescribed maximum) 5) Deferred debts: - E.g., dividends declared but not paid, and interest accrued on debts since liquidation 6) Members: - Any surplus is distributed to members according to their rights under the articles or the terms of issue of their shares Secured creditors with fixed charges (and indeed floating charges) may appoint a receiver to sell the charged asset, passing any surplus to the liquidator. In the event of a shortfall (?...) - Correct Answers: ... they must prove for the balance as unsecured creditors Floating chargeholders are secured creditors. This means that a floating chargeholder who faces a shortfall on their debt cannot share in the amount protected (ring-fenced) and available to unsecured creditors. However, they are still entitled to (?...) - Correct Answers: ... priority over any amounts left after the prescribed part has been paid to the unsecured creditors In some cases, a company can be struck off the company register without liquidation. In this instance, any property vests (?...) - Correct Answers: ... in the Crowan as 'bona vacantia'. This means that there is no known person entitled to it. The Crown may disclaim it, or sell any assets What is an IVA (Individual Voluntary Arrangement)? - Correct Answers: An arrangement available to an individual (including sole traders and partners) to reach a compromise with their creditors, with the aim of avoiding bankruptcy. An IVA usually provides for the debtor to pay reduced amounts towards their total debt over a period of, usually, 5 years (An IVA, once approved, is binding on all of the debtor's creditors, and none may petition for bankruptcy) What is the procedure for applying for an Individual Voluntary Arrangement? - Correct Answers: An individual may apply to the court for an interim order where they intend to submit a proposed arrangement to their creditors (doesn't have to have details, but often does) This interim order will effectively impose a moratorium on actions against the debtor (though secured creditors may continue to enforce their security against him) The individual's nominee (who must be an insolvency practitioner) is required to submit their comments on the proposal's chances of success The creditors may reject the proposals or accept them (with, or without, modification) either by deemed consent or another method Once approved, a supervisor is appointed (who is usually the nominee) to be responsible for supervising the scheme and distributing sums to the creditors Upon completion of the IVA, assuming all terms are complied with, the debtor is fully discharged from all liabilities contained in it (Application may be made to the court that the terms of the IVA are unfairly prejudicial to the creditor, or that there has been some material irregularity in relation to a meeting of the creditors. A creditor may also petition the court for bankruptcy in exceptional circumstances, e.g., where the debtor fails to comply with the terms of the IVA) What are the advantages of an Individual Voluntary Arrangement? (6) - Correct Answers: For the individual: - Sole trader or partner is permitted to continue in business and to operate a normal bank account (but without an overdraft facility) - There is flexibility in drawing up the proposals to suit their personal and financial circumstances - They do not suffer the restrictions that would be imposed by bankruptcy, e.g., not being able to act as director or a limited company - Details of IVAs are not published in the press as details of bankruptcy are For the creditor: - It is essential that an IVA is considered as it is likely to give greater satisfaction to creditors than bankruptcy would - The costs of administering an IVA are significantly less than bankruptcy, thus enabling a higher return to creditors What are the disadvantages of an Individual Voluntary Arrangement? (2) - Correct Answers: The period of an IVA is usually 5 years, which is longer than the 3 years applicable in bankruptcy There is no opportunity for a trustee in bankruptcy to investigate the debtor's actions or the possibility of hidden assets (A debtor's home and assets are still at risk unless excluded from the IVA, and if terms are not complied with, they may still be made bankrupt) What is the procedure involved in bankruptcy? - Correct Answers: A debtor can apply for bankruptcy online with the Insolvency Service for a fee An adjudicator will review the application and decide whether or not to make the debtor bankrupt A creditor can petition the court to make a debtor bankrupt if they are owed a debt, or a share of a debt, that is £5,000 or more The court can also be petitioned by the supervisor of an IVA where the debtor breaches the terms of the IVA or if the debtor gave false information to obtain the IVA The court hearing will normally take place at least 14 days after the service of the petition to give time for the debtor to file objections and for creditors to attend If the court is satisfied that the debtor is unable to pay their debts as and when they fall due, it will make for a bankruptcy order Where a creditor petitions for bankruptcy, they will be able to show that the debtor is unable to pay their debts, if they can show that: - They have served a statutory demand on the debtor that has not been satisfied - Their attempt to enforce a judgement order has not been satisfied What are the effects of bankruptcy? (3) - Correct Answers: Debtor becomes an undischarged bankrupt, and subject to personal restrictions: - Cannot act as a director of a company or an insolvency practitioner - Cannot borrow more than £500 without telling the lender about their bankruptcy - Under ICAEW rules, they may not practise as a chartered accountant The court may stay action against the debtor from the date of the petition and, generally speaking, the bankrupt can no longer be sued by their creditors once the order is made. There are exceptions, however, e.g., (?...) The bankrupt's estate automatically vests in the trustee in bankruptcy (subject to the rights of secured creditors) and does not need any written contract or transfer of rights or property. The trustee in bankruptcy has extensive powers, although some are subject to the court's approval. The bankrupt's estate is defined to exclude: (4) - Correct Answers: ... a secured creditor can still enforce their security Bankrupt's estate excludes: - Such tools of the trade and other items as are necessary for use personally in their employment, business or vocation - Such clothing and household provisions as are necessary to satisfy the basic domestic needs of the bankrupt and their family - Property held by the bankrupt on trust for another person - Certain tenancies protected in some way by legislation The trustee in bankruptcy must require the creditors to prove their debts (via proof forms). The trustee will then rank them according to the prescribed order and make payments accordingly. The order is as follows: (7) - Correct Answers: 1) Costs: - The costs of realising the estate, the remuneration of the trustee, and incidental expenses 2) Pre-preferential debts: - As provided by certain statutory provisions, e.g., funeral expenses where the bankrupt is deceased 3) Preferential debts: - Remuneration of employees (for a prescribed period, and subject to a prescribed maximum) - Sums payable in connection with occupational pension schemes - Accrued holiday pay 4) Ordinary debts: - If fund is insufficient to pay all unsecured creditors, they rank equally 5) Interest: - Creditors may prove for interest up to the date of the bankruptcy (and therefore only if all preferential and ordinary creditors have been paid in full) 6) Postponed debts: - E.g., a debt owed to bankrupt's spouse 7) Surplus: - Any surplus is returned to the bankrupt (incredibly unlikely) A bankruptcy is discharged after (?) year(s), normally Bankruptcy restrictions or undertaking for between (?) and (?) years may be put in place if they were culpable to some extend for their insolvency - Correct Answers: 1 year, normally Between 2 and 15 years