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Tests And Procedure For Insolvency Notes

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INSOLVENCY TESTS & PROCEDURES
Just because a company is profitable, does not mean it is solvent.
Cash Flow Test - s.123(1)(e) IA [Cash Flow Statement - Closing Balance]
Balance Sheet Test - s.123(2) IA [Balance Sheet - Net Assets]
 The company is paying its debts
 Liabilities outweigh assets
 Debts could be paid by selling assets or obtaining a loan
 Liabilities include legal liabilities
 Debts in the future can be paid as fall due
 Future liabilities are included
 A debtor is not solvent just because if sufficient time was given the debts would  Contingent and prospective assets are not included but uncalled capital is be paid included

tionVoluntarytionVoluntarynCompulsory

Insolvency Procedures - The purpose of all three of these processes is to collect and distribute the company's assets and terminate the company's existence.
Process
Key Officer

1. PRESENT
PETITION
(liquidation commencess.129(2),
if the petition is successful)
Insolvent
 S.124(1) - Petition by company (directors resolve on its behalf), directors, any creditor (prospective or contingent), members or a
Liquidator
(and
(either official clerk of the magistrates'
court solvent)
receiver or

S.122(1)On one of the 7 grounds,
usually ground
(f)
that the company is unable to pay its debts companies
 S.123 U ble t d bt f 4 ir t la t

1. S.89 - STATUTORY DECLARATION of solvency by directors
Solvent
 They will require an auditors' report as proof
Liquidator companies 2. S.84(1)(b) - Members' SPECIAL RESOLUTION within 5 weeks of declaration of solvency 89(2)(a) (86 a voluntary winding up is
(chosen by only deemed to commence at the time of the passing of the resolution for voluntary winding up)
shareholders)
 S.84(2A) W itt ti f ial luti t b iv t h ld f lifyin fl ti h llowin th h

1. Company is INSOLVENT so NO STATUTORY DECLARATION OF SOLVENCY is filed
Insolvent
 But, directors prepare statement of affairs for creditors and Registrar of Companies
Liquidator companies 2. Directors request LIQUIDATOR NOMINATIONS from creditors
(chosen by only

3. Creditors decide nominee in VIRTUAL MEETING or via DEEMED CONSENT PROCEDURE
creditors and/

4 M

b

' SPECIAL RESOLUTION t

t t liq id ti

( .86

lu t

windin

is d

dt

t th ti

f th

NB: Unlike compulsory liquidation, in the case of voluntary liquidation there is no automatic moratorium on proceedings against the company
* STATUTORY DEMAND - A demand for payment served on a debtor by a creditor containing information prescribed by IR (Rules) 2016; COMPOUNDING A DEBT - Creditor and debtor come to a mutual agreement regarding an existing debt 'to the reasonable satisfaction of the creditor' at the time
** The court will take into account indicators such as (1) the creditor having demanded money and the company (without reasonable excuse) having failed to comply with that demand and (2) the company admitting it cannot pay the debt (e.g. in correspondence)
***Good reasons include:
 Debt is bona fide disputed by the company
 Winding up is opposed by other creditors
 The petition constitutes an abuse of process
 The company is being wound up by other creditors
 The company has paid or tendered payment of the debt
 The courts of England and Wales do not have jurisdiction
Functions and powers of a liquidator
General functions s.143(1) IA
 Collect and realise the company's assets
 Pay creditors according to statutory order

Pay any surplus to the members

Powers (Contained in; ss.165, 166, 167)

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