Chapter 10 - Insolvency Law Exam Questions and Complete Solutions.

Chapter 10 - Insolvency Law Exam Questions with Complete Solutions What are the 3 purposes of administration? - Correct Answers: - rescue company as going concern - if not practicable, then to achieve a better result for the creditors as a whole than there would be on a winding up - if neither is practicable and provided interest of creditors are not harmed, then company assets will be realised to make a distribution to one of more preferential or secured creditors What is the key advantage of administration? - Correct Answers: To give the company breathing space to resolve its problems. If successful, creditors should enjoy a better return in relation to past debts and the benefit of an ongoing client What is moratorium? - Correct Answers: Temporary stoppage of activities to give space to the company and time to resolve issues. If cannot be achieved then will be placed into voluntary liquidation Who may appoint an administrator? - Correct Answers: - company via OR - directors acting by a majority - one or more creditors - QFCH who can show the amounts to a charge over the whole or substantially the whole of company's property; must contain enough power to appoint one; must notify any other QFCH An administrator must be... - Correct Answers: a licensed insolvency administrator When can an appointment of an administrator be made out of court? - Correct Answers: No appointment can be made out of court if the company is in liquidation or administration. Creditors cannot make an appointment at all out of court If a company/directors apply for appt of an administrator out of court, how does it work? - Correct Answers: Must give 5 days notice to any floating chargeholder If a QFCH apply for appt of an administrator out of court, how does it work? - Correct Answers: Must give 2 days notice prior to any prior QFCH before appointment is made What must be filed in court when appointing an administrator out of court? - Correct Answers: - notice of appt - stat declaration as to lawfulness of appt and enforceability of charge - statement by administrator that the purpose of administration is likely to be achieved and that he consents to the appointment How can an appointment for an administrator be made in court? - Correct Answers: - court must be satisfied that the order would achieve the purpose of administration - any party can use this route - company is must be unable or unlikely to be able to pay its debts - must give notice of application to QFCH who may intervene (they must show that the charge is a QFC) What must the administrator do within 7 days of appt? (step 1) - Correct Answers: - file notice with Registrar - require company officers and employees to provide a statement of affairs within 11 days What must the administrator do within 8 weeks? (step 2) - Correct Answers: - submit statement of his proposals to achieve aim of administration to registrar, company creditors, company members - should seek creditor acceptance proposals via deemed consent - invited creditors to form a creditors committee What happens to the administrator 1 year after appt? (step 3) - Correct Answers: Administrator's appt is terminated unless extended by the court or (once only) by a majority of creditors What is deemed consent? - Correct Answers: Where we have given notice, and if less than 10% object we can assume that everyone else consents What are the powers of an administrator? - Correct Answers: Powers previously enjoyed by directors - remove or appoint a director - call a meeting of members or creditors - apply to court for directions regarding functions - make payments to secured or pref creditors - make payments to unsecured creditors, if they feel that paying them will assist in achievement of admin, otherwise only by permission of court - present or defend petition for winding up of company What can be done if administrator harms interest of a creditor or member? - Correct Answers: They can apply to the court What are the 6 consequences of administration (from date of petition for order)? - Correct Answers: 1. moratorium 2. assets subject to a floating charge (administrator can sell property and use proceeds without chargee consent) 3. assets on HP or fixed charge (administrator can sell assets with court approval and can be used to pay off owner or chargee) 4. directors (powers are suspended but they remain in office) 5. employees (not automatically dismissed but their contracts can be terminated) 6. transactions at an undervalue and precedence (can be avoided) Explain the effect of moratorium as a consequence of administration - Correct Answers: - no resolution or court order to wind up company except with administrator consent: - no enforcement of fixed charges - no recovery of property on HP or leases or enforcement of retention clause - no legal proceedings commenced against company What is an administrative receiver? - Correct Answers: Appointed by FCH and manages part of the company's property and wide powers over its business What is a fixed charge receiver? - Correct Answers: - may be appointed by holder of a fixed charge over land in the event of borrower default - role is to collect rent and/or sell property - does not need to be qualified insolvency practitioner and will often be a quantity surveyor etc - main concern is to realise property for the benefit of the lender, but also owes a duty of care to the borrower to act prudently What effect does the appt of a receiver have on floating charges? - Correct Answers: Normally causes them to crystallise and become fixed charges (but still ranked as floating on a winding up) What is a CVA? - Correct Answers: When a company and its creditors make a payment plan: - composition of debts (60% instead of full) - longer time period for repayment - equity swop What is the key benefit of a CVA? - Correct Answers: Company can continue trading - can also apply for a moratorium for typically 28 days (but can be extended) What is the procedure for a CVA? - Correct Answers: - nominee is appted by a solvent company or administrator/liquidator who reports on likelihood of success - creditor approval is required (75% on a value basis) - binds all unsecured creditors - any creditor can appeal within 28 days for unfair prejudice etc What are the 3 main types of liquidation? - Correct Answers: 1. compulsory (by court) 2. voluntary (creditors) 3. voluntary (members) How does a members voluntary liquidation