Insolvency

Heis v Financial Services Compensation Scheme

Company Voluntary Arrangements are contractual in nature

cash flow test

practical insolvency test in Scotland

• debtor borrowed or incurred debts

• when debt is due debtor could not pay

• cash flow insolvency

• debtor is cash flow bankrupt

balance sheet test

absolute insolvent test in Scotland

• how many assets compared with liabilities

• if more liabilities, debtor is balance sheet bankrupt

Company Voluntary Agreement (CVA)

rescue procedure

designed with intention of providing more flexible corporate insolvency rescue procedure for small companies

Creditors Voluntary Winding Up

not actually initiated by creditors

1. vote for resolution

2. directors aware of imminent insolvency

3. members to vote for a resolution

4. an interim liquidator appointed (eg lawyer)

5. a meeting of creditors called later

6. a creditor-appointed liquidator prevails

7. little court involvement, for efficiency

compulsory winding up

only court can order

petitioned on basis of insolvency

1. creditor who hasn’t been paid on time goes to court and asks

2. debt is true and due

3. court judgement

4. court grants an order to say I decide the company should be placed into liquidation procedure, and a liquidator will be appointed

5. petitioner-nominated liquidator or official receiver

6. often petitioned for my HMRC if you haven’t paid tax

roles of the liquidator - kill

kill the company, company is terminated

roles of the liquidator - sell

to realise the assets of the company

do not need to sell by ourself

in most cases, hire sale agent

roles of the liquidator - pay

use proceeds from sales to pay creditors

pari passu principle

insolvency, not enough assets

paid in the same proportion not the same amount

the least worst principle

preferential creditors - employee claims

company owes to employees

far more vulnerable

unsecured

preferential creditors - tax arrears

tax authority given preference

unsecured

tax authority is technically general public

the waterfall hierarchy

1. secured creditors

2. liquidation and expenses costs

3. preferential creditors

   1. employees first

   2. tax authority second

4. floating charge holder 4

5. unsecured creditors

until creditors are paid, shareholders get nothing

types of transactions subject to avoidance

transactions at an undervalue

transactions as a preference

unfairly created floating charge

transaction as an undervalue

1. transaction

2. at an undervalue

3. at time company was nearing insolvency

transaction avoidance

avoiding transactions made pre-insolvency by the company in an attempt to decrease what is available for creditors

transactions as a preference

paying a creditor first

fellow creditors are victims!

pari passu victim is victim!

when company is insolvent

specific transactions at an undervalue

a gift

buy assets at an inflated price, sell assets at a significantly reduced price

receive services at an inflated price, provide services at a significantly reduced price

connected persons (transaction avoidance)

if you do a transaction undervalue to benefit of connected party, extend from 2 to 5 years

conditions to transactions at an undervalue

2-5 years prior to insolvency

at a significant undervalue - accountant judges

insolvency at that time

in a liquidation or administration procedure

judicial procedures required for transaction avoidance

consent from creditors committee or court

apply for a court order

court judgement - demand beneficiary to hand back the balance

restore

examples of transactions as a preference

• debtor paid an unsecured debt before it was due

• company created a security for an unsecured debt

• pay a connected party a debt which was not due

relevant periods for transaction as a preference

6 months for ordinary creditor

2 years for connected party

exact time of the commencement for insolvency procedure

procedural steps of transactions as a preference

1. consent from creditors committee or court

2. petition to the court

3. court judgement

4. restore

transaction avoidance can only be used in

liquidation: creditors’ voluntary winding up or compulsory one

administration

not receivership

not CVA

unfairly created floating charge

a floating charge created when company was insolvent

2 years for a connected party, 12 months for others

insolvency

no benefit for the company

attack!

wrongful trading

cannot trade in bankruptcy

difficulties in enforcing wrongful trading

doesn’t promote entreneurship

hard to pinpoint when the company was insolvent

objectives of administration

1. rescue the company as a going concern or as a legal entity

2. achieve a better result for all creditors

3. realise property for secured and preferential creditors