Insolvency Exam Questions with Complete Solutions.

Insolvency Exam Questions with Complete Solutions Statutes that govern insolvency - Correct Answers: Bankruptcy (Scotland) Act 2016 & Insolvency Act 1986. What is insolvency? - Correct Answers: The inability of the debtor to pay back the creditor. Which then requires the appointment of a third party to liquidate the debtors assets and distribute them to the creditors in statutorily prescribed manner What two broad categories are there for insolvency? - Correct Answers: - Personal insolvency = anything not a company - Corporate Insolvency = company debtors What are the three possible states of insolvency? - Correct Answers: - Practical insolvency - Absolute insolvency - Apparent Insolvency Practical insolvency - Correct Answers: debtor unable to pay debts as they fall due. For companies see s122(1)(f) and 123(1)(e) of the Insolvency Act 1986. Absolute insolvency - Correct Answers: total liabilities exceed total assets. See s123(2) of the Insolvency Act 1986 gratuitous alienations and unfair preferences Apparent insolvency - Correct Answers: when proof is shown to the court that the value of the company's assets is less then the amount of its liabilities Equalization of Diligence Sequestrian petition What is Diligence - Correct Answers: Diligence is the area of law which provides a range of procedures under which a creditor can enforce payment for debt For reasons why someone might be deemed personally insolvent look where? - Correct Answers: section 16 Bankruptcy Act 2016 For reasons why a company might be deemed corporately insolvent look where? - Correct Answers: See section 123 Insolvency Act 1986 If a transaction happened right before insolvency what can the creditors do? - Correct Answers: They can recover the assets conveyed to third party and strike down securities that are in favor of that party What are gratuitous alienations? - Correct Answers: Gifts made when a debtor is absolutely insolvent can be challenged by creditors and 'reduced'. (See s 98 2016 Act, s 242 1986 Act) From how far back can gifts be retrieved by creditors? - Correct Answers: 5yrs back for gifts given to associates 2yrs back for gifts given to anyone else Unfair Preferences - Correct Answers: This is when a debtor unfairly gives preference towards a certain creditor when going insolvent Liquidation - Correct Answers: occurs when a business goes insolvent and liquidates all its assets to pay its creditors What three types of liquidation are there? - Correct Answers: 1. Compulsory liquidation 2. Members Voluntary liquidation 3. Creditors Voluntary liquidation Functions of the Liquidator - Correct Answers: Administer the assets of the company and manage matters during winding up. Distribute assets to creditors according to their rights as creditors. How does the Liquidator distribute assets? - Correct Answers: By entitlement: 1. Secured creditors (including those doing diligence) 2. Expenses of liquidator 3. Preferred creditors 4. Unsecured creditors 5. Postponed creditors 6. Shareholder - only receive payment when the creditors have been paid in full Purpose of Administration - Correct Answers: 1. Rescue company as going concern or 2. Or, Achieve better result for company creditors than likely if wound up immediately or 3. Or, Realise property for secured/preferential creditors (s8-27 Insolvency Act 1986) Receivership - Correct Answers: When one creditor can make his floating charge attache to the property of a business going under and pay himself back Receivership now only applies to? - Correct Answers: floating charges created before 15 September 2003 Receivers primary duty is - Correct Answers: , unlike a liquidator, to act in the interest of the holder of the floating charge and only has very general duties to the company. Sequestration - Correct Answers: The process available to court to seizing property that belongs to debtor, then give it to the trustee to realize the assets and pay off the debts What are the tasks of the trustees in sequestration? - Correct Answers: 1. To recover, manage and realise the debtor's estate. 2. To distribute the estate among the debtor's creditors according to their respective entitlements. What are the respective entitlements of creditors? - Correct Answers: 1. Secured creditors 2. Diligence 3. Other creditors - Outlays and remuneration for interim trustee - Outlays and remuneration for trustee - Expenses of creditor who petitioned for sequestration - "Preferred" debts - "Ordinary unsecured debts" - Interest on debts - "Postponed" debts Bankruptcy - Correct Answers: A term for insolvency amongst non-corporate entities.