Business Law and Practice - Bankruptcy of LLPs and Companies

Question 1

Insolvency

Answer 1

Director of an insolvent company is only punished if they have caused the insolvency

Insolvency procedures:

Fixed asset receivership: not an insolvency proceeding but often leads to insolvency. Receiver acts for an individual creditor with a secured debt. Assets received to pay creditors are often expensive and important to business functioning.

Restructuring plan: creditors agreeing to accept less and must be approved by those owed at least 75% in value of unsecured debt.

Moratorium: halts most actions by creditors to enforce their rights. Not available to companies which are or have been in the last 12 months subject to an insolvency procedure

Administration: allows for re-organisation of company or realisation of assets (often insolvent companies but solvent companies can also go into administration). Moritorium applies which prevents creditors taking action against company to enforce companies. Administrators acts for the benefit of the company as a whole (or for its creditors). Can enter administration in two ways:

1. Court order (in court)
2. Filing documents in court (out of court)

Company Voluntary Arrangement: must be implemented under supervision of an insolvency practitioner who is known as nominee until proposals are approved. If CVA approved by necessary majority of creditors (75% or more in value) this will bind all the unsecured creditors. Does not bind secured or preferential creditors unless they agree. Supervisor can also petition for company to be wound up

Liquidation: this is final and results in company being wound up and struck of register of companies. Liquidator appointed and collects company’s assets to sell any non-cash assets for cash:

1. Voluntary; members’ voluntary liquidation & creditors’ voluntary liquidation
2. Compulsory

Question 2

Small company

Answer 2

Company with turnover of not much more than £10m and balance sheet of not much more than £5m. Can have no more than 50 employees

Question 3

Members’ voluntary liquidation

Answer 3

Members and directors control process from start to finish

Used by a solvent company where company wishes to cease trading or wind down a dormant company

Starts with statutory declaration of solvency sworn by directors - directors satisfied that company will be able to pay its debts in full

• Within 5 weeks of declaration the members must pass a special resolution that company should be wound up and appoint an insolvency practitioner to be the liquidator. Liquidator takes on the power of the directors. Appointment advertised in London Gazette and filed at Companies House

Question 4

Creditors’ voluntary liquidation

Answer 4

Directors advised that company insolvent and if they continue trading they could be personally liable for the debts through fradulent or wrongful trading

No statutory declaration of solvency

Begins with members passing a special resolution and appointing an insolvency practitioner

Company dissolved after 3 months

Question 5

Compulsory liquidation

Answer 5

Started by a creditor presenting a winding up petition to the court

Court schedules a winding up hearing

At hearing court will decide whether to make a winding up order or adjourn/dismiss the petition

Automatic presumption

Initially official receiver appointed as liquidator but creditors can appoint their own

Question 6

Statutory order

Answer 6

1. Expenses of winding up (i.e. liquidator’s fees and those of his professional advisors)
2. Preferential creditors (employees for holiday pay and wages for the last four months up to a maximum which varies with inflation and amounts owed to HMRC)
3. Floating charges
4. Unsecured creditors

• Ring fencing: if more than £10,000 is left for floating charge creditors 50% of first £10,000 and 20% of anything above £10,000 up to £600,000 is set aside for unsecured creditors

5. Members

Each class of creditor must be fully paid before the liquidator moves on to next class - if there is not enough money to pay all of the creditors in a class the money is shared amongst them according to the amount owed (amount leftover/total amount owed to creditors)