work? - Correct Answers: - suitable only when solvent - commenced by SR at date of resolution - directors give declaration of solvency (if cannot, then it becomes creditor voluntary liquidation) - notice in london gazette within 14 days of SR - company appoints liquidator by OR What happens if members approve a CVA but creditors oppose? - Correct Answers: Creditor decision will prevail How does a creditors voluntary liquidation work? - Correct Answers: - used where directors are unable to make a declaration of solvency - s/h pass resolution to wind up company and directors nominate liquidators under deemed consent - directors call a creditors meeting within 14 days of resolution, giving 7 days notice of meeting - directors present statement of affairs - creditors may appoint liquidator - members and creditors form a liquidation committee to assist the liquidator How is the liquidator apptd in a creditors voluntary liquidation? - Correct Answers: Directors nominate a liquidator --> creditors must make a decision after 3 days ---> if deemed consent, then approved What is a declaration of solvency? - Correct Answers: Stat declaration that directors have made full enquiry into affairs of the company and that it will be able to pay its debts in full with interest, within 12 months or less. - must be made by all (if 2+ then majority) - include statement of assets and liabilities - not made more than 5 weeks before resolution to wind up is passed - delivered to registrar within 15 days What is a compulsory liquidation? - Correct Answers: When company is obliged to wind up by court order on petition of a creditor or member on 7 statutory grounds What are the 2 main grounds we consider when petitioning for compulsory winding up? - Correct Answers: 1. company is unable to pay its debts 2. that it is just and equitable to wind up the company In relation to compulsory winding up, how can it be showed that a company is unable to pay its debts? - Correct Answers: 3 options: 1. creditor must show they are owed more than £750, have written to co and have waited at least 21 days 2. creditor must show they have taken them to court 3. creditor must show that liabilities are greater than assets In relation to compulsory winding up, how can it be showed that it is a just and equitable winding up? - Correct Answers: - usually relied on by a member who is dissatisfied with the directors or controlling s/h over the management of the company - must be shown that no other remedy is available (Ebrahimi) Under what circumstances can the Dept for Business and Trade petition for a compulsory winding up? - Correct Answers: - if PLC has not obtained a trading certificate within 1 year of incorporation - following report, inspectors determine that it is in public interest On a compulsory winding up, the court appoints who? - Correct Answers: an official receiver as liquidator, although may be replaced by an insolvency practitioner at a later date. they must investigate the causes of failure of the company What are the consequences of liquidation? - Correct Answers: - deemed to have commenced at the time the petition was presented - any disposition of property or transfer of shares are void after the date unless ordered otherwise - legal proceedings are halted - seizure of assets after date are void - employees automatically dismissed - floating charges crystallise - assets of company remain property of company but under liquidator control, unless the court orders assets to be vested in liquidator - business may be continued, but not as a going concern What are the powers of a liquidator? - Correct Answers: - settle list of contributories - collect and realise company assets - discharge company debts - redistribute surplus What happens once liquidation is complete? - Correct Answers: - voluntary - must preparer an account showing how dealt with and lay before members and creditors. then file with registrar who will deem company to be dissolved after 3 months - compulsory - liquidator must go back to court who makes an order to dissolve company. then files order and Registrar records dissolved at that date When can charges be avoided on liquidation? - Correct Answers: - any charges not registered within 21 days are void and chargee becomes unsecured creditor - floating charge created within 12m prior to winding up (or 2 years if a connected person) may be void or voidable When can transactions at an undervalue be avoided on liquidation? - Correct Answers: 2 years before liquid or admin: - gift or transaction which company gives greater value than it receives UNLESS - in good faith - for purpose of carrying on business - believing it will benefit the company When can preferences be avoided on liquidation? - Correct Answers: (6m for unconnected; 2 years connected) - transaction which benefits one creditor of its debts on an insolvent liquidation - made with intention of producing that result What are the priority of charges where different charges are over the same property? - Correct Answers: 1. legal charges (fixed) rank according to the order of creation 2. equitable charges (floating) also take priority according to order of creation 3. legal charge created before an equitable one has priority 4. equitable charge created before legal only takes priority if the legal charge had notice of the equitable charge when it was created What is the negative pledge clause in relation to priority of charges? - Correct Answers: A creditor to whom a floating charge is given may seek protection by prohibiting a company from creating a fixed charge over the same property (which would usually take priority). In the absence of this clause, the fixed charge will rank first since it attaches to the property at the time of creation (whereas floating only attaches at crystallisation). What are the priorities for distributing company assets on liquidation? - Correct Answers: 1. costs including in getting assets, liquidator rem etc 2. preferential debts (employees, holiday pay, pensions) 3. secondary preferential debts - e.g. to HMRC such as PAYE, NI, VAT 4. floating charges, subject to ring fencing 5. unsecured ordinary creditors (whatever is left from 1-4) 6. deferred debts 0 e.g. div accrued not paid 7. members - any surplus What is ring fencing? - Correct Answers: A percentage of assets are ringfenced for unsecured creditors where there is a min fund for 10k: - 50% of first 10k of floating charge realisations - 20% of floating charge realisations thereafter