18. Liquidation and dissolution

Question 1

What is liquidation?

Answer 1

Liquidation is a process by which the company’s assets are collected and distributed to persons so entitles. The company will then be dissolved.

Question 2

When is liquidation deemed to commence?

Answer 2

The commencement of winding up will depend upon the type of winding up:

• a voluntary winding up is deemed to commence when the special resolution is passed resolving to wind the company up;
• a compulsory winding up usually commences when the winding up application is presented to the court.

Question 3

What are the two types of voluntary winding up, and what are the differences between them?

Answer 3

There are 2 types of winding up: a members voluntary winding up and creditors voluntary winding up. The difference between them is based on whether the directors make a declaration of solvency. If such declaration is made, it will be a members’ voluntary winding up. If no declaration is made, it will be a creditors voluntary winding up.

Question 4

What 5 types of persons can petition for a winding up order?

Answer 4

Under IA 1986, the following persons can make apply to court:

1. the Co
2. The D
3. Creditor
4. Contributory (a person liable to contribute to the assets of the co upon it being would up, shareholders whose shares are not fully paid
5. Liquidator
6. Designated officer in the mag court

Question 5

On what grounds can a compulsory winding up order be made?

Answer 5

S.212 CA 2006 provides that a Co may be wound up by the court if:

1. The Co resolved by special resolution that the Co be wound up by court
2. The Co has not been issued with Trading certificate (being a plc) and more than a year has expired since it was so registered
3. it is an old plc
4. The Co does not commence its business within a year from its incorporation or suspends its business for a whole year
5. the co is unable to pay its debts
6. at the time when the moratorium has come to an end, no CVA has effect in relation to the company
7. the court has opinion that it is just and equitable that the co should be wound up.

Question 6

What is the role of the liquidator?

Answer 6

S143 of IA 1986 (applicable to compulsory winding up) states that the functions of the liquidator are to “secure assets of the company are got in, realised and distributed to the Co’s creditors and if there is a surplus, to the persons entitles to it (a similar provision is in s107 re voluntary winding up)

Question 7

What does the pari passu principle state?

Answer 7

Liquidator will distribute the assets to the creditors in proportion to the size of the claim against the co (each creditor will receive and equal proportion of the debt owed to it).

Question 8

Set out the order in which the company’s assets are distributed?

Answer 8

The order of distribution of assets upon liquidation is as follows:

1. liquidation expenses
2. preferential debts
3. debts secured by floating charge (minus the prescribed part)
4. unsecured debts
5. deferred debts
6. any remaining assets are distributed to the members

Question 9

What is preferential debt?

Answer 9

Preferential debts include:

1. Contributions to occupational pension schemes
2. certain remuneration owed to employees (but only the first £800 ranked as preferential)

Question 10

How is the prescribed part calculated?

Answer 10

The liquidator must set aside a portion of of the assets subject to floating charge:
- where the Co’s net assets does not exceed the £10k in value, 50% of that property
- where the co’s net property does exceed the 10k in value, 50% of the first 10k in value, and 20% of that part of the co’s net property that exceeds 10k (IA 1986 (Prescribed Part) Order 2006.
The sum that is set aside is known as the “the prescribed part” and it cannot exceed £600k.

Question 11

Provide six examples of the type of conduct that can result in liability under ss. 206-211.

Answer 11

S 206-211 create a range of offences that impose criminal liability on certain persons (usually past and present officers of the Co) who have engaged in specified conduct:

• fraud in anticipation of the Co being wound up (s.206) (eg. falsifying book entries, disposing of property obtained on credit which has not been fully paid for)
• transactions in fraud of creditors (s207) (eg. gifting property, concealing co property);
• misconduct in the course of winding up (s208) (eg. concealing info from the liquidator);
• falsification of co’s books (s.209);
• material omissions from statements re co affairs
• false misrepresentations to creditors.

Question 12

How does fraudulent trading under IA1986 differ from fraudulent trading under CA2006?

Answer 12

The two key differences between fraudulent trading under IA 1986 and fraudulent trading under CA 2006 are:

• the IA 1986 provisions only apply where the co is in liquidation or administration, whereas s.993 of CA2006 can apply at any time;
• the IA provisions impose civil liability, whereas s.993 of the CA imposes criminal liability

Question 13

When will a person have engaged in wrongful trading?

Answer 13

S. 214 (which applies to co in liquidation) and 246ZB (which applies to co in administration) provide that ta person will have engaged in wrongful trading if three conditions are satisfied, namely:

1. The Co has gone into insolvent liquidation or insolvent administration;
2. At some point before the commencement of the winding up or before the Co entered administration, the person knew or ought to have concluded that there was no reasonable prospect that the Co would avoid going into liquidation or insolvent administration;
3. that the person was a director or shadow director of the Co at the time.

Question 14

How can a director avoid liability for wrongful trading?

Answer 14

A director will not be liable for wrongful trading if the court is satisfied that D “took every step with a view to minimising the potential loos to the company’s creditor as .. he ought to have taken”.

Question 15

What is a prohibited name?

Answer 15

• A name by which the liquidating Co was known at any time in the 12 months period prior to its liquidation
• A name which is so similar to a name falling within (a) as to suggest association with the co. (s.216)

Question 16

What are the consequences of breaching s216?

Answer 16

a PERSON WHO BREACHES S.216 commits a criminal offence and can be made personally liable for the debts and liabilities of the new company incurred while they were involved in its management in contravention of s216 (s217).

Question 17

What is a deferred debt?

Answer 17

Statute provides that certain deferred debts (eg sums due to a member by way of dividend IA 1986 s. 740 rank below the claims of unsecured creditors.

Question 18

When will a transaction be undervalue?

Answer 18

A company enters into a transaction at an undervalue if:

• the Co makes a gift to a person or otherwise enters into a transaction with a person on terms that provide for the company to receive no consideration
• the Co enters into a transaction with a person for a consideration the value of which is significantly less that the value of the consideration provided by the co (238)

Question 19

When will a person be connected with the co?

Answer 19

S.249 provides that a person is connected if:

• they are a director or shadow director of the Co;
• they are an associate of a director or shadow director
• they are an associate of he co

Question 20

What is a preference?

Answer 20

A company gives a preference to a person if:

• that person is a creditor, surety or guarantor for any of the Co’s debts or other liabilities, and
• the Co does anything or suffers anything to be done which has the effect of putting that person into a position, which in the event of insolvency. will be better than the position they would have been in if the that things had not been done (s.239)

Question 21

When will a credit transaction be extortionate?

Answer 21

A credit transaction is extortionate if:

• the terms of the transaction are or were such as to require grossly exorbitant payments to be made in respect of the provision of the credit
• the transaction otherwise grossly contravened ordinary principles of fair dealing (s244)

Question 22

When can a liquidator or administrator invalidate a floating charge?

Answer 22

A floating charge can be invalidated by a liquidator or administrator if it was made at the relevant time:

• in the case of a charge which is created in favour of a person connected with the company, within a period of 2 years ending on the date of the onset of insolvency, or
• in the case of a charge which is created in favour of any other person, within a period of 12 months ending on the date of the onset of insolvency (s.245)