Corporate Insolvency and Restructuring: Master the Legal Framework for Insolvent Companies

Question 1

Which of the following is the overarching objective of company administration?

Accepted Answer

Facilitating the company's ongoing operations under court protection

Answer

Maximizing creditor returns

Answer

Distributing company assets to shareholders

Answer

Liquidating company assets and ceasing operations

Question 2

What is the primary responsibility of a liquidator during liquidation?

Accepted Answer

Managing and distributing company assets to creditors

Answer

Investigating company operations and reporting to creditors

Answer

Deciding whether or not to liquidate the company

Answer

Overseeing company directors and ensuring compliance with insolvency laws

Question 3

Distinguish between 'cash flow insolvency' and 'balance sheet insolvency'.

Accepted Answer

Cash flow insolvency involves an inability to meet current obligations, while balance sheet insolvency indicates negative shareholder equity.

Answer

Cash flow insolvency indicates negative shareholder equity, while balance sheet insolvency involves an inability to meet current obligations.

Answer

There is no distinction between cash flow insolvency and balance sheet insolvency.

Answer

Balance sheet insolvent companies are more likely to recover than cash flow insolvent companies.

Question 4

What is the key purpose of a pre-pack administration?

Accepted Answer

Facilitating the sale of a company's assets and business prior to administration

Answer

Enabling ongoing company operations under court protection

Answer

Distributing remaining company assets to creditors

Answer

Ending company operations and liquidating assets

Question 5

Explain the concept of the 'insolvency gap' and its potential consequences.

Accepted Answer

The insolvency gap refers to the period between a company becoming insolvent and entering formal insolvency proceedings, potentially resulting in creditor losses and director liability.

Answer

The insolvency gap is a period of financial stability for a company.

Answer

The insolvency gap only affects large companies.

Answer

There is no such thing as an insolvency gap.

Question 6

Identify the core principles that underpin the UK insolvency framework.

Accepted Answer

Fair treatment of creditors, asset value maximization, and transparency

Answer

Prioritizing secured creditors, business continuity, and minimizing job losses

Answer

Protecting shareholder interests, ensuring business survival, and rehabilitating insolvent companies

Answer

Punishing negligent directors, distributing assets to employees, and promoting entrepreneurship

Question 7

Which of the following is NOT a legal obligation of a director of an insolvent company?

Accepted Answer

Continuing to trade despite insolvency

Answer

Minimizing potential creditor losses

Answer

Filing for insolvency upon the company becoming insolvent

Answer

Acting in the best interests of creditors

Question 8

What is the primary objective of administration?

Accepted Answer

To rescue the company as a going concern

Answer

To liquidate the company's assets

Answer

To appoint a receiver to manage the company's affairs

Answer

To distribute the company's assets to creditors

Question 9

Who has the sole authority to appoint an administrative receiver?

Accepted Answer

The court

Answer

The company's board of directors

Answer

The company's creditors

Answer

The shareholders

Question 10

Which of the duties listed below is NOT carried out by a liquidator?

Accepted Answer

Managing the company's day-to-day operations

Answer

Collecting and distributing company assets

Answer

Reporting to creditors

Answer

Investigating the company's affairs

Question 11

Differentiate between a voluntary liquidation and a compulsory liquidation.

Accepted Answer

A voluntary liquidation is initiated by the company's members, while a compulsory liquidation is initiated by a creditor.

Answer

A voluntary liquidation is a more formal process than a compulsory liquidation.

Answer

Both (A) and (B) are true.

Answer

Neither (A) nor (B) is true.

Question 12

What is the main purpose of a winding-up petition?

Accepted Answer

To formally request a court order to wind up a company

Answer

To appoint a liquidator

Answer

To distribute the company's assets

Answer

To investigate the company's affairs

Question 13

Identify the type of creditor that does NOT have a secured interest in a company.

Accepted Answer

Ordinary creditor

Answer

Debenture holder

Answer

Mortgagee

Answer

Bank

Question 14

Which organization is tasked with regulating corporate insolvency in the United Kingdom?

Accepted Answer

The Insolvency Service

Answer

The Financial Conduct Authority (FCA)

Answer

The Serious Fraud Office (SFO)

Answer

Her Majesty's Revenue and Customs (HMRC)

Question 15

In the event of financial distress and insolvency, what are the legal duties and potential liabilities of company directors?

Accepted Answer

Directors must prioritize the company's interests, even if unpopular with shareholders.

Answer

Directors have no legal duties when their company becomes insolvent.

Answer

Directors are personally liable for their company's debts if it becomes insolvent.

Answer

Directors can avoid liability by resigning before insolvency.

Question 16

What is the primary purpose of administration?

Accepted Answer

To provide a temporary moratorium on creditor action, allowing the company to propose a rescue plan or restructure its debts.

Answer

To liquidate the assets of a company and distribute the proceeds to creditors.

Answer

To investigate the affairs of a company.

Question 17

Who has the authority to appoint an administrator?

Accepted Answer

The court or a qualifying floating charge holder.

Answer

The shareholders of the company.

Answer

The directors of the company.

Answer

The creditors of the company.

Question 18

What is the primary role of a liquidator?

Accepted Answer

To realize and distribute the assets of a company to its creditors in accordance with the relevant insolvency legislation and to investigate the company's financial affairs.

Answer

To investigate the affairs of a company.

Answer

To manage the affairs of a company in administration.

Question 19

Which of the following is a characteristic of a preferential payment in corporate insolvency?

Accepted Answer

A payment made to a creditor within a specified period before the commencement of liquidation or administration.

Answer

A payment made to a creditor in the ordinary course of business.

Answer

A payment made to a creditor in satisfaction of a debt.

Question 20

What is the main effect of a moratorium in corporate insolvency?

Accepted Answer

It suspends legal proceedings by creditors against the company, providing a breathing space for the company to explore restructuring options or seek a solvent exit.

Answer

It vests the company's assets in the liquidator.

Answer

It dissolves the company.

Question 21

What is the primary objective of a company voluntary arrangement (CVA)?

Accepted Answer

To allow a financially distressed company to compromise with its creditors and restructure its debts without the need for formal insolvency proceedings.

Answer

To appoint an administrator for a company.

Answer

To wind up a company.

Question 22

Under UK insolvency law, which of the following is a key duty of directors of an insolvent company?

Accepted Answer

To act in the best interests of the company's creditors in accordance with the applicable legislation and professional standards.

Answer

To continue trading as long as possible.

Answer

To maximize the value of the company's assets.

Question 23

What is the purpose of a pre-pack administration?

Accepted Answer

To facilitate the sale of a financially distressed company's business or assets to a new buyer prior to the company entering formal administration, with the goal of preserving value and minimizing disruption to the business.

Answer

To wind up a company.

Answer

To appoint an administrator for a company.