IFA IFA Insolvency & Financial Restructuring 1 — Questions and Answers
Question 1: Which test for insolvency focuses on whether a company's total liabilities exceed its total assets?
- Cash flow test
- Balance sheet test (Correct answer)
- Liquidity ratio test
- Working capital test
Correct answer: Balance sheet test
The balance sheet test determines insolvency by comparing total liabilities against total assets; if liabilities exceed assets, the entity is technically insolvent.
Question 2: Under Chapter 7 of the US Bankruptcy Code, what happens to the debtor's non-exempt assets?
- Assets are restructured over five years
- Assets are liquidated by a trustee to pay creditors (Correct answer)
- Assets are transferred to a creditors' committee for management
- Assets are protected from creditor claims indefinitely
Correct answer: Assets are liquidated by a trustee to pay creditors
In Chapter 7 bankruptcy, a court-appointed trustee liquidates the debtor's non-exempt assets and distributes the proceeds to creditors according to statutory priority.
Question 3: What is a 'preference payment' in the context of insolvency law?
- A payment made to a creditor before insolvency that may be reversed by a trustee (Correct answer)
- A payment authorized by the bankruptcy court during proceedings
- A creditor's first claim on secured assets in liquidation
- A dividend paid to shareholders before winding up
Correct answer: A payment made to a creditor before insolvency that may be reversed by a trustee
A preference payment is a transfer made to a creditor within 90 days before bankruptcy (one year for insiders) that may be avoided by the trustee to ensure equitable distribution among all creditors.
Question 4: What is the 'automatic stay' that takes effect immediately when a bankruptcy petition is filed?
- A court order requiring the debtor to cease all business operations
- A temporary freeze on most collection actions and lawsuits against the debtor (Correct answer)
- A mandatory pause in the debtor's financial reporting requirements
- A suspension of the debtor's right to incur new obligations
Correct answer: A temporary freeze on most collection actions and lawsuits against the debtor
The automatic stay immediately halts most collection efforts, foreclosures, and creditor actions against the debtor upon filing a bankruptcy petition, providing breathing room for the proceedings.
Question 5: In a Chapter 7 liquidation, which class of creditors is paid FIRST from the estate's assets?
- General unsecured creditors
- Equity shareholders
- Secured creditors, to the extent of their collateral value (Correct answer)
- Priority unsecured creditors such as employee wages
Correct answer: Secured creditors, to the extent of their collateral value
Secured creditors are paid first from the proceeds of the specific collateral securing their claims, up to the value of that collateral, before any unsecured or equity claims.
Question 6: What does 'fraudulent conveyance' mean in insolvency proceedings?
- Concealment of assets from a court-appointed trustee during hearings
- A transfer of property made to hinder, delay, or defraud creditors (Correct answer)
- Falsification of financial statements submitted before filing for bankruptcy
- An unauthorized payment made to a director during insolvency
Correct answer: A transfer of property made to hinder, delay, or defraud creditors
Fraudulent conveyance refers to a transfer of assets made with intent to defraud creditors, or made for less than fair value when the debtor was insolvent, which a trustee can reverse.
Question 7: Which professional is typically appointed to administer a corporate liquidation under US bankruptcy law?
- A court-appointed receiver
- A licensed insolvency practitioner
- A Chapter 7 bankruptcy trustee (Correct answer)
- A CPA designated by the creditors' committee
Correct answer: A Chapter 7 bankruptcy trustee
In a US Chapter 7 corporate liquidation, a bankruptcy trustee appointed by the US Trustee Program oversees the collection, liquidation, and distribution of estate assets.
IFA IFA Insolvency & Financial Restructuring 1
Which test for insolvency focuses on whether a company's total liabilities exceed its total assets?