SCOTLAND INSOLVENCY PRACTITIONERS ASSOCIATION CERTIFICATE OF PROFICIENCY IN INSOLVENCY. Examination Friday 4 June 2004 pm

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1 SCOTLAND INSOLVENCY PRACTITIONERS ASSOCIATION CERTIFICATE OF PROFICIENCY IN INSOLVENCY Examination Friday 4 June 2004 pm INSOLVENCY (3 HOURS) Part A: Part B: Part C: All questions to be answered All questions to be answered 2 questions to be answered The questions in Part A carry the marks as indicated All questions in Part B and Part C carry 15 marks Part A answers are to be completed on the question papers provided. For Parts B and C each question is to be answered on a separate sheet of answer paper. The examiner will take account of the quality of English and the way in which the material is presented. NOTES: Candidates should note that all questions are based on the law and best practice as at 31 December Candidates must ensure that their answers to all questions in Parts A, B and C are fastened with treasury tags which are provided. References to the Act are to the Insolvency Act 1986 as amended. References to Sections and Rules are to the Insolvency Act 1986 and the Insolvency (Scotland) Rules 1986 as amended unless otherwise stated. References to BA are to the Bankruptcy (Scotland) Act 1985 as amended. 1

2 CANDIDATE NUMBER PART A MULTIPLE CHOICE THE CORRECT ANSWER TO EACH OF THE QUESTIONS IS TO BE INDICATED BY PLACING A CROSS IN THE APPROPRIATE BOX. FOR QUESTIONS 1 27 ONLY ONE ANSWER IS REQUIRED. MARK FOR EACH OF THESE QUESTIONS. THERE IS ONE FOR QUESTIONS EACH QUESTION CARRIES THE MARKS INDICATED. 1. In a creditors voluntary liquidation, appointment date 3 January 2004, which one of the following claims ranks as preferential? a) Inland Revenue in respect of Corporation Tax ρ b) Customs and Excise in respect of VAT ρ c) Employees in respect of holiday pay ρ d) Employees in respect of redundancy ρ e) Inland Revenue in respect of PAYE/NI ρ 2. Which Statement of Insolvency Practice deals with the reporting to the Department of Trade & Industry on the conduct of directors? a) SIP 8 ρ b) SIP 4 ρ c) SIP 12 ρ d) SIP 3 ρ e) SIP 2 ρ 2

3 3. What Section or Schedule of the BA deals with the administration of Trust Deeds? a) Section 51 ρ b) Schedule 4 ρ c) Section 5 ρ d) Schedule 5 ρ e) Schedule 6 ρ 4. Which Schedule to the Act deals with the powers of an administrator? a) Schedule 1 ρ b) Schedule 2 ρ c) Schedule 3 ρ d) Schedule 4 ρ e) Schedule 6 ρ 5. For a Court liquidation in Scotland the expression registered office means the place which has longest been the company s registered office during what period immediately preceding the winding up petition? a) 28 days ρ b) 1 month ρ c) 3 months ρ d) 1 year ρ e) 6 months ρ 3

4 6. In a company s voluntary arrangement the directors deliver their proposals for a voluntary arrangement to the nominee. Within what period must the Statement of Affairs be supplied after the proposal is received? a) 7 days ρ b) 7 days or such longer period the nominee allows ρ c) 10 days ρ d) 10 days or such longer period the nominee allows ρ e) 14 days ρ 7. Within what period prior to the date of sequestration does the BA state any arrestment or poinding becomes ineffectual in creating a preference for the arrester or poinder? a) 30 days ρ b) 1 week ρ c) 1 month ρ d) 60 days ρ e) 6 months ρ 4

5 8. Which of the following statements is not true? A permanent trustee requires the consent of commissioners, creditors or Court to do any of the following:- a) carry on any business ρ b) sell any perishable goods ρ c) create a security over any part of the estate ρ d) bring legal proceedings relating to the estate of the debtor ρ e) defend legal proceeds relating to the estate of the debtor ρ 9. What is the maximum amount which would be available to unsecured creditors under the prescribed part provisions of the Act? a) 100,000 ρ b) 250,000 ρ c) 400,000 ρ d) 600,000 ρ e) 1,000,000 ρ 5

