Please enable JavaScript.
Coggle requires JavaScript to display documents.
CORPORATE INSOLVENCY, PERSONAL INSOLVENCY - Coggle Diagram
CORPORATE INSOLVENCY
ADMINISTRATION
Company is / is likely to become unable to pay its debts
Collective procedure (insolvency procedure) = administrator acts in the interests of the creditors as a whole rather than on behalf of a particular creditor
Administrator owed duty to court + creditor and must achieve one of the following:
1. Rescue the company as a going concern OR
2. Achieve a better result for the company's creditors as a whole than would be likely on wound up OR
3. Realise the company's property to distribute to 1 or < secure or preferential creditors
-
Administrative moratorium
During administration > company has full moratorium, during which:
- No order or resolution to wind up the company can be made or passed
- No administrative receiver can be appointed
- No security can be enforced over the company’s property or to repossess goods subject to security, hire purchase and retention of title
- No legal proceedings can be commenced / continued against the company or its property
- A landlord cannot forfeit a lease of the company’s premises
Pre-packaged sales in administration
Business and assets of an insolvent company are prepared for sale to a selected buyer prior to the company's entry into administration
Goodwill + continuity of business are not damaged by the administration
BUT sale ro director / shareholder MUST be approved by creditor in advance
-
What is insolvency?
When court makes a winding up order as a company is unable to pay its debts since:
- unable to pay its debts as they fall due = cash flow test
- has **liabilities > assets = balance sheet test
- does not comply with a statutory demand for a debt < £750 = company is cash flow insolvent OR**
- has failed to pay a creditor to satisfy enforcement of a judgment debt
Directors must continually review the financial performance of a company + decide what action to take on behalf of the company:
- do nothing (may be liable under Insolvency Act) / do deal / appoint administrator / request the appointment of a receiver / liquidation
RECEIVERSHIP
Enforcement procedure conducted in the interests of a secured creditor
There are 3 types of receivers
1. Administrative receivers (rare) Secured creditor with fixed and floating charges over all company's assets may appoint an AR to control secured assets, sell them and use the proceeds to repay the debt owed to the secured creditor.AR = licensed insolvency practitioner ARs may only be appointed by QFC holders if:
- floating charge was created before 15 September 2003 OR
- statutory exception applies
2. Fixed Charge Receivers (most common)
Holders of a fixed charge pursuant to the terms of the relevant security document appoint FCR to enforce security, sell secured assets to repay the debt to their appointor, often a bank.
FCR owe duties to the appointor to act in good faith in the course of their appointment + owe a limited duty to the debtor
FCR can only deal with assets secured by the security document and CANNOT be appointed while a pre-insolvency moratorium subsists or if the company is in administration.
FCR needed not be licensed insolvency practitioner.
3. Court-appointed receivers
Appointed by the court + powers and duties are set out in the court order
Appointments made where shareholders are locked in dispute to run the business until the dispute is determined
LIQUIDATION
Process where company is wound up and its assets transferred to creditors via proportionate dividends and if there is a surplus of assets over liabilities to its members > removed from the register of companies and dissolved
- Same rank creditors pari passu
Solvent + insolvent can be wound upThere are 2 types of liquidation
1. Compulsory liquidation
- Applicant presents a winding up petition to the court requesting a winding up order against the company on a number of statutory grounds
- When court grants a petition for compulsory liquidation = order is in favour of all the creditors and contributories
- Official Receiver becomes liquidator until another person is appointed + will notify CH + all known creditors of the liquidation + secure and realises the assets and distributes to company’s creditors + takes into custody the property of the company
Applicant = creditor / company via shareholders or directors (if insufficient assets to fund a voluntary liquidation) / administrator / administrative receiver / supervisor of a CVA / Secretary of State for Business, Energy & Industrial StrategyGround = company is unable to pay its debts + it is just and equitable for the company to be wound up
a. Inability to pay debts =
- CANNOT comply with a creditor’s statutory demand over £750 w/in 21 days of request to pay
- CANNOT pay judgment debt after creditor sues company
- CANNOT pay its debts as they fall due (cash-flow test)
- Value of company’s assets < liabilities (balance sheet test)
Consequences of winding up order
- Automatic stay on proceedings against the company
- All employees will be dismissed
- Directors lose their powers and they are automatically dismissed
- Any dispositions of property = void
2. Voluntary winding up
Company can be wound up without a court order in 3 situations:
Company's purpose according to the articles has expired and resolution of the shareholders – RARE
a. Company resolves by special resolution to wind up the company. The company must be solvent – MVL
b. Company resolves that it is advisable to wind up the company due to its inability to carry on its business. The company is insolvent – CVL
a. Members' voluntary winding up (MVL)ONLY for solvent companies
- Directors swear a declaration of solvency stating they made an enquiry into company's affairs and AND company will be able to pay its creditors in full w/in 12 months from the commencement of the winding up
- If lie = fine / imprisonment
- Members must pass a special resolution to place the company into MVL and an ordinary resolution to appoint a liquidator.
