Summary
Summary SQE Business Law and Practice - Insolvency Notes
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Notes covering corporate and personal insolvency, with relevant specification points and updated figures according to SRA updates.
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BLP - INSOLVENCYSQE1 Specification:
Insolvency (corporate and personal):
options and procedures - CVA/IVA, bankruptcy, administration, fixed asset receivership,
voluntary and compulsory liquidation
claw-back of assets for creditors – preferences, transactions at an undervalue, fraudulent
and wrongful trading, setting aside a floating charge
order of priority for distribution to creditors.
Insolvency Inability of a company to pay its debts (corporate insolvency) or the inability of an
individual to pay its debts (personal insolvency) – both governed by Insolvency Act
1986 and Insolvency Rules 2016
Aims of to save companies in financial difficulties
insolvency control company directors
protect companies’ creditors
CORPORATE INSOLVENCY
Corporate insolvency test (s122 and 123 of IA) – company deemed insolvent when deemed to
be unable to pay its debts when:
1. Creditor served statutory demand for £750(or more) & company doesn’t pay WITHIN 21
days OR come into agreement with creditor re payment
2. Creditor obtained judgement against company, but debt still not paid
3. CASH FLOW TEST: Company unable to pay debts
4. BALANCE SHEET TEST: company liabilities exceed assets
Liquidation ‘winding up’ business stops trading, all assets sold, company ceases to
exist
Liquidation proceedings liquidator runs company, director powers end
Liquidator: can challenge company’s previous transactions so they can get more money to
pay to creditors
Then distribute to creditors in statutory order
Liquidator powers:
Carry on company’s business
Commence and defend litigation on company behalf
Investigate past transactions
Investigate directors’ conduct
Collect and distribute company assets
Under duty to maximise assets available to creditors – can do this by bringing claims
against directors
Do all that is necessary to facilitate winding up of the company
THEN Registrar of Companies dissolves company 3 months later.
, BLP - INSOLVENCY
Type of liquidation Explanation
Compulsory liquidation 3rd party commences proceedings against insolvent company
3rd party usually a creditor / ‘petitioner’ presenting
winding up petition at court
Basis: company unable to pay its debts (s 122 IA)
Usually show inability to pay debts by statutory demand
If demand unpaid after 3 weeks winding up petition vs
company
Court – ultimate discretion in decision
Court can adjourn to later date if company give plan of paying
back within reasonable time
If order given for winding up, Official Receiver (OR) will be
company’s liquidator
OR: civil servant and court official, employed by Insolvency
Service
OR can appoint a private insolvency practitioner, depending on
nature of case and creditors’ wishes ONLY IF company has
sufficient fees
Creditors voluntary Commenced by company when insolvent
liquidation (CVL) Creditors take over early stage
Directors usually go for CVL when pressured by creditors but
not formally brought forward by creditors
If not followed, Ds face risk of facing personal claims ie
misfeasance/fraudulent trading etc
Members voluntary Commenced by solvent company because it wants to stop trading/is
liquidation (MVL) dormant/wishes to bring affairs to end in orderly manner
Only available to SOLVENT companies
If during MVL, liquidator realises company is insolvent – MVL
turns into CVL
Often used for dormant companies or when Ds want to retire
Claims Explanation
liquidators/administrators
can bring against directors
Avoidance of certain floating Invalid floating charges automatically void
charges (s245 IA) Charge granted without company receiving adequate
considerations in exchange for granting security – at the
relevant time
Relevant time:
- If charge created in favour of a person who is
connected with the company during 2 years ending
with onset of insolvency; or
- If charge created in favour of any other person, during
12 months prior to onset of insolvency
Onset of insolvency: compulsory liquidation: date of
winding up petition
Onset of insolvency: CVL: formal date entering liquidation
Person connection: director or shadow director/close
relative/business associate/associate of company
Administrator/liquidator will seek injunction on basis
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