Insolvency and administration: formula sheet

Key formulas

Cash flow test

Insolvent if: debts falling due cannot be paid when due

Looks at liquidity now and in the near term. Assets do not matter if they cannot be turned into cash in time.

Balance sheet test

Insolvent if: total liabilities > total assets

Looks at net position. Include contingent and prospective liabilities where the question says so.

Insolvency vs liquidation

Insolvency = state; liquidation = procedure

Insolvency may lead to liquidation, but is not the same thing.

Compulsory winding up

Petition → court hearing → winding-up order → liquidator takes control

The court starts and supervises the process. Usual petitioner is an unpaid creditor, but the company, directors or members may also petition.

Main grounds for compulsory winding up

Unable to pay debts | members resolved court winding up | just and equitable

Learn these three as a core list. Further grounds may exist in particular jurisdictions.

Voluntary winding up resolution

Usually a special resolution (at least 75% of votes cast); an ordinary resolution if the fixed term ends or a stated event occurs

Special resolution is the usual route to start a voluntary liquidation. An ordinary resolution suffices where the articles' fixed term ends or a stated event occurs.

Members' voluntary liquidation (MVL)

Solvent company + declaration of solvency + members appoint liquidator

Creditors are expected to be paid in full within the stated period.

Creditors' voluntary liquidation (CVL)

Insolvent company + no valid declaration of solvency + creditors involved in choosing liquidator

Creditors' interests come first. A creditors' meeting or decision process is held. The members may nominate a liquidator, but the creditors' choice generally prevails if they nominate someone else.

Effect on directors' powers

Compulsory: directors' powers end on the court order | Voluntary: directors' powers generally end when the liquidator is appointed, not on the resolution

In a voluntary winding up, limited continuation of powers may be allowed by the creditors (or committee) or the liquidator. The company continues to exist until dissolution but stops trading except to wind up.

Compulsory liquidation appointment

Court order → liquidator appointed under the court process

Liquidator is an officer of the court as well as the company's agent.

Creditors' voluntary liquidation appointment

Members' resolution to wind up → creditors confirm or choose liquidator

Used when the company is insolvent but the members start the process.

Members' voluntary liquidation appointment

Directors' declaration of solvency → members appoint liquidator

Only available when the company can pay its debts.

Order of distribution

Secured creditors with fixed charges → costs of liquidation → preferential creditors → floating charge holders → unsecured creditors → members

Exact detail varies by jurisdiction; know the general order. Surplus goes to members last.

Liquidator's core duties

Collect assets → investigate → report → distribute

A simple memory chain for essay or scenario answers.

Order of payment

1. Fixed charge holders (from the charged asset) → 2. Liquidation costs → 3. Preferential creditors → 4. Floating charge holders → 5. Unsecured creditors → 6. Members

This is the order used for the exam in ACCA LW. If a question gives its own order, follow the question. The fixed charge holder is paid from the proceeds of the charged asset. Steps 2 to 4 are paid from the remaining floating charge and free assets, and each class is paid in full before the next receives anything from those assets.

Fixed charge shortfall

Shortfall = Debt − Proceeds of the charged asset

A positive shortfall is claimed as an unsecured debt. If proceeds exceed the debt, the surplus goes into the general pool.

Unsecured creditors' dividend

Dividend per ₹1 owed = Funds available to unsecured creditors ÷ Total unsecured debts

Pari passu rule: all unsecured creditors receive the same proportion of what they are owed.

Pari passu share

Creditor's payment = Creditor's debt × Dividend per ₹1

Use this to find what one unsecured creditor receives.

Purposes of administration

1. Rescue the company as a going concern → 2. Better result for creditors as a whole than liquidation → 3. Realise property to make a distribution to one or more secured or preferential creditors

Perform for rescue unless the administrator thinks it is not reasonably practicable or that the second purpose would achieve a better result for creditors as a whole. The third applies only if neither of the first two is reasonably practicable, and it must not unnecessarily harm creditors as a whole.