6 10. In connection with the prescribed part what is the definition of a company s net property? a) The amount of its property which would otherwise be available to preferential creditors after costs ρ b) the amount of its property which would otherwise be available to unsecured creditors after costs ρ c) the amount of its property which would otherwise be available to the holders of any floating charge created by the company ρ d) the amount of its property which would otherwise be available to fixed charge creditors after costs ρ e) the surplus available to pay shareholders after payments of costs, creditors and interest ρ 11. At what time may an offer of composition be made by or on behalf of the debtor? a) at any time ρ b) at any time to the interim trustee ρ c) within seven days of the presentation of the sequestration petition ρ d) at any time after the issue of the Act and Warrant ρ e) at the creditors meeting prior to the appointment of the Permanent Trustee ρ 12. By which section of the Act is a liquidator obliged to submit receipts and payments accounts to the appropriate authority? a) Section 189 ρ b) Section 190 ρ c) Section 191 ρ d) Section 192 ρ e) Section 193 ρ 6

7 13. Your partner was appointed as permanent trustee of Joe Bloggs, the date of sequestration being 1 April Your partner indicates he wishes to pay a first interim dividend to the ordinary creditors following the end of the first accounting period. By what time must the creditors have submitted their statements of claim to the permanent trustee in order to rank for the first interim dividend? a) eight weeks prior to the end of the accounting period ρ b) four weeks before the end of the accounting period ρ c) two weeks before the end of the accounting period ρ d) by the end of the accounting period ρ e) at any time up until the dividend is declared ρ 14. A floating charge holder may appoint an administrator. However, he may not appoint an administrator until he has given how many days written notice to any prior floating charge holder? a) 2 days ρ b) 2 business days ρ c) 5 days ρ d) 5 business days ρ e) 7 days ρ 15. An administrator sends notice to each person whom he considers it appropriate, requiring them to prepare and submit a statement of affairs. The notice is required to inform each of those persons of all the following, except one. Which one? a) the names and addresses of all the others to whom the same notice has been sent ρ b) the time within which the statement must be delivered ρ c) the penalty with non compliance with the notice ρ d) the purpose for which the statement is to be used ρ e) the application to each person to whom the notice applies of section 235 of the Act ρ 7

8 16. For which of the following functions does the interim trustee require the sanction of the Court? a) to borrow money ρ b) to require the debtor to deliver to him any money ρ c) to maintain insurance policies ρ d) to close down the debtor s business ρ e) require the debtor to deliver to him perishable goods ρ 17. Who can recall an award of sequestration? a) the Court of Session ρ b) the Accountant in Bankruptcy ρ c) the Permanent Trustee with approval of Petitioning Creditor ρ d) The Sheriff Court ρ e) The Interim Trustee if debts paid in full ρ 18. Within what period after the making of an administration order must the administrator advertise in the Edinburgh Gazette? a) within 7 days ρ b) within 10 days ρ c) within 14 days ρ d) within 30 days ρ e) forthwith ρ 8

9 19. For what period prior to the date of sequestration does section 67 of the BA state that a debtor shall be guilty of an offence if he fails to keep or preserve proper records of his business affairs? a) 5 years ρ b) 6 months ρ c) 2 years ρ d) 12 months ρ e) 3 years ρ 20. Where a company is being wound up by the court, which section of the Act states that the Court, where there is no liquidation committee, may sanction the liquidator to carry on the business of the company? a) Section 171 ρ b) Section 172 ρ c) Section 169 ρ d) Section 167 ρ e) Section 161 ρ 21. If it appears in the course of the winding up of a company that a business has been carried on with intent to defraud creditors, who may apply to the Court for an Order to make such contributions to the company s assets as the Court thinks fit under Section 213? a) A supervisor under the company s voluntary arrangement ρ b) a Liquidator of the company ρ c) an Administrator of the company ρ d) a former officer of the company ρ e) a Receiver of the company ρ 9

10 22. Under Rule 1.24 who commits an offence if he makes any false representation or commits any other fraud for the purpose of obtaining the approval of the company s members or creditors to a proposal for a voluntary arrangement? a) the auditor ρ b) a creditor of the company ρ c) a liquidator of the company ρ d) a shadow director ρ e) a contributory of the company ρ 23. When a moratorium comes in to force pending the calling of meetings to approve a company voluntary arrangement, the nominee is required to advertise the fact that a moratorium is in force. When must the nominee place this advertisement? a) forthwith ρ b) as soon as is reasonably practical ρ c) within 4 business days of the moratorium coming in to force ρ d) within 4 days of the moratorium coming in to force ρ e) within 7 days of the moratorium coming in to force ρ 24. A liquidator requires sanction to take proceedings under all the following sections of the Act, except one which is the exception? a) S213 ρ b) S214 ρ c) S234 ρ d) S242 ρ e) S243 ρ 10