- The winding up commences when the special resolution is passed
b. Creditors' voluntary winding up (CVL)Most common
- Shareholders pass a special resolution to place the company into a CVL AND ordinary resolution to appoint a nominated liquidator.
- W/in 14 days of special resolution being passed the directors of the company must ask the company’s creditors to either approve the nominated liquidator or put forward their own choice of liquidator which will take precedence
- Directors must draw up a statement of the company’s affairs + send it to creditors.
Role of the liquidatorQualified Insolvency Practitioner or the Official ReceiverPowers:
- Sell any of the company's property
- Execute deeds
- Raise money on the security of the company’s assets
- Make or draw a bill of exchange or promissory note in the name of the company
- Appoint an agent to do any business that the liquidator is unable to do
- Carry on the business of the company
- Commence or defend court proceedings
- Pay debts
Powers to avoid certain transactions to maximise assets:
- Disclaim onerous property
- Apply to court to set aside a transaction at an undervalue
- Apply to court to set aside a preference
- Apply to court to set aside, or vary the terms of, an extortionate credit transaction
- Claim that a floating charge created for no new, or inadequate, consideration is invalid
- Apply to court to set aside a transaction that will defraud creditors
-
PERSONAL INSOLVENCY
2. Bankruptcy
Enables an collection, sale and distribution of insolvent individuals' assets for the benefit of all the bankrupt's creditors1. Bankruptcy petition brought by a creditor OR debtora. Creditors’ Petition
- Ground = debtor is unable/has no reasonable prospect to pay its petition debts.
- Debt must be for a liquidated sum < £5,000, generally unsecured
- Debtor domiciled / present in England and Wales.
b. Debtor’s Petition
- Ground = debtor is unable to pay its debts
- Petition accompanied by statement of affairs setting out the debtors' assets and liabilities.
Inability to pay debts is evidenced by:
- Statutory demand neither satisfied w/in 3 weeks from service, nor set aside by court OR
- unsatisfied execution of judgment / another legal process
- IF GROUNDS ARE MET = court has discretion to make a bankruptcy order
- Official Receiver becomes first trustee in bankruptcy unless the court orders otherwise and majority of creditors can seek appointment of licensed insolvency practitioner as another Trustee
- Bankrupt CANNOT act as director / be involved in management of company / obtain credit of < £500 w/out disclosing the bankruptcy, give gifts + practise in certain professions
Trustee - powers and dutiesBankrupt’s estate vests in the Trustee immediately by operation of law upon making bankruptcy orderPowers:
- Collect in the assets + sell them
- Disclaim onerous property or contracts
- Ask creditors to prove their claims against the bankrupt + give notice to them of sale proceeds + distribute in order of priority
Order of priority:
1. secured creditors
2. bankruptcy expenses incl Trustee’s remuneration
3. 2 tiers of preferential creditors
4. ordinary unsecured creditors
5. statutory interest
6. debts of a spouse
7. surplus payable to the bankrupt
Bankrupts - Duties
- give trustee information as to his affairs
- attend on the trustee at such times
- do all such other things required by trustee
Bankrupt automatically discharged from bankruptcy after a max 1 year = released from most of bankruptcy debts + personal restrictionsBUT IF they do not comply with obligations > Trustee may apply for order suspending automatic discharge
Bankruptcy Restriction Orders (BRO)
Secretary of State / Official Receiver acting on SS direction, may apply to the court for a BRO if court considers it appropriate having regard to conduct of the bankrupt
Conduct = failure to keep records / entering into preferences or transactions at an undervalue / fraud
BRO will operate for a period of between two and 15 years > breach = fine / imprisonment
Bankrupt CANNOT act as director / be involved in management of company / obtain credit of < £500 w/out disclosing the bankruptcy
HOWEVER, bankrupt can offer the Secretary of State a bankruptcy restriction undertaking (BRU) with same effect as a BRO.
-
-
Individuals must recognise when they are in financial difficulty and can do nothing / do a deal with some or all of their creditors / seek bankruptcy order.
There are 2 formal collective insolvency procedures for individuals:
1. Individual voluntary arrangements (IVA)
2. Bankruptcy