SQE Prep: Business Law and Practice PDF

SQE prep BUSINESS LAW AND PRACTICE ƒ The name of each member of the partnership ƒ The partnership’s business address h All that is required of a sole trader’s letterhead is: ƒ The individual’s...

SQE prep BUSINESS LAW AND PRACTICE ƒ The name of each member of the partnership ƒ The partnership’s business address h All that is required of a sole trader’s letterhead is: ƒ The individual’s business name, ƒ Their real name if it is different to the business name, and ƒ The business’s address a t be 6cb l l no 10. INSOLVENCY 2c 3 s ha 6 1. Insolvency is a term that indicates a person or business3 se antodpay their debts. d8 is runable 8 d- its options c ou ws 2. If a sole proprietor or partnership is insolvent, c l t lare: l a - a8 a h h Negotiating with a creditor for99less to or 9 time tot pay riga reduction in what must be paid 4 s y e op for lack of consideration) (though such agreements might 3 9- notntbe er binding yc h An Individual Voluntary 8 7 Arrangement i b d d (‘IVA’) in which a number of creditors agree a-amount a nmoneye to accept a reduced 4 0 BR le, tect and payment at a different time 5 I of h Bankruptcy a 0e AR s, tit pro e. r : 6 1 B ight are rpos 3. A debtor e 2 draft n tifi may practitioner. not r an IVA on their own but rather must instruct an insolvency 20 all hich y pu r Ide ht ©wns of w r an e hrigThe insolvency o o ll fpractitioner will: Us opy BRI ls, a old C AR ƒ riaHave r s debtor prepare a statement of affairs the B ate ed o m ƒar Apply to the bankruptcy court for an interim order which prevents creditors sh from filing a bankruptcy petition ƒ Prepare a report advising whether there is a realistic chance a proposal can be crafted that might be accepted and calling a meeting of creditors and, if so, call the meeting h Approval of an IVA requires approval of the creditors owed at least 75% of the unsecured debt owed by the debtor ƒ If approved, the IVA becomes binding on all ordinary unsecured creditors ƒ Preferential creditors (that is, employees owed holiday pay or wages due in the last four months) and secured creditors aren’t bound unless they agree to the proposal 165 BUSINESS LAW AND PRACTICE SQE prep ƒ The insolvency practitioner will supervise and implement the plan h If the debtor fails to comply with the IVA or provided false or misleading informa- tion, the supervisor or any creditor who is a party to the IVA may petition for the debtor’s bankruptcy 4. Bankruptcy is a judicial process in which the assets of the bankrupt debtor are passed to a third party, the trustee in bankruptcy, who liquidates the assets and uses the money from the liquidation to pay off as many of the debtor’s debts as possible. h e Once an application for bankruptcy is made, the debtor’s creditors ba must stopochas- tb ing after the debtor, and the debtor will be discharged from after one year 36c most of theiraldebts ln c h 8 62 e d s ƒ The debtor can apply online for a bankruptcy 3d order s n - 8 our s a ƒ One or more of the debtor’s unsecured 8 cdcreditors all cowed t lawat least £5,000 can submit a petition for a bankruptcy-order a 9 9 t to righ 9 s pyis insolvent (unable to pay their 9 The application must prove 9 -4 thattthe e redebtor ciso payable immediately and the debts) by showing8either 3 that ithe n debt y b or the debt is payable in the future debtor does not a -7have funds n d to pay, e d and the debtor 4 05 Bhas RI no l e , a tect prospect of being able to pay reasonable e R ti ro. t a0 BAowes 9 If the6debtor ts, areliquidated p se debt for £5,000 or more, the creditor may ie r make : a1statutory 2 r i g h a urpofor payment; if the debt is not paid within three h demand f 20 orllthe idebtor e nti weeks, © s a h c ny pdoes not apply to set aside the statutory demand r Id ht withinw n three o f w weeks, r a the debtor will be deemed insolvent e r i g o l o l d f owes a future liability of more than £5,000, the creditor Us opy B9RI Iflsthe, adebtor l C AR riamayorserve so a statutory demand for proof of ability to pay and if the debtor B ate edoesn’t d show a reasonable prospect of being able to pay the debt when m ar it falls due or apply to court to set aside the statutory demand, the debtor sh will be deemed insolvent 9 If the debtor owes a judgment debt of more than £5,000, the creditor can seek to execute on the judgment; if the attempt fails, the debtor will be deemed insolvent ƒ The supervisor of an IVA can petition for a bankruptcy order if the debtor is