11 25. Where the liquidator is appointed by the Court, he is required to summon separate meetings of the company s creditors and contributories if requested by what percentage of the company s creditors? a) 10% ρ b) 30% ρ c) 40% ρ d) 50% ρ e) 66% ρ 26. In what period must the interim trustee call a meeting of creditors known as the statutory meeting? a) 14 days after presentation of petition ρ b) 14 days after the date of the award of sequestration ρ c) 21 days after the date of the award of sequestration ρ d) 28 days after the date of the award of sequestration ρ e) 60 days after the date of the award of sequestration ρ 27. Within what period must a declaration of solvency be made to have effect? a) 7 days prior to the date of passing of the resolution for winding up ρ b) 14 days prior to the date of passing of the resolution for winding upρ c) 14 days prior to the Edinburgh Gazette notice ρ d) 21 days prior to the Edinburgh Gazette notice ρ e) 5 weeks prior to the date of passing the resolution for the winding upρ 11

12 28. Where the liquidator has issued a certificate that the creditors have been paid in full with interest, how should the liquidator proceed regarding the composition of the committee? QUESTION TOTAL 3 MARKS 12

13 29. After a trust deed has been signed, how does the trustee proceed to have it made a protected trust deed? QUESTION TOTAL 3 MARKS 13

14 30a) State whether a liquidator is allowed to recover the following costs in a liquidation he is dealing with. Where you have stated that he/she can recover such costs, state, with your reasons, whether or not the basis of the cost recovery must be disclosed and authorised by those who approve the liquidator s remuneration. i) specialist copying carried out on the office holder s firm s photocopier for a circular to creditors; ii) case advertising; iii) the office holder s office and equipment renting costs; iv) room hire for a creditors meeting at the office holder s business premises; v) reimbursement of a member of the office holder s staff in respect of an invoice which the staff member has paid for international air travel incurred in connection with a major contract debt owed to the company in liquidation; vi) document storage costs in respect of old records of the company in liquidation which are stored in the liquidator s basement. Part (a) half mark for each correct answer total 3 marks 14

15 30b) Where the liquidator wishes to recover expenses which require approval from those who authorise his/her remuneration, what will be persuasive evidence of the reasonableness of the charge he wishes to make? Part (b) 1 mark QUESTION TOTAL 4 MARKS 15

16 31a) What interest is payable on creditors claims in a winding up where it has been possible to pay all creditors a dividend of 100p in the and there are further funds in the estate available for distribution? (1.5 marks) 31b) What is the order of priority for payment of interest to the different categories of creditors? (1.5 marks) QUESTION TOTAL 3 MARKS 16

17 PART B BOTH QUESTIONS IN THIS SECTION ARE COMPULSORY 32a) A partner in your firm has recently been contacted by the directors of Tuckers Food Suppliers Limited ( the company ) who provide food products for sale in staff canteens at various local businesses. The company has made losses for each of the last two years and the results for the current year are also very poor. To ensure that the directors act in accordance with their obligations they have requested that your firm assist them with the convening of meetings of both members and creditors, to place the company into creditors voluntary liquidation. At a meeting with the directors, you have been provided with the following information: 1 the company trades from heritable premises in Dalrymple Street, Girvan. An independent valuation has been carried out and values the property at 230,000. These premises were purchased by the company some eight months ago for 150,000 with the assistance of a standard security from Carrick Bank PLC whom are currently owed 75, the company has three delivery vans. Two of these are on finance with Finance UK Limited. These were purchased some two years ago for 18,000, their book value, and are now valued at 4,000 each with total finance outstanding of 7,500. The remaining van is on rental agreement at a monthly cost of the company has debtors of 65,000 which are subject to a factoring agreement with Two Way Factors plc. The factors have advanced 65% of the debts due to the nature of the company s business. The director has also advised that 20% of the debts will be irrecoverable due to the age of the debts concerned; they are over 150 days old. 4 the company has some debtors which are not subject to the factoring agreement totalling 15,650. One of these debtors has proceeded in to liquidation owing the company 9,665 and the liquidator has confirmed that no dividend will be paid in this regard. The balance should be collected. 17

