ADMINISTRATIONS, COMPANY VOLUNTARY ARRANGEMENTS and RECEIVERSHIPS (3 hours)

Transcription

1 JOINT INSOLVENCY EXAMINATION BOARD Joint Insolvency Examination Tuesday 12 December 2006 ADMINISTRATIONS, COMPANY VOLUNTARY ARRANGEMENTS and RECEIVERSHIPS (3 hours) ANSWER ALL FOUR QUESTIONS QUESTIONS 1 AND 2 CARRY 20 MARKS EACH QUESTIONS 3 AND 4 CARRY 30 MARKS EACH SUBMIT ALL WORKINGS The Examiner will take account of the way material is presented. Candidates should answer the questions set. Marks will not be awarded for extraneous material. Note: References to the Act are to the Insolvency Act 1986 as amended including amendments by the Enterprise Act 2002 and subordinate legislation that took effect up to and including 1 April References to Sections and Rules are to Sections of the Insolvency Act 1986 and to Rules of the Insolvency Rules 1986 as amended that took effect up to and including 1 April References to Sections and Rules of other Acts, Regulations and Orders will mention the Act, Regulation or Order. JIEB/ACVAR/D06 Page 1 of /06

2 1. You were appointed Administrator of Slim and Yummy Bars Limited ( the Company ) on 30 January 2006 by the High Court of Justice on the Company s application. CJM Bank plc ( the Bank ) holds a valid fixed charge over the book debts of the Company under a confidential invoice discounting agreement ( CID ). The Company commenced operating from leasehold premises in Manchester in 2005 selling weight loss bars. The manufacture and distribution of the bars was subcontracted. In May 2005 the bars were launched with a major chain of chemists and a number of independent health food stores in the UK initially under exclusivity agreements. These proved extremely popular and sales exceeded original forecasts. In December 2005, following the initial success of the bars, several of the major supermarket chains agreed to stock them. As a result the Company increased the manufacture of the bars but unfortunately sales to the supermarkets did not reach the anticipated levels. At the date of your appointment the Bank was owed 100,000. The Bank has since levied further interest and charges of 5,000 and an administration fee of 25,000. You have legal advice which confirms that the Bank has the contractual right to levy this charge under its CID agreement with the Company. 450,000 has been received from the realisation of book debts. Of this amount, 400,000 has been paid directly by the debtors into the Company s CID account with the Bank. The Bank remitted the surplus to you on 13 September A further 50,000 of debtor realisation was paid into the Administration bank account during the first four months after your appointment. Extracts from the statement of affairs show the following: Assets Book value 000 Estimated to realise 000 Book debts Computer equipment Stock Liabilities Preferential creditors 150 CJM Bank plc 100 Unsecured non preferential creditors 5,000 Issued share capital ( 100) 0 JIEB/ACVAR/D06 Page 2 of /06

3 A number of the Company s creditors claimed retention of title over stock that had been supplied by them. Stock subject to a valid retention of title claim could not be sold by the Company without the agreement of the relevant creditor. You came to a commercial agreement with these creditors whereby the stock was released. The sale of stock resulted in sale proceeds of 300,000 received on 17 February The following retention of title claims were paid in full on the following dates: Choc Chip Limited 25, March 2006 Sugar & Spice Cooking Limited 50, February 2006 Fruity Goodness Limited 75, March 2006 Vitiman Limited 25, March 2006 You have realised the sum of 250,000 in consideration for the Company entering into an exclusive licensing agreement with J Wagstaff Limited. This money was received on 21 July ,000 was received from the sale of the computer equipment on 22 May employees were made redundant. Each employee was owed 4 weeks wages and 2 weeks holiday pay of 350 per week and have all received their statutory redundancy payments from the Redundancy Payments Office. A dividend of 100p in the pound was paid to preferential creditors on 24 November The costs of the application for the Administration totalled 7,500. This was paid from the estate on 21 March Further legal fees of 50,000 were paid on 1 September At the meeting of the creditors committee held immediately after the Schedule B1 paragraph 51 meeting held on 31 March 2006, the committee resolved that the Administrator be remunerated on the basis of time properly spent by him and his staff in attending to matters arising in the Administration and be authorised to draw disbursements including internal costs defined by SIP9 as category 2 disbursements. Following the meeting 55,000 was drawn in respect of Administrator s remuneration. The time, in hours, spent up to today s date, 12 December 2006, is detailed below: Classification of work function Partners Managers Other senior staff Assistants & support staff Administration and planning Realisation of assets Trading Creditors JIEB/ACVAR/D06 Page 3 of /06

