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Corporate Insolvency Notes

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Core Module: BLP Paper A

Company Law - Private Limited Companies Corporate Insolvency Insolvency and enforcing a security Key changes in the law

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Insolvency Act 1986 [IA]
Enterprise Act 2002 [EA]

Fundamental changes:

1. Promoting Administration

2. Restricting Administrative Receivership

3. Abolished 'Crown Preferences'

4. Ring Fencing [for recoveries under floating charges]

Key Date: 15th December 2003 [EA corporate Insolvency provisions came into force]. Insolvency

No definition provided within EA. S.123 IA 1986 uses the phrase: 'inability to pay debts'

When is a company unable to pay debts =
a) The company has not paid, secured or compounded a claim for a sum due to a creditor exceeding PS750 within three weeks of having been served with a writte demand in the prescribed form [the statutory demand]. b) An execution or judgment is unsatisfied c) It is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due [the cash flow test]
d) The value of the company's assets is less than its liabilities, taking into account contingent and prospective liabilities [the balance sheet test]. Why is it important to determine whether company is insolvent or not?

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Transactions may be open to challenge

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It will determine whether a voluntary liquidation is controlled by its creditors or members

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It impacts the duties of directors

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Certain procedures require 'Declaration of Solvency' [e.g. buy back shares].

Insolvency practitioner = anyone acting as a liquidator, administrator, administrative receiver, supervisor of a voluntary arrangement or a trustee in bankruptcy must be a I.P S.389 IA: criminal offence to act as an I.P when not qualified to do so. What can a lender do if borrower is in default?

1 It depends on whether the debt is secured or unsecured. Secured Unsecured

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Action for debt -

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Action for debt - court court

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Petition for

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Petition for winding winding up up

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Enforcement of

Core Module: BLP Paper A security How to enforce security

Five methods to consider:

1. 2.

3. 4.

5. Possession Sale Foreclosure Appointment of receiver Appointment of administrator

Possession

Pledgee - already has possession
Legal Mortgagee -entitled to take possession irrespective of default
Court can order possession
Precursor to sale

Sale

Pledgee can sell on default
Mortgage / charges - can sell asset pursuant to the security document

Foreclosure

Order by Court
Court brings end to the mortgagor's equity of redemption -mortgagee becomes absolute owner.
Appointed by secured lender / creditor [pursuant to the rights under the security document]
Types of receivers: a) Receivers over specific assets b) Administrative receivers

Appointment of receiver

Appointment of administrators Enforcing a floating charge

Encouraged by EA 2002 reforms

Recoveries of floating charges are subject to: a) Rights of preferential creditors;
Preferential debts: Defined Sch.6 IA 1986

b) Ring fencing
S.176A IA 1986 [introduced by EA 2002]
Apply to floating charges created on / after 15 th December 2003
Any liquidator, administrator or receiver shall set aside a prescribed part of th company's net property for distribution to unsecured creditors.
[net property = the amount of property which (but for the ring fencing) would be available for floating charge holder].

When will ring fencing apply?
R.F will not apply if:

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The net property is less than the prescribed minimum 2

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