18 5 stock remaining has a cost value of 18,640. However, as the stock is perishable it is anticipated that only 20% of its cost will be realised. 6 the company has a small amount of office furniture and equipment with a book value of 7,500. Independent agents, Deals for You Limited, estimate the sum of 3,600 should be realised the company employs some 30 members of staff. All are owed one week s wages totalling 7,800. The highest paid employee earns 650 per week. The employees also have outstanding holiday pay totalling 12,000 and will be entitled to redundancy pay of 78,000 and notice pay of 31, trade and expense creditors total 195, the liabilities to H M Customs and Excise and the Inland Revenue are as follows: VAT 1 July 2003 to 30 September ,300 1 October 2003 to 31 December ,850 1 January 2004 to 4 June ,650 Inland Revenue - 1 April 2003 to 4 June , the company has 999 ordinary 1 shares all of which are paid up and held equally by the directors. In addition there are outstanding director s loans totalling 25,000. There is also a Share Premium Account shown in the last set of accounts totalling 15,000. REQUIRED (a) Prepare the Statement of Affairs to be presented to the meeting of creditors as at 4 June (9 marks) 32(b) You were appointed liquidator of Tuckers Food Supplies Limited at the meeting of creditors held on 4 June Since your appointment you have sold all of the assets of the company and are due to report to the creditors. To date you have incurred time costs of 27,500, paid agents fees of 3,500 and solicitors costs of 2,300. The liquidation committee has determined your remuneration for the period in the sum of your time costs. REQUIRED (b) Set out the information you, as liquidator, should provide to creditors in your report, in relation to the payments made and proposed to be made which are referred to above, in accordance with SIP9. (6 marks) 18

19 33(a) A partner in your firm has been appointed as interim trustee in the sequestration of a Mr Willie Brown. The petitioning creditor s law agents have advised you that they believe Mr Brown may have entered into a number of transactions that may not have been in the best interest of the general body of creditors. REQUIRED (a) Set out the steps you would take to make further enquiries both of the debtor and others in order to uncover as much information as possible about these transactions. (5 marks) 33(b) From your enquiries you establish the following facts: Mr and Mrs Brown purchased their first house jointly for 100,000 in They put down a deposit of 10,000 from their joint savings account with the balance being funded by way of a standard security of 90,000 from the Inveraray Building Society. In 1997 Mr Brown went in to business on his own account. He obtained a loan for his business of 30,000 from the Strachur Bank ( the bank ). The bank insisted on taking a standard security from Mr and Mrs Brown s house, which Mrs Brown consented to after obtaining independent legal advice. At this time, the house was valued at 200,000 and the balance outstanding to Inveraray was 80,000. Standard security payments were made from the Brown s joint resources. In June 2001 the bank borrowing (secured on the house) had increased to 50,000. Mr Brown had other liabilities to various creditors of 50,000 in addition to income tax assessments of some 100,000, although he believed these to be excessive. The house was now worth 300,000 with 70,000 remaining outstanding to Inveraray. Mrs Brown, a lady of independent means, was concerned about her husband s indebtedness and asked him to agree to the house being conveyed into her sole name, in consideration for which she would take on responsibility for the first standard security and the second standard security in favour of the bank. Mr Brown, (who had no other significant assets), agreed and the house was duly conveyed in accordance with Mrs Brown s wishes. Mr Brown continued to live, with Mrs Brown, at the house. 19

20 On 22 January 2004 the Inland Revenue presented a sequestration petition against Mr Brown and on 5 March 2004 he was sequestrated. Your principal was subsequently appointed permanent trustee. You have established that the balance outstanding on the first standard security is now 50,000, (with all payments since 2001 solely being made by Mrs Brown), and she has also reduced the indebtedness to the bank to 30,000. The house has now increased in value to 350,000. REQUIRED b) Does the permanent trustee have a possible claim against Mrs Brown and if so, what kind of claim could be pursued under what section of the BA? Who could challenge Mrs Brown and what would be the amount of such a claim? (7 marks) c) The sequestrated estate has no funds with which to pursue any claim. Assuming that your firm would not risk funding the proceedings, how might funding be arranged to enable any claim to be pursued? (3 marks) QUESTION TOTAL 15 MARKS 20

