#3355 - Insolvency Crib Sheet - Business Law and Practice

Insolvency

1. Is the balance sheet accurate

   1. Check date

      1. Does it pre-date any more recent discoveries that would inflate or deflate the balance sheet values

   2. Is there the potential of any bad debts?

      1. Is there a provision for bad or doubtful debts in the balance sheet?

2. Is the company insolvent?

   1. 122(1)(f) IA 1986 company will be insolvent if it is unable to pay its debts

      1. Is the company balance sheet insolvent?

         1. 123(2) is the value of the company’s assets less than the amount of its liabilities, taking into account contingent & prospective liabilities?

            1. APPLY TO FACTS

      2. Has the company “reached the point of no return”?

         1. BNY Corporate Trustee Services v Eurosail UK

      3. Is the company cash-flow insolvent

         1. 123(1)(e) is the company unable to pay its debts as they fall due?

            1. APPLY TO FACTS

      4. 123(1)(a) is a creditor owed more than 750, and has he served on the company a written demand requiring the company to pay the sum due, and has the company neglected to pay the sum for 3 weeks?

      5. 123(1)(b) Has a creditor obtained judgment against the company & attempted to execute the judgment, & is the debt still unsatisfied in part or full?

3. What can creditors do?

   1. Petition for Company’s Compulsory Liquidation

      1. Prove company is insolvent as defined by 122 IA 1986

         1. Court makes winding up order – Official Receiver appointed as liquidator

      2. 129(1) winding up of the company by the court is deemed to commence at the time of presentation of the winding up petition

      3. 103 Directors will be dismissed

      4. Costs of winding-up have to be borne out of the company’s assets reducing the amount of the funds for creditors

   2. Force the directors to commence a creditors’ voluntary liquidation

      1. 84(1)(b) special resolution of members to wind company up voluntarily

         1. SEE FLOW CHART FOR DETAILED PROCEDURE

   3. Apply for an administration court order by the company

      1. Administrator has a duty to try to achieve one of 3 statutory purposes para 3(1) Sch B1

         1. (a) rescue company as a going concern

         2. (b) Achieving better results for company’s creditors as a whole than would be likely if company were wound up

         3. (c) realising property in order to make a distribution to one or more secured/ preferential creditors

   4. Is there a floating charge?

      1. Created before 15 September 2003

         1. Appoint an administrative receiver if company has defaulted on the loan

   5. If QFCH then can follow out-of-court route for pushing the company into administration

      1. Also can follow this route if have ability to appoint an admin receiver 14(2)(c)

      2. Administrator’s first priority is rescue of the company as a going concern para 3(1) Sch B1 but creditor can choose appointment of administrator

   6. If fixed charge then can appoint an LPA receiver

      1. 101 LPA 1925 implied power to appoint receiver whenever company in breach of a loan agreement

      2. Act solely for charge holder

      3. Assets may be worth considerably less than their book value and so route may result in creditor recovering less than it is owed

4. What can members do?

   1. Special resolution for members voluntary liquidation

      1. SEE FLOW CHART FOR DETAILED PROCEDURE

   2. Generally shareholders are only liable to the extent that their shares are not fully paid 74(1)

      1. Both past & present members can be liable to this extent 74(2)(d)

      2. 127(1) any transfer of shares once insolvency proceeding have begun is void

5. What can directors do?

   1. Continue to trade on the basis that the position has not yet been reached where insolvency is inevitable

   2. Look to have the company placed in creditors’ voluntary liquidation

   3. Court route into administration

      1. Moratorium on enforcement of company’s liabilities would be imposed

   4. Instigate a CVA

      1. It might be possible to persuade the creditors not to pursue their claims now if there is a sufficiently attractive prospect of payment in the future if trading improves

         1. 899(1) CA 2006 75% in value of unsecured creditors at meeting must agree to directors’ proposals

            1. R1.19(1) IR 1986 secured creditors cannot vote

         2. APPLY TO FACTS – is company a “small company” 382 CA 1986?

            1. If not it cannot apply for a moratorium whilst CVA is put into place

   5. Prepare up to date accounts in order to give them a clear view of Company’s actual financial status, on which they can base their decision

   6. Seek & follow advice of insolvency practitioner, as by doing so they may be able to show that they are taking every step to minimise the loss to creditors, thus giving them a defence to a wrongful trading claim

6. Directors’ liabilities?

   1. Did directors know or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation?

      1. 214 IA 1986 wrongful trading

         1. Objective & subjective test

            1. Someone with general knowledge, skill & experience reasonably be expected of a person carrying out directors functions in relation to the company plus knowledge director actually had

         2. May be ordered to contribute to liquidation pot

         3. 214(3) defence only if directors are seen to have taken every step with a view to minimising the loss to creditors which they out to have taken

            1. APPLY TO FACTS

   2. Did directors have an intention to defraud creditors?

      1. 213 Fraudulent trading if anyone knowingly carried on business with intention to defraud

         1. There must be real moral blame In re Patrick & Lyon Ltd

         2. 993 CA 2006 criminal liability

   3. Did directors misapply or retain or become accountable for any money or other property of the company or any misfeasance or breach of fiduciary duty

      1. 212 Misfeasance

         1. Continuing to trade in the interests of the Company’s members ahead of its creditors’ interests may be a breach of general duty under 172 CA 2006

            1. 172(3) on insolvency, creditors’ interests override those of the company

         2. 1157 CA 2006 – defence if acted honestly or ought reasonably be excused

   4. Claims for wrongful trading or breach of duty could also result in some or all of the directors being disqualified under the CDDA 1986

   5. Did directors give personal guarantees?

      1. Any impact on their own personal insolvency?

         1. 267(2) IA 1986

            1. (a) debt payable immediately and debtor does not have sufficient funds to pay this, even though he may be able to in the future

            2. (b) Debt is payable at some specified point in the future & debtor has no reasonable prospect of being able to pay

7. Impact on employees

   1. 386 employees are preferential creditors in regard to their salaries & pension schemes

      1. 175(1)(a) preferential creditors are paid in priority to other debts except fixed charge holders & liquidation expenses

      2. If employees cannot obtain the full amount they are owed, they are entitled up to 4 months wages to a maximum of 800 & accrued holidays

      3. Winding up normally means automatic termination of employment contracts.

         1. If there is a notice period in employment contract or employee had a fixed-term contract then there could be remedies for breach of contract

8. Order of distribution of assets on liquidation

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