Who can appoint an administrator

Court order (on application) | Holder of a qualifying floating charge | The company or its directors

Describe these routes in general terms. The appointee must be a licensed insolvency practitioner.

Moratorium effect

No winding-up order or winding-up resolution (apart from limited exceptions such as public interest petitions) | Administrator's consent or court permission needed to enforce security, repossess goods or bring legal proceedings

It protects the company, so the business can keep trading while the administrator acts. Consent or permission is not the test for starting a winding up.

Administrator's role

Officer of the court (whether or not appointed by the court); acts as agent of the company; owes duties to creditors as a whole

Directors remain in office but may not exercise powers that would interfere with the administrator's functions, unless the administrator consents.

Transaction at an undervalue

Gift, or consideration received is significantly less than value given, made within the relevant time while the company is insolvent (or becomes so because of it)

Defence: the company acted in good faith for the purpose of carrying on its business, with reasonable grounds to believe it would benefit.

Relevant time: undervalue

Two years ending with the onset of insolvency

The onset is the date of the administration application or filing of notice, or the start of the winding up. The company must be unable to pay its debts then, or become so as a result.

Preference

Company puts a creditor, surety or guarantor in a better position on insolvent liquidation than otherwise, influenced by a desire to do so

The desire is the key test. Ordinary commercial pressure or a mere wish to carry on business is not enough.

Relevant time: preference

Six months before onset of insolvency; two years if the person preferred is connected with the company (not merely an employee)

The company must be unable to pay its debts at the time, or become so because of the preference.

Presumed desire

If the person preferred is connected with the company, the desire to prefer is presumed

The connected person must rebut the presumption.

Avoidance of floating charges

A floating charge created within the relevant time is invalid except for new value given at the same time as or after creation (money paid, goods or services supplied, or discharge or reduction of a company debt at or after creation)

Relevant time: 12 months before onset of insolvency; two years if the chargee is connected. A charge granted for a debt owed before the charge was created is not new value. Discharging a company debt at or after creation is new value. For a non-connected chargee the company must be insolvent at the time or become so because of the transaction.

Court remedy

Court may make any order to restore the position as if the transaction had not happened

Orders include returning property, repaying money or releasing a charge. The court must protect third parties who acted in good faith and gave value.

Fraudulent trading test

Business carried on with intent to defraud creditors, or for any fraudulent purpose = dishonesty required

Civil and criminal. Any person knowingly party can be liable, not only directors.

Wrongful trading test

Insolvent liquidation + director knew or ought to have concluded no reasonable prospect of avoiding it + did not take every step to minimise creditor loss

Civil only. Applies to directors, including shadow directors. No dishonesty needed.

Wrongful trading defence

Director must prove every step was taken to minimise potential loss to creditors

The burden of proof is on the director for the defence.

Standard of care

Objective standard (reasonably diligent person in the role) + any higher actual skill the director has

A director cannot rely on being inexperienced to lower the standard.

Remedy for both

Court may order contribution to the company's assets

The money goes to the liquidator for creditors generally, not to one creditor.

Disqualification

Court order barring a person from acting as a director or managing a company for a stated period

Acting while disqualified is an offence and can bring personal liability.

Who proposes a CVA

Directors (or an administrator or liquidator) propose; a nominee reports to the court and then to creditors and members

The company stays under director control unless it is also in administration or liquidation.

Who is bound by a CVA

Approved by the required creditor majority → binds all unsecured creditors entitled to vote

Includes dissenting and non-voting creditors. Secured and preferential creditors are not bound without their consent.

Voting majority for creditors (common rule)

At least 75% by value of those voting in favour

The usual rule is a 75% value majority, with a check that it is not defeated by more than half of unconnected creditors. Check your study text for the precise test used.

Role of a receiver

Receiver = agent of the appointing secured creditor's security → realise charged assets → repay that creditor

The duty is to the appointing creditor, not to unsecured creditors generally.

Receiver vs administrator

Receiver: benefit of the secured creditor. Administrator: benefit of creditors as a whole

The most common exam comparison.

