A more recent version of these Corporate Insolvency notes – written by Cambridge And Oxilp And College Of Law students – is available here.
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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
Insolvency Act 1986 [IA]
Enterprise Act 2002 [EA]
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?
Transactions may be open to challenge
It will determine whether a voluntary liquidation is controlled by its creditors or members
It impacts the duties of directors
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
Action for debt -
Action for debt - court court
Petition for winding winding up up
Core Module: BLP Paper A security How to enforce security
Five methods to consider:
5. Possession Sale Foreclosure Appointment of receiver Appointment of administrator
Pledgee - already has possession
Legal Mortgagee -entitled to take possession irrespective of default
Court can order possession
Precursor to sale
Pledgee can sell on default
Mortgage / charges - can sell asset pursuant to the security document
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:
The net property is less than the prescribed minimum 2
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