in default of the IVA h If the bankruptcy order is made, then an official receiver is appointed who will act as the trustee in bankruptcy unless the creditors seek to appoint their own nominee h Most of the debtor’s property will automatically vest in the trustee, but the bank- rupt is entitled to keep: 166  SQE prep BUSINESS LAW AND PRACTICE ƒ Things needed for day-to-day living ƒ Tools required for their job ƒ Their salary h During bankruptcy proceedings, the bankrupt may not: ƒ Apply for credit over a prescribed amount ƒ Act as a company director a t be ƒ Be a partner 6cb l l no 3 ha ƒ Trade under another name 6 2c s h The trustee pays creditors in the following 3d8 order: r se and d- 8 c ou ws c l t la l ƒ Costs of the bankruptcy a8 a 9 9 - t to righ ƒ Preferential debts, including 9 employee -4PAYE, and r py for four months and money es wages o owed to HMRC for VAT, 9 e National c Insurance contributions 8 3 i nt by 7 nd ted ƒ Ordinary unsecured 5 a- I creditors a 0 BR le, tec 4creditors ƒ Postponed a 0 AR s, tit(spouse e p ro eor. civil partner) h A bankruptr 6 B : 1whoighas t re rpthe h caused a osbankruptcy by their own dishonesty, negligence, e fi 202 ll r isiconsidered ortirecklessness n a h ch y pu ‘culpable’ and can be subject to a court bankruptcy r Ideorder h t ©forw nup s tof w15 years o r an e rig I obankrupt fo all ld person Us ophy BIfRthe l s , o is a partner in a general partnership: C AR ƒ riaIf the s r partnership is at will, it will be dissolved on the bankruptcy of the partner B ate eand d o the partner’s share of assets will be turned over to the trustee m ar shƒ If the partnership is for a specified term or undertaking, it will continue and usually the remaining partners will purchase the insolvent partner’s interest h If the bankrupt is a member of an LLP, they can’t participate in management of the LLP h If a general partnership itself is insolvent, the partnership is wound up using the same processes as for bankruptcy h If an LLP is insolvent, it is wound up in the same way as a company 5. The insolvency options for a company or LLP are: 167 BUSINESS LAW AND PRACTICE SQE prep h Receivership: If a creditor has taken a charge over a company’s fixed assets, the agreement will usually provide that if the company defaults, the creditor can ap- point a receiver to take the charged asset and sell it to pay off the obligation ƒ No proof of insolvency is needed ƒ The receiver’s duties are owed to the secured creditor and not to any other potential creditor h A restructuring plan, which allows companies to restructure their debts with the e sanction of the court if approved by those owed at least 75%b tb ain value of the unse- o cured debt 6c 3 ll n 2c ha s (an inde- h Administration, which is a procedure which enables 86 the administrator e d 3d and/or pendent insolvency practitioner) to run, reorganise, n rssells the a company as a going concern -8 ou d c w a 8c all t la ƒ The administrator acts in the interests 9 9 - of the t ri gh as a whole tocreditors ƒ A company can go into administration -4 9 r es opya formal court hearing or by the through 9 3 papers with e nt the c y court company by filing certain 7 8 i b 5 a- I a nd ted ƒ The court can make e the 40better B i le, for R torder o tec if the court is satisfied that the order is like- only ly to achieve 6 a0 BAR ts, e pr sthe a result t e. company’s creditors than liquidation h A company r: voluntary a r rpo (‘CVA’), similar to an IVA, which seeks to res- 1 righarrangement ie 2 cue n the 20 all hich y pu tif company deThe ƒI ig h t ©process an by the directors of the company who make a written ns ofiswstarted r r e r I o ato w o ll d fcreditors Us opy Bproposal R ls, othe l and nominate an insolvency practitioner to supervise the C AR ria or CVA s B ƒ atAs e d ewith an IVA, 75% or more in value of the unsecured creditors must agree to m the h ar CVA in order for it to be implemented s h A moratorium, which can be sought whilst the company seeks to implement any of the above devices ƒ The moratorium is a court order which halts most actions by creditors to en- force their rights ƒ The directors of the company will appoint an insolvency practitioner as a ‘monitor’ to oversee the company’s affairs and ensure that it is likely that the moratorium will result in a rescue of the company as a going concern ƒ The directors remain in charge of running the business 168  SQE prep BUSINESS LAW AND PRACTICE h Liquidation, which causes the company’s assets to