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BLP (25)


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What was the most significant reform to the law of insolvency and when did it come into force?
It was contained in the Enterprise Act 2002 and came into force on 15 September 2003.
Can directors ignore financial difficulties and keep a company trading?
If the Co is liquidated, directors can be made personally liable to contribute to the company's assets under the IA (the sections dealing with wrongful or fraudulent trading).
What are the implications in relation to directors duties once a company finds itself in financial trouble?
S. 172 duty to promote the success of the company switches to protecting the interests of creditors.
What can happen if a director does not exercise power under s. 172(3) when a company finds itself in financial difficulty?
Director can be held liable for to pay damages to the Co under s. 212 IA 1986 which deals with misfeasance.
Aside from paying damages to the company, how else might a director be impacted?
Disqualification risk under Company Directors Disqualification Act 1986.
What options are open to directors who intend to turn around the fortunes of a failing company?
1. restructuring the company's debt;
2. replace some directors;
3. appoint turn around specialists.

Are informal agreements usually legally enforceable?
No, on the basis that there is no consideration for forbearance of a debt, therefore an informal agreement is unlikely to be enforceable as a matter of contract.
What is the advantage of a formal agreement?
Legally binding
What are the two types of formal arrangement that can be made?
1. Scheme of arrangement (s. 895 - 901 CA 06); or
2. Company Voluntary Arrangement (s. 1-7 IA 1986).
What is a scheme of arrangement?
1. Complex formal arrangement;
2. Compromises between creditors and Co;
3. 3/4 in value of the relevant creditors must agree;
4. Must be sanction by the court
5. A sanctioned scheme binds any dissenting or unknown creditors

When are Schemes of Arrangment for often used and why?
For complex group insolvencies owing to the cost and court's involvement.
What is a Company Voluntary Arrangement (CVA)?
1. Less costly than Scheme of Arrangement;
2. Put in place a timetable for repayment;
3. CVA is implemented and supervised by an insolvency practitioner.

Describe the process of setting up a Company Voluntary Arrangement?
1. Directors of company formulate written proposals for repayment of the company's debts;
2. Proposals include nominated IP;
3. Creditors and shareholders vote (in two separate meetings) to approve plan and IP appointment.

Who usually advises directors trying to put a Company Voluntary Arrangement in place?
The nominated insolvency practitioner.
What happens in the event of a conflict between votes case at the creditors' meeting and members' meeting in the context of putting a Company Voluntary Arrangement in place?
The decision of the creditors' meeting prevails.
Who is bound by the approval of a CVA?
1. Not only creditors who were given notice of and entitled to vote; also
2. all creditors who would have been entitled to vote, had they been given notice;
3. creditors under 2 (above) can claim as if they were a party to the CVA.

Can a secured or preferential creditors' rights to their priority position be affected or prejudiced without their consent?
In terms of buying time to put a rescue plan in place, what can directors do?
Small companies can apply to the court for a short moratorium (initially 28 days). Rare in practice.
What was the intended purpose of Administration?
1. provide breathing space
2. during which creditors are unable
3. without court consent
4. to enforce security
5. or take other enforcement action

For the purpose of a administration, when can a charge holder appoint an administrator?
Only if the charge is a Qualifying Floating Charge, defined in Sch B1, para 14.
Who can apply to court to appoint an administrator?
1. the company (members in GM);
2. the directors (by BR);
3. a creditor;
4. a supervisor of a CVA; and
5. a liquidator

Who can use the out of court procedure to appoint an administrator?
1. the company;
2. directors;
3. a Qualifying Floating Charge Holder (the QFCH).

If a QFCH appoints an administrator? When does the appointment commence?
The date of the notice.
If the company or its directors appoint an administrator, when does the appointment commence?
1. must file notice to appoint at court and serve on QFCH;
2. The QFCH has 5 days in which to appoint its own administrator
3. i.e. QFCH can veto.
4. If no veto, Co or its directors may appoint by filing notice to court in a further 5 day window.

What does the appointment of an administrator create?
An immediate moratorium on enforcement action.
Can a QFCH's choice of administrator override the choice of an unsecured creditor?
Yes. There is an interim moratorium if the unsecured creditor applies which gives the QFCH time to use the out of court procedure to appoints its choice of administrator.
What must directors do pending the appointment of an administrator?
Must merely preserve the company's business and assets until appointment.
On a practical note, what has to happen while a company is in administration?
All business stationery must state that the Co is in administration.
During administration (post appointment), what can directors do/not do?
Cannot exercise any management power without the consent of the administrator.
To whom does an administrator owe duties?
1. officer of the court;
2. under a duty to act in the interests of all the creditors.
When does an administrator's appointment terminate?
1. Automatically after 12 months.
2. Can be extended by 6 months if the creditors agree.
3. Court can also sanction and other extensions.