21 PART C ONLY TWO QUESTIONS IN THIS SECTION ARE REQUIRED TO BE ANSWERED 34 Thorney Construction Limited ( the company ) was incorporated on 20 November 1995 as ABC Limited and changed its name to its current trading style on 30 November The principal objects since incorporation have been general construction and maintenance works. The company has worked mainly for one large customer, Mainline plc at its two plants in Glasgow and Aberdeen. The company s turnover for the year ending 30 March 2003 was 7.5m. The company has 120 full time employees. At present the company is owed the sum of 800,000 by Mainline plc and has ongoing contracts at the two plants, which have a potential value of 1.9m. REQUIRED Several months ago, the company tendered for and won a contract with Inverness plc which is valued at 1.1m. The contract has run for three months and invoices raised total 425,000. The company operates an overdraft facility with Ye Old Ship Bank plc ( the bank ). The bank holds a qualifying floating charge which is over the whole of the company s property and dated 20 November The directors have become increasingly concerned by the financial position of Inverness plc and have recently received notification that the company has entered in to administration and have been advised to cease works on the contract. Owing to this development, the company has come under pressure from its trade suppliers and a creditor is threatening to petition the Court for the appointment of a provisional liquidator. The directors are aware that if the company ceases trading it will severely impact upon the monies due from Mainline plc and the future value of the contracts at Mainline s two plants. 34(a) briefly describe the insolvency procedures available to a limited company. Give reasons why each procedure may or not be appropriate for Thorney Construction Limited, based on the facts of the question (4 marks) 21

22 34(b) outline the purposes of an administration order assuming no winding up petition has been presented, outline the statutory requirements to be considered and steps to be taken by the company or directors in placing the company in to administration. (9 marks) 34(c) If a winding up petition has been presented against the company, explain how the position differs for the company or the directors obtaining the appointment of an administrator compared with the holder of a qualifying floating charge obtaining such an appointment. (1 mark) 34(d) If the company is in Court liquidation how would the position differ in respect of the liquidator and a qualified floating charge holder applying for the appointment of an administrator? (1 mark) QUESTION TOTAL 15 MARKS 22

23 35 Describe the definition of an unfair preference in the BA and state which section of the Act covers this type of transaction. The section states the type of transactions which do not apply to an unfair preference and these should be included in your answer together with a note of when a preference becomes completely effectual. Who may challenge such a transaction? What order may the court produce on being satisfied that a transaction is an unfair preference? May such a transaction still be challenged under common law and, if so, by whom? After a successful challenge, what must the permanent trustee do? QUESTION TOTAL 15 MARKS 23

24 36 A partner in your office has recently been contacted by Cleaning and Dusting Services Limited ( the company ), a local business cleaning company. The company has a number of small business contracts. Business has been quiet and although a small profit is being achieved, the company is experiencing cash flow problems and is unable to meet its debts as and when they fall due. The company has recently won a tender to clean a chain of 15 hotels which will ultimately alleviate the company s problems, but in the meantime it needs to address the current cash flow difficulties and has requested your advice in relation to a company voluntary arrangement. The company has been issued with a statutory demand from a supplier of cleaning products, Kill Germs Fast Limited in the sum of 30,000 and is unable to pay this. Further pressure is being received from two other trade creditors and the Inland Revenue who are all threatening to petition the Court for the winding up of the company. The company is anxious to resolve matters as quickly as possible and to secure its position so that creditors cannot continue with their threatened actions and so the new contract can be commenced. REQUIRED Draft a memo to your partner advising him of the following: (i) The reasons why a company voluntary arrangement would be beneficial to the company if it could obtain a moratorium under the provisions of the Insolvency Act 2000 and the conditions which must apply to the company to obtain such a moratorium; (4 marks) (ii) The steps to be taken to obtain a moratorium and, when obtained the effect it has on creditors and the company; (9 marks) (iii) The duties of the nominee in connection with monitoring the company s performance during the moratorium; (1 mark) (iv) What change to specific bonding requirements for the CVA procedure was made on 1 January 2003? (1 mark) QUESTION TOTAL 15 MARKS 24