4 Average chargeout rates by grade are as follows: Grade per hour Partner 300 Managers 200 Other senior staff 150 Assistants and support staff 100 All outstanding time has been approved by the creditors committee and is to be invoiced and paid today, 12 December In addition your tax department has an outstanding invoice for 15,000 in respect of its services in the computation and submission of the pre appointment tax return which resulted in a tax rebate of 40,000 on 22 May The cash book details payment of the following disbursements: Date Bond 1, February 2006 Statutory advertising 1,500 3 April 2006 Photocopying 1,000 3 April 2006 Photocopying August 2006 Insurance 5, February 2006 Travel April 2006 Subsistence April 2006 As all of the casework is concluded you intend to file notice with the Registrar of Companies today in order to move to Creditors Voluntary Liquidation. Requirements (a) (b) Prepare the receipts and payments account for inclusion with the final progress report, stating any assumptions made. (18 marks) List examples of work which would be classified as administration and planning. (2 marks) (20 marks) JIEB/ACVAR/D06 Page 4 of /06

5 2. You are a senior manager in the corporate recovery firm of IP & Co. Charlotte Jade, a partner in your firm has been approached by the directors of Tong Cleaners Limited ( the Company ) to act as Nominee in respect of a proposed Company Voluntary Arrangement ( CVA ). The Company operates as industrial cleaners throughout the whole of Yorkshire and Humberside and trades from leasehold premises in Hull. The management accounts provided by the directors indicate that the Company traded profitably until two years ago. A full list of creditors has been provided. These total 400,000. The directors have advised you of the following: The Company intends to propose a two year CVA; The reduction in profitability was caused by the liquidation of a major customer. The Company is owed 35,000 by that customer; VAT for the last quarter has not been paid; The directors have not drawn a salary for the last two months; Should the proposal be approved by creditors a local investor wishes to make a one-off payment into the arrangement of 250,000; The Company has sourced two new customers. The directors are confident that turnover will increase; The Company intends to make monthly voluntary contributions of 2,000 from trading income; and The Company owes its subsidiary company, Gildersome Limited, 50,000. Requirements (a) (b) Prepare a memorandum to Charlotte stating what further information should be requested from the directors to assist you in drafting the CVA proposal. (7 marks) Outline appropriate clauses to be incorporated in the proposal dealing with the procedure for (i) (ii) (iii) (iv) the submission of claims for dividend purposes; (2 marks) the admission or rejection of claims for dividend purposes; (2 marks) the declaration and payment of dividends; (5 marks) and dealing with unclaimed dividends or unpresented cheques. (2 marks) (c) State when and for what amount the case should be bonded. (2 marks) (20 marks) JIEB/ACVAR/D06 Page 5 of /06

