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LPC - BLP MODULE - CORPORATE INSOLVENCY (DISTINCTION)
- Module
- LPC
- Institution
- Swansea Metropolitan (UWTSD)
Notes on corporate insolvency for the LPC BLP module.
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By: angelicaherrera • 3 year ago
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BLP – CORPORATE INSOLVENCYMainly contained within the Insolvency Act 1986.
The detailed rules for implementing the law are contained in the Insolvency Rules 2016.
The basic aims of corporate insolvency law are:
- Protect the creditors of the company
- Balance the interests of competing groups of creditors
- Promote corporate rescues
- Control or punish the directors
There are several mechanisms available to the companies, the creditors and other interested parties.
- Liquidation – brings the company to an end and divides up the assets
- Administration and company voluntary arrangements – aim to rescue the company
- Receivership – an option for secured creditors to recover what is owed solely to them.
When is a company insolvent and how is this proved?
When is a company’s insolvency relevant?
- Insolvency is usually pre-requisite for insolvency proceedings
- The duties owed by the directors depend on whether or not the company is or was solvent
- Past transactions of the company may be investigated if the company was insolvent at the
time or shortly after the transactions were made
- Some company procedures such as buy back out of capital may be undertaken only in the
company is solvent.
The test for insolvency is contained in sections 122 and 123 of the Insolvency Act 1986 and is based
on the company’s ability to pay its debts (section 122(1)(f)).
A company is deemed unable to pay its debts if:
A creditor owed more than £750 has served a formal written demand on the company,
waited three weeks and has not been paid or come to an arrangement with the company.
A creditor has obtained judgment against the company and attempted to execute the
judgement and the debt is still unsatisfied in full or in part
It can be proved to the court that the company cannot pay its debts as they fall due – the
cash flow test.
It can be proved to the court that the company’s assets are less than its liabilities – balance
sheet test.
What are the insolvent company’s options?
The directors of a company that is or may be insolvent must be very careful to take all steps they
can to remedy the situation.
They should usually take professional advice as soon as possible and need to be alert to the
possibility that one or more creditors may serve statutory demands or sue
If they do not take all steps, they may be personally liable on liquidation or administration and may
be subject to disqualification. The directors have several options:
To take steps to put the company into liquidation themselves
To talk to their creditors to see if they will wait for payment or come to a compromise
To enter into a formal arrangement with their creditors called a company voluntary
arrangement. It may all the company to avoid liquidation.
To appoint an administrator to take over the running of the company and possibly to return
it to solvent trading or sell it as a going concern.
, What are the unpaid creditors options?
Unsecured creditors:
Section 123(a) - Serve a statutory demand for a debt in excess of £750, wait three weeks and
then present a petition to the court to put the company into liquidation.
Section 123(1)(b) - Sue the company, obtain judgement, and attempt to execute the
judgement and then present a petition to the court to put the company into liquidation
Suggest a CVA
Apply to court to put the company into administration.
Generally, an unsecured creditor will prefer one of the rescue mechanisms as it is likely to receive
little or nothing if the company goes into liquidation. However, the issue of a statutory demand or
the commencement of court action may encourage the debtor company to find the money to pay
that particular creditor.
Secured creditors:
In addition to the options for an unsecured creditor a secured creditor may:
Appoint an administrator out of court
To appoint an LPA receiver
If the security for the debt was created before 15 th September 2003, they may appoint an
administrative receiver.
What is liquidation?
Liquidation is just the winding up of the company which results in the company ceasing to exist.
The basic steps are:
Liquidation proceedings are commenced
A liquidator is appointed
The liquidator collects the company’s assets and may review past transactions
The liquidator distributes the assets in the statutory order to the creditors
The company is dissolved.
There are three types of liquidations:
Compulsory liquidation – commenced against an insolvent company by a third party
Creditors voluntary liquidation – commenced by an insolvent company, usually in response
to creditor pressure
Members voluntary liquidation – commenced by a solvent company that wishes to cease
trading.
Compulsory liquidation.
Normally a result of a hostile process initiated against the company’s wishes. The company is
insolvent.
The process is commenced by the presentation at court of a winding up petition. The petitioner must
be able to prove one or more of the grounds listed in section 122.
The most common ground on which a petition for liquidation may be founded is that the company is
unable to pay its debts (section 122(1)(f)).
There are four ways in which this may be proved:
By statutory demand
By unsatisfied judgment
By the cash flow test. There are a number of indicators that a court may take into account in
assessing whether a company is unable to satisfy the cash flow test.
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