be sold to pay off debts. The company will then cease to exist 6. A voluntary liquidation can be started by the members or the directors of a company. h In a Members’ Voluntary Liquidation (‘MVL’), the members and directors control the process from start to finish ƒ It’s available only if the company is solvent but the individuals involved in run- ning the company wish to wind it up h A Creditors’ Voluntary Liquidation (‘CVL’) is started by the t tak- be ba directors butnothen en over by the creditors 6c 3 ll 2c ha s the company is ƒ It’s usually commenced because the directors86 are advised e dthat insolvent and if they continue trading, 3 d could be they n rs personally liable for the - debts of the company through fraudulent 8 ou or wrongful sa d c w trading a 8c all t la ƒ The directors resolve that the 9 - ri gh and should be placed into 9 companyt tois insolvent liquidation, and the members 9 -4 pass r o py resolution to start the liquidation ea sspecial 9 e c 7. A creditor who can show that 3 78 the company d int bisyunable to pay its debts can petition for - the company to be wound 0 5aupR an ctedliquidation). I(compulsory , h A liquidator0ise appointed 4 B itltoe collect R t o te. assets and sell them to pay off the company’s A , p se r debts : 6a B hts re ie r 2 1 r i g h a urpo f 20 paid e nti © are h Debts s all inhthe n y p ic following order: d t w e wncompany r I rigƒ h Ifothe l l of for aapplied for liquidation within 12 weeks of a moratorium, certain Us opy BRIoflsthe , a moratorium o ld debts and pre-moratorium debts C AR ƒ riaExpenses r s of winding up B ate ed o m ƒar Preferential debts, such as employee wages and holiday pay due in the last sh four months ƒ Debts secured by floating charges in order of priority ƒ Unsecured debts ƒ Shareholders h If there is not enough money to fully satisfy all the creditors at one level, then the debts rank and abate equally 8. A preference arises when a debtor does something that intentionally puts a creditor in a better position on liquidation than they otherwise would have been. 169 BUSINESS LAW AND PRACTICE SQE prep h The trustee in bankruptcy has the power to claw back a preference paid within six months of the onset of insolvency (two years if the preferred creditor is a con- nected person) ƒ For a company compulsory liquidation, the onset of insolvency is the date of presentation of the petition ƒ For a CVL, it is the date the company enters liquidation ƒ For administration, it is the date the company files a Notice of Intention to Appoint an Administrator or the date when it enters administration, whichever is earliestbe ba ot ƒ 6c petition For an individual, it is the presentation of the bankruptcy 3 al l n 9. A transaction at undervalue is a transaction in which 8 6 property 2c that would sh d s e n d have otherwise been part of the bankruptcy estate/assets of 3 the company r swas a given as a d ou years -8 withinctwo gift or was sold for significantly less than market value w of a company’s c a a8 insolvency or five years of an individual’s bankruptcy. all ht l 9 9- t to yrig h Such a transaction can be set aside 4 9 s re cop 3 9- te h If the debtor is a company, - 78it must nhave d in been d by insolvent at the time of the transac- tion or become so as5aaresult e 4 0 BRI le, a tect 0e AR s, titof pinsolvency ƒ There is a presumption a ro e. if the transaction is to a connected person: 6 r 1 B i g h are rpos t e i 02 llthere r u h For an n 2 a hicish no tifindividual, y prequirement to prove the debtor was insolvent at the d e timet © the I h wn of r a s transaction w n was made if it was made within the two years before the r e r g petition i o l l f o Us opy BRI ls, a old C Aƒ R Insolvency r ia or s is presumed if the transaction was made at any time in favour of a B atclose e drelative or business associate m re h For h aacompany, there is a defence if the transaction was entered into in good faith, s for the purpose of carrying on the business, and if when it was made there were reasonable grounds for believing it would benefit the company h The grant of a security interest is not a transaction at undervalue 10. Fraudulent trading arises when a director (or any other person who knowingly participates) carries on business of the company with the intent to defraud creditors. h If fraudulent trading is established, the directors may be liable to make such per- sonal contribution to the company’s assets as the court orders h It’s also a criminal offence 170