A set of notes based on assigned reading and lecture notes and questions, covers almost all areas taught on the subject of company and individual insolvency on the Business Law module including: charges, wrongful and fraudulent trading, preferences, transactions at an undervalue and rescue options.
1. Insolvency means the business does not have sufficient assets to meet its liabilities and
so owes more money than it possesses, cash flow insolvency is where the income is
less than expenditure and so debts cannot be paid as they fall due.
i. When a business goes insolvent, people who are affected include:
shareholders, employees, ex-employees who are owed a pension from
the business and creditors.
2. A fixed charge is a charge over a specific asset or class of assets, for instance a charge
fixed over machinery or over a specific car, the asset cannot be disposed of without
the consent of the charge holder who is also entitled to sell it to recover the debt due
to them if the company is unable to repay it another way. A floating charge is one that
floats over the charged assets (which can be all assets or a class of them) and so whilst
the business is solvent there is in practice essentially no charge; the charge will
crystallise however when a specified event occurs (insolvency, whatever the form,
being an example but the charge document may also specify any other event) and the
assets the floating charge was granted over that are in the possession of the borrower
are at that time will be treated as having a charged fixed over them, the holder of such
a charge is able to appoint an administrator out of court. Re Yorkshire Woolcombers’
association (1903) sets out the features of a floating charge.
3. A receiver is a person appointed to take charge of charged assets and sell them to
recover the money owed to the charge holder. An administrator is a person appointed
when a company enters administration to manage their affairs in the hope of
preventing the company from being forced into liquidation. The official receiver is an
officer of the court who generally handles the first stages of insolvency proceedings
but may also act as a liquidator or trustee if no appointment to the position is made. A
liquidator is the person charged with converting insolvent business assets into money
with which to repay creditors and wind up the company. A trustee in bankruptcy is the
person appointed to deal with the assets of a person who has been made bankrupt
who is not entitled to own property as a result, they will collect their assets and seek
to repay their debts.
4. Alternate names for liquidation are winding up and dissolution. Liquidation can be
compulsory, with the most often reasons being insolvency or that it is just and
equitable to do so, or voluntary where the members pass a resolution that the
company though solvent ought to be liquidated. A creditors voluntary liquidation (CVL)
is a method for an insolvent company to voluntarily liquidate and is instigated by a
board resolution and authorised by special resolution, a solvent company can however
choose to liquidate itself which is often referred to as a members voluntary liquidation
(MVL).
5. D- a creditor owed more than £750 can send a statutory demand for payment and in
the absence of either payment or an agreement to deal with repayment of the debt
can then petition for the company to be liquidated.
6. (Fixed charge holders- not part of liquidation as sold by charge holder, Receiver’s costs
are not included in the list and the court has jurisdiction over how to pay a court
appointed receiver), Costs of liquidation, , preferential creditors, floating charge
holders, unsecured creditors, interest on preferential and unsecured debt, deferred
creditors, shareholders.
, 7. Fraudulent trading requires it to be proved that the company business was conducted
with the intent to defraud creditors of either the company or of another. It applies to
any knowing parties involved in the fraud.
8. Wrongful trading is where a director either know or ought to have concluded that
there was no reasonable prospect of the company avoiding insolvent liquidation.
9. To establish a transaction at an undervalue it must be established that the company
either made a gift or the transaction involved no consideration being given to the
company or that the transaction for money or money’s worth was for a value
significantly less than the consideration given by the company. No order under s.238
will be made if the company entered into the transaction in good faith for the purpose
of carrying on its business and at the time there were reasonable grounds to believe
the transaction would benefit the company.
10. Preference is dealt with in s.239 of the insolvency act, it refers to circumstances in
which a creditor or a surety or a guarantor for any of the company debts or liabilities is
placed in a position prior to liquidation that is better than they would be in during
liquidation had they not been placed in that position by something the company does
or suffers to be done. The motivation must be to place them in such a position, if the
company does something that has an ancillary effect of doing so can avoid s.239
operating. The court if it sees fit to do so can make any order to restore the pre-
preferential position. Must be within a “relevant time” within 2 years prior to onset of
insolvency in case of a connected person but 6 months otherwise.
11. A connected person under the definition given in s.249 is a director or shadow director
of the company or an associate of such a person or alternatively an associate of the
company. S.435 defines an associate as any of the following: a spouse/civil partner, a
relative or a spouse/civil partner of a relative. A person is also an associate of persons
employed by him or by whom he is employed which includes company directors and
officers. Relatives are limited to lineal ancestors or descendants, siblings, aunts and
uncles and nephews and nieces; half-blood relations are treated as if full blood and
legitimacy is irrelevant.
12. A company voluntary arrangement (CVA) is an agreement ( it Is contractual) between
a company and its creditors dealing with repayment of all or part of corporate debt
over a specified period, either to forgo or wait for part of their debt per s.1 IA 1986.
Directors will make a written proposal to creditors identifying an insolvency
practitioner as the nominee, nominee has 28 days to consider the proposal and report
to the court on viability; will normally decide to call meetings of members and
creditors with small companies able to have a moratorium. The agreement will be
drafted by an insolvency practitioner and a meeting of creditors will be called, a vote
of 75% or more by debt value will ratify the agreement on the part of the creditors. An
agreement correctly implemented will bind the company and all creditors (except
secured and preferential) so long as adhered to, no legal action such as a winding up
petition can be presented, and any pending proceedings are stayed. Assets must be
handed to the nominee (who will now be called supervisor).
13. Administration is an attempt to avoid the company being forced to liquidate in which
an insolvency practitioner (the administrator) is appointed as an interim chief
executive and will seek to rescue the company as a going concern either by selling it
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