6 3. You were appointed Administrator of Turner Food (Dudley) Limited ( the Company ) on 1 August The Company was incorporated in 1987 and traded from leasehold factory premises in Dudley, preparing and supplying handmade sandwiches to local shops. James Turner was the sole director until December 2003, when due to his ill health, his son Edward Turner and daughter-in-law Charlie Turner were appointed as fellow directors. In May 2004 the directors decided to expand the sandwich business to include the supply of chilled convenience food. In order to finance the necessary conversion of the factory premises and the purchase of additional refrigeration units and packaging machinery, a loan was obtained from ABC Bank plc ( the Bank ). The loan is secured by a floating charge registered on 10 May 2004 over the assets of the Company. All bank borrowings including the ongoing overdraft facility were personally guaranteed by James and Edward jointly and severally. The Company s books and records indicate that the bank overdraft was reduced from 15,000 to 10,000 in the last twelve months of trade. The loan instalments have been met on time and currently 7,500 is outstanding. Whilst initially it appeared that the chilled convenience food business would be successful, the Company was undercut by large national distributors. James died last month. The Company accounts indicate that he had an overdrawn director s loan account of 30,000. This had reduced from 50,000 the previous year. The auditors have provided a letter signed by James confirming that the 50,000 was outstanding last year. James s widow has instructed JMB Solicitor & Co who have advised you that his estate is insolvent. They further state that James is owed 5,000 in unpaid rent in respect of the leasehold factory premises. Edward and Charlie have advised you that since December 2003 James had taken no active part in the running of the Company. Edward is a qualified accountant and had sole responsibility for the Company s financial affairs. He has not provided a statement of affairs despite several requests. Charlie is a florist and works part time on a local market stall in addition to looking after their three small children. As no other offers were received the business and assets of the Company were sold at market value to Turner Sandwiches (Dudley) Limited of which Edward is the sole director and shareholder. The Company will be put into Creditors Voluntary Liquidation on the conclusion of the Administration. Unsecured creditors are owed 75,000 of which 30,000 is owed to the H M Revenue and Customs in respect of corporation tax and PAYE and 25,000 in respect of VAT. JIEB/ACVAR/D06 Page 6 of /06

7 Requirements (a) (b) (c) (d) Prepare a memorandum stating for each of the directors the factors that you would take into account when considering whether to submit a D2 return or a D1 report on the conduct of the Company s directors to the Disqualification Unit of the Department of Trade and Industry. (15 marks) State what supporting appendices should be attached if you submit a D1 report. (4 marks) List what further information should be obtained with respect to the overdrawn director s loan account. (3 marks) Draft a letter to Edward explaining the restriction on the re-use of names of insolvent companies detailing the steps that he needs to take to avoid contravention of Section 216 in this case. (8 marks) (30 marks) PLEASE TURN OVER JIEB/ACVAR/D06 Page 7 of /06

8 4. You were appointed Administrator of LAP Conservatories Limited ( the Company ) on 4 December 2006 by ABC Bank plc, the holder of a qualifying floating charge under the powers contained in a debenture dated 6 January The Company trades from leasehold premises on the outskirts of London as suppliers and fitters of double glazing and conservatories both to a national house building company and to local customers. The Company was formed in December 2003 as the vehicle to acquire the business and assets of Aardvark Joinery Limited from its administrative receivers. Both directors had been directors of Aardvark Joinery Limited. One of the two directors Mr Thomas, wishes to resign his directorship. He has informed you that the Company has an occupational pension scheme. You have decided to trade the business to try and achieve a sale as a going concern as there has been interest from a variety of sources. The main supplier of conservatories has notified you that their goods were supplied under a retention of title clause. The conservatories in stock are required in order to complete the order book. All of the Company s vans are leased. A director of the leasing company has spoken to the case manager and has stated that it wishes to collect the vans by the end of the week. The national house building company has indicated that it may ask for the Company to re-tender for the contract. Requirements (a) (b) List the statutory requirements to be met during the first three months after appointment, specifying, where applicable, the relevant timescales. (13 marks) Set out the effect and state the action you would consider in respect of each of the following circumstances: (i) (ii) (iii) (iv) the director wishing to resign; (4 marks) the retention of title clause over the conservatories; (5 marks) the threatened repossession of the Company vans; and (5 marks) the house building company seeking a re-tender for its contract. (3 marks) (30 marks) JIEB/ACVAR/D06 Page 8 of /06