18 - Liquidation and dissolution Flashcards
Must a company be insolvent to be liquidated or dissolved?
No
When is a company considered insolvent?
When it cannot pay its debts
When is a company considered to be unable to pay its debts? (4)
- Creditor of more than £750 demands payment and this is not settled within 3 weeks
- Judgement executed against company, and company fails to satisfy that judgement
- Proved to court’s satisfaction that the company is unable to pay debts as they fall due
- Court is satisfied that assets are less than liabilities
What is liquidation?
The process of resolving a company’s affairs by collecting assets and paying off debts, liabilities and entitled persons, prior to dissolution
On what must a company in liquidation state that it is being wound up?
- On every invoice, order of goods, business letter
- On all websites
What are the two types of liquidation?
- Voluntary winding up
- Winding up by the court
Purpose of voluntary winding up
Allowing company and creditors to settle affairs in a way that avoids involving the courts
2 benefits of voluntary winding up
- Faster than involuntary
- Less costly than involuntary
How does voluntary winding up commence?
Passing of special resolution
Consequences of passing special resolution for voluntary winding up
- Company ceases to carry on business
- Transfers of shares or alteration of status of members is void
Two types of voluntary winding up
- Members’
- Creditors’
What does a declaration of solvency declare?
- Directors have made full inquiry into company’s affairs; and
- Directors have formed opinion that the company will be able to pay its debts in full
What decides whether a voluntary winding up is members’ or creditors’?
Members’ if declaration of solvency made within 5 weeks of passing of special resolution
5 examples of who can apply for winding up by the court
- The company
- Directors of company
- Any creditor or creditors
- Secretary of state
- FCA
6 reasons why a company may be wound up by the court
- Company has resolved to do so
- No issue of trading certificate within 1 year for PLC
- Old public company
- Business not commenced within a year of incorp (or suspended for a year)
- Company unable to pay its debts
- Court has opinion that it is just and equitable to wind the company up
What is by far the most popular reason a company may be wound up by the court
Unable to pay its debts
What is the role of a provisional liquidator in case of winding up by court?
Keep things in status quo and preventing anybody from getting priority
What is the role (functions) of the liquidator?
Secure that the assets of the company are got in, realised and distributed to the company’s creditors, and if there is a surplus, the people’s entitled to it
Job of liquidator after they have realised company’s assets
Apply those assets ‘in satisfaction of the company’s liabilities pari passu’
What does the pari passu principle state?
Liquidator will distribute the assets to the creditors in proportion to the size of their claim against company - effectively, each debt will be paid in proportion
Order of liquidator’s distribution
- Fixed charge assets unavailable so in essence paid first *
- Moratorium debts, etc.
- Liquidation expenses
- Preferential debts (ordinary, then secondary)
- Debts secured by floating charge (minus ‘prescribed part’)
- Unsecured debts
- Deferred debts
- Members
Two types of preferential debt
Ordinary (paid first), and secondary
Two examples of preferential debts
- Contributions to occupational pension schemes
- Certain remuneration owed to employees (only first £800 is preferential)
What did parliament do after deciding to strengthen position of unsecured creditors in liquidation? S.176A
Provided that for charges created on or after 15 September 2003, the liquidator must set aside a portion of assets subject to a floating charge
How much property is set aside by the liquidator if net assets do not exceed £10k?
50%
How much property is set aside by the liquidator if net assets exceed £10k?
50% of first £10k, 20% of excess of £10k
What is the amount set aside by liquidator known as?
Prescribed part
What is the maximum amount of the prescribed part?
£800k
If prescribed part exceeds amount owed to unsecured creditors, where does the surplus go?
To satisfy the debts secured by floating charge
What is an example of a deferred debt?
Sums due to a member by way of dividend
Why might liquidator make distributions to all in order, and have some left over to give to members?
Company solvent on winding up
What is the significance of liability being placed on certain persons who engage in specified forms of malpractice before and during liquidation?
Wrongdoers have to contribute to company’s assets
Malpractice before and during liquidation - 6 offences which impose criminal liability on certain persons
- Fraud in anticipation of winding-up
- Transactions in fraud of creditors
- Misconduct in course of winding-up
- Falsification of company’s books
- Material omissions from statements relating to company’s affairs
- False representations to creditors
What was Cork Report concerned at?
Phoenix companies
The ease at which a person can allow a company to become insolvent, form a new company, and then carry on trading as before, leaving behind trail of unpaid creditors.
Could even trade assets purchased from liquidator at a discount
S.216 - In order to combat use of Phoenix companies, which 3 restrictions have been placed upon persons who were directors of insolvent companies in 12 month period leading to liquidation?
- Cannot be director of other company known by prohibited name
- Cannot take part in promotion, formation or management of company with prohibited name
- Cannot be concerned with business carried on under prohibited name, in any way
What is meant by ‘prohibited name’?
- Name by which liquidated company was known at any time in 12 month period prior to liquidation
- Name which is so similar to a name falling within the above to suggest an association
2 instances where person will be permitted to use a prohibited name
- Where that person obtains the leave of court to do so
- In circumstances prescribed by IR 2016 (insolvency rules), such as where business is acquired by NewCo under arrangements made by liquidator
Penalty for breaching S.216 (restrictions on phoenix companies)
- Committing criminal offense
- Personally liable for debt and liabilities of NewCo
When is a liquidator allowed to adjust certain pre-liquidation transactions?
If these harm the creditors’ interests or undermining the pari passu principle
4 types of transactions which can be adjusted by liquidator
- Transactions at an undervalue
- Preferences
- Extortionate credit transactions
- Invalid floating charges
How will a liquidator adjust certain transactions?
By invalidating them or requiring those engaged to contribute to company’s assets
Briefly explain what is meant by transactions at an undervalue re. liquidation adjustment
Selling off assets to person or connected person to take them out of liquidator’s hands
Briefly explain what is meant by extortionate credit transactions re. liquidation adjustment
Company has acquired credit on extortionate terms within 3 year period of entering liquidation
Briefly explain what is meant by preferences re. liquidation adjustment
A payment to a creditor prior to going into liquidation that effectively acts as a preferential distribution of assets
Briefly explain what is meant by invalid floating charges re. liquidation adjustment
Floating charges can be cancelled if made within relevant time and company could not pay debts at the time
Debt remains but becomes unsecured
What happens to remaining property at dissolution?
Is deemed bona vacantia and passes to crown
2 ways in which dissolved company can be restored
- Administrative restoration
- Application made to court to restore dissolved company
Conditions required for administrative restoration (5)
- Made by former director or member
- Made within 6 years of dissolution
- Company was carrying on business at time of dissolution
- If bona vacantia property, crown must consent to restoration
- Applicant delivers specified documentation
Which persons are empowered to make application to court to restore company? (5)
- Secretary of state
- Any former director, member or liquidator
- Any person with contractual relationship with co
- Any person with potential legal claim against co
- Any person who was a creditor at time of dissolution
How do Crown debts rank in liquidation?
As unsecured debts
How much remuneration owed to employees in liquidation is considered preferential
£800
Floating charges may be considered invalid if made within what time of onset of insolvency?
- 2 years if in favour of connected person
- 1 year if in favour of any other person