Quick revision

• A company is insolvent if it cannot pay its debts as they fall due (cash flow test) or its liabilities exceed its assets (balance sheet test).
• Liquidation ends the company; administration aims to rescue it or get a better result for creditors than liquidation.
• Winding up can be compulsory, by court order, or voluntary, started by a members' resolution. A voluntary winding up is either a members' voluntary winding up (a solvent company, with a directors' declaration of solvency) or a creditors' voluntary winding up (an insolvent company, with the creditors involved).
• A liquidator collects assets, pays creditors in the correct order, and distributes any surplus to members.
• In liquidation, holders of fixed charges are paid from the proceeds of the charged asset, outside the general order of payment.
• After fixed charge holders are paid from their charged asset, the general order is: liquidation expenses; preferential creditors; floating charge holders (after the prescribed part is set aside for unsecured creditors, where applicable); unsecured creditors, who rank equally (pari passu); then members.
• Unsecured creditors rank equally and share the prescribed part and any funds left after the earlier claims. Interest and deferred debts come next, and members are paid last, only if a surplus remains.
• An administrator acts as agent of the company and must act in the interests of creditors as a whole.
• Transactions at an undervalue and preferences may be set aside if made within the relevant period before insolvency.
• Wrongful trading needs a director who knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation, and who did not take every step to minimise potential loss to creditors.
• Fraudulent trading requires intent to defraud creditors, which makes it harder to prove than wrongful trading.
• A court can disqualify a director from managing companies for unfit conduct.

Common mistakes

• Treating insolvency and liquidation as the same thing. Fix: Remember: insolvency is a financial state; liquidation is a legal procedure that ends the company.
• Saying a company is solvent because assets exceed liabilities. Fix: Always check the cash flow test too. A company with illiquid assets can still be insolvent.
• Saying only creditors can petition for compulsory winding up. Fix: Remember that the company, directors and members can also petition. Creditors are just the usual case.
• Treating MVL and CVL as differing by who resolves to wind up. Fix: The test is solvency. A valid declaration of solvency gives an MVL. Without one, it is a CVL.
• Saying the directors keep full control after a liquidator is appointed. Fix: Remember that in liquidation the liquidator takes over and the directors' powers largely cease.
• Mixing up who appoints the liquidator in each type of winding up. Fix: Court for compulsory, creditors for creditors' voluntary, members for members' voluntary.
• Paying floating charge holders before preferential creditors. Fix: Remember that a floating charge ranks below preferential creditors by statute. Only a fixed charge holder is paid from its charged asset ahead of them.
• Forgetting the liquidation costs. Fix: Always deduct the liquidator's fees and expenses from the floating charge and free assets before paying preferential creditors. If the question sets out a different order for costs, follow the question.
• Saying the main purpose of administration is to wind up the company Fix: Remember administration aims first at rescue. Liquidation ends the company. Link administration with the word survival.
• Listing the three purposes in the wrong order or treating them as equal choices Fix: State them in order: rescue first, then a better result for creditors than liquidation, then realising property for secured or preferential creditors. The administrator can pass over rescue if it is not reasonably practicable or if the second purpose gives creditors a better result. The third applies only if neither of the first two is reasonably practicable.

Exam tips

• In scenario questions, test both cash flow and balance sheet separately and show each result.
• Read figures carefully: a long-term debt not yet due does not fail the cash flow test today.
• Use the exact words: insolvency is a state, liquidation and administration are procedures.
• For procedure questions, match the aim to the facts: rescue points to administration or a CVA; ending the business points to liquidation.
• Objective questions are all or nothing, so check every option for equivalent traps before choosing.
• Start every liquidation question by deciding: compulsory, MVL or CVL. The rest of the answer follows from that label.
• In objective items, look for the key words: court order, declaration of solvency, creditors' meeting. They give away the type.
• Learn the three core grounds for compulsory winding up as a list and be ready to match each to a short scenario.