Chapter 21 Company law: restructuring and insolvency Flashcards
21.2 Reconstructions
The company law perspective – occurs where all or part of the undertaking of a company is transferred to another person but in circumstances where there is no substantial change in the persons who are ultimately interested in the undertaking.
Tax perspective – where companies restructure themselves, the steps involved in the scheme will have tax consequences. There is no single code of tax rules applicable to a scheme of reconstructions. The tax consequences of each step must be analysed.
21.3 Amalgamations
Company law perspective – is the reverse of a reconstruction. It brings together two or more undertakings in separate companies within a single company. A takeover of one company by another type of amalgamation. The receiving company may be a new one formed to receive the several undertakings of the participating companies. An amalgamation requires continuity of shareholder interest at the time when the separate businesses are amalgamated the shareholders in the receiving company must be the aggregate of the shareholders in the participating companies. There is then no substantial change in the ultimate interests in the participating undertakings.
A tax perspective – this is not a term found in tax legislation, but certain transactions that are provided for in tax legislation are company law amalgamations.
21.4 Partitions
Company law perspective – a partition occurs where a company is divided between two or more shareholders so that there is, after the transaction, no substantial identity of shareholders in relation to each part of the undertaking of the company that has been partitioned, this is the opposite of a reconstruction.
Tax perspective – the only way in which a company can be divided between groups of shareholders is by way of partition. Tax law states the term ‘demerger’ but this is a tax concept only. It is a method of partition which qualifies for special tax treatment should the conditions for that treatment apply.
21.5 Voluntary arrangements
A voluntary arrangement is a procedure that is used when a company is in financial difficulty. This is when they make arrangements with its creditors, if they are satisfied the debts will be met and the company will survive this is agreed. The creditors enter into a scheme of arrangement or they receive an agreed proportion of what they are owed. The proposal is made by the directors or the administrators if the company is in liquidation.
The proposal includes the appointment of a nominee, who arranges a meeting with the creditors to discuss the proposal. The creditors can alter the proposal but cannot change it substantially. If altered it must be agreed by the creditors and approved by the company’s shareholders, at that stage is becomes a binding contract. The nominee will supervise the conduct of the arrangement.
A voluntary arrangement may be challenged by a shareholder or creditor on the grounds they are unfairly prejudiced by the terms of the arrangement itself.
21.6 Administration
Administration is a procedure under the Insolvency Act 1986 which is aimed at companies in financial difficulties. It is designed to rescue a company by placing it under an administrator who must be a licensed insolvency practitioner. Once an administrator order is in force the company cannot be put into liquidation by its creditors without a court’s permission. An administrator has three objectives:
• Primary objective: rescue the company as a going concern
• Secondary objective: to achieve a more advantageous realisation of the company’s assets for the company’s creditors as a whole than would be achieved if the companies were wound up
• Tertiary objective: to realise the company’s property so as to make a distribution to one or more secured or preferential creditors
A court may appoint an administrator if it is satisfied that the company is unable to pay its debts. But there is also an out-of-court process for putting companies into administration available to the company, its directors and a secured creditor with a qualifying floating charge.
Once an administrator has been appointed, unsecured creditors cannot enforce their debts and secured creditors cannot enforce their charged without court permission. This gives the administrator time to present proposals to creditors and shareholders. If agreed by a majority of the creditors, the administrator manages the company to achieve the objectives of the proposals. The directors are still in office but don’t run the company as long as the administrator is in place. The administration automatically ends after 12 months although this period can extend indefinitely by the court.
21.7 Liquidation
An accounting period for a company ends immediately before its winding up starts and begins when the winding up starts. The purpose of winding up is to bring a company to an end, the company no longer exists as a separate legal person and is removed from company’s house. A licensed insolvency practitioner is appointed as a liquidator. An insolvent company may go into liquidation after administration. A solvent company can go into liquidation if the shareholders want to bring its existence to an end.
The liquidator ascertains assets and liabilities and turns assets into cash to pay creditors in a legally prescribed order. If there is a surplus the shareholders receive the rest according to their entitlement. On appointment of a liquidator, the directors cease to have any power in running the company. There are three types of liquidation:
• Compulsory liquidation by which a court orders a company to be wound up, it occurs where the company refuses to pay creditors and has applied to the court for liquidation to commence
• A member’s voluntary liquidation where a solvent company holds a meeting and the shareholders vote to wind it up
• A creditors voluntary liquidation where an insolvent company holds a meeting and the shareholders vote to wind it up. The liquidator must call a creditors’ meeting to approve the proposal for the winding up of the company.
Where a liquidator is appointed, they take over management of the company from the directors and become the beneficial owner of the company’s assets. The liquidator becomes liable for the company’s tax compliance and the payment of any corporation tax and other tax liabilities.
In the process of liquidation, a liquidator will realise its assets. A secured creditor with a fixed charge will appoint a receiver to sell the charged asset and pass any surplus to the liquidator. The liquidator realises the assets in the following order:
• Costs of getting in the assets, paying the liquidator’s remuneration and paying incidental costs of the liquidation procedure
• Preferential creditors
• Secured creditors with floating charges, subject to a ring-fenced amount (prescribed part) preserved for unsecured creditors
• Unsecured creditors
• Shareholders according to their rights under the articles. They are capital receipts who are treated as having disposed of their shares in return for the payment, for tax purposes
If the assets of the company are insufficient to pay the creditors in any class in full, the assets are divided pro rata among creditors of that class. Preferential creditors have preferred debts, which are:
• Wages owed to an employee in respect of the four months before the relevant date, up to the statutory limit per employee
• Holiday pay owed to an employee without limit
• Contributions to an occupational pension fund
• Money borrowed by the company to enable it to pay wages
The liquidator has the power to overturn certain of the company’s transaction. For example, if a transaction at an undervalue two years prior to the winding up resolution. If a shareholder received an asset from the company from less than its market value, the liquidator can reverse the transfer or collect the difference between the market value of the asset and the price actually paid for it from the purchaser or the directors of the transferor company.