Can an administrator sue the directors for any part they played in causing or exacerbating the creditors' losses?
No, unlike the liquidator.
Can an administrator bring administration to an end?
Yes by filing the appropriate notice to the court.
Who are fixed charge receivers?
Appointed by the holder of a fixed charge in the circumstances set out in the security documentation.
What property can a fixed charge receiver deal with?
Only the property charged. (S)he is only able to deal with that property.
What are fixed charge receivers often referred to as?
LPA receivers
What is the Relevant Date, i.e. when the EA 2002 came into force?
15 September 2003
Who are administrative receivers?
Debentures entered into pre the Relevant Date (15 September 2003), were able to appoint ARs. Effectively abolished post Relevant Date.
How could the holder of a floating charge appoint an Administrative Receiver?
1. Without formality; and
2. provided the terms confer on the QFCH permit appointment.
What were the powers of administrative procedures?
1. All express powers set out in debenture;
2. Extensive powers set out under Sch 1.
What was the most important power of an Administrative Receiver?
Take possession of, get in and sell the assets of the company to repay the debenture holder.
What is liquidation?
The realisation and distribution of the assets of a to company to its creditors
What is liquidation also referred to as?
winding up
What are the two types of liquidation?
Voluntary and compulsory
What two types of voluntary liquidations exist?
1. Members' voluntary liquidation
2. Creditors' voluntary liquidation
When will dissolution take place under a compulsory liquidation?
1. Three months
2. After notice by the liquidator
3. To the Registrar
4. that the winding up of the Co is complete.

When will dissolution take place under a voluntary liquidation?
1. Three months;
2. from the filing by the liquidator
3. of the company's
4. final accounts and return.

What happens after the dissolution of the company?
The company ceases to exist.
Who can issue the petition for compulsory liquidation?
1. a creditor
2. the company (would usually go into voluntary as cheaper and quicker)
3. the directors (same applies)
4. an administrator
5. an administrative receiver
6. the supervisor of a CVA
7. the SoS for Business, Innovation and Skills (on public police grounds).

What are the usual grounds for compulsory liquidation?
1. Co's inability to pay its debts (s. 122(1)(f));
2. Court of the opinion that its 'just and equitable' to wind up the company (s. 122(1)(g)).
How do you know if a company is unable to pay its debts? Auth?
Consider the definition in s. 123 IA 1986
When is the members' voluntary liquidation procedure utilised?
Only when the Co is solvent.
What resolutions need to be passed for the purpose of entering into a members' voluntary liquidation?
1. A SR approving the members' voluntary liquidation; and
2. An OR appointing a liquidator.
Can a members' voluntary liquidation be converted into a creditors' voluntary liquidation?
Yes, if the company becomes unable to pay its debts within the period specified in the statutory declaration (given under s. 89(1) of the IA.
What is a creditors insolvent liquidation?
1. Commenced by resolution of the members;
2. but under the effective control of the creditors
3. who can choose the liquidator

What resolutions do shareholders need to pass to enter into a creditors voluntary liquidation?
1. A SR to approve the CVL; and
2. An OR to provisionally appoint a liquidator.
What happens after the members of a company pass the necessary resolutions to enter into a CVL?
1. A creditors' meeting is convened within 14 days;
2. The directors provide a statement of the company's affairs;
3. The creditors vote to appoint their own appointee as liquidator.

Bar realising the company's assets, what else should a liquidator do?
Maximise the assets available for distribution to the company's creditors.
How does a liquidator maximise the assets available for distribution to the company's creditors?
1. Challenging voidable transactions
2. Disclaiming onerous property (s. 178)
Does a liquidator need to get permission before taking certain actions?
Yes. The liquidator needs the consent of the committee of creditors (if appointed) or the court:

1. before commencing legal proceedings; or
2. to carry on running the business.

Should there be sufficient monies to pay preferential creditors, what are employees entitled to?
1. Remuneration due in the four months before winding up/petition;
2. £800.00 per employee (max) plus accrued holiday pay and certain contributions owning to a pension scheme.
What is the ring-fenced fund?
A pot of money effectively shared equally between the floating charge creditors and unsecured creditors.
How is the ring fenced fund calculated?
The following proportions of the company's net property:

1. 50% of first £10,000; and
2. 20% thereafter up to a maximum fund of £600,000.

What do the ring fence provisions apply to?
1. Realisations from floating charges created on or after the Relevant Date; and
2. Where the net property of the company is less than £10,000 (cost would outweigh the benefit).
Calculate your insolvency dividend
1. Divide the 'total amount available to unsecured creditors' by the amount that remains due.
2. times that figure by 100 = 'insolvency dividend of [figure] pence for every £1 owed'.
Do you need to create a ring-fenced fund of no floating charge holder ranks above the unsecured creditors?

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