Corporate Insolvency Flashcards
What is corporate insolvency?
Companies can be apparently insolvent. If the company is an unregistered body, it can be sequestrated. If it is registered and becomes insolvent, it may be liquidated.
What is liquidation?
Liquidation (aka winding up) is the main process.
⁃ Governed by the Insolvency Act 1986.
⁃ Two types:
⁃ 1) Compulsory
⁃ 2) Voluntary
⁃ Can be either by members or creditors.
What is voluntary winding up?
This is where the shareholders of a company by special resolution agree that the company should be wound up. Can either be creditors or members voluntary winding up [nb though in both cases it is the company that decides that the company is to be wound up].
Whether it is a creditors voluntary winding up or a members voluntary winding up is dependent on whether the company is solvent. ⁃ If the directors in the 5 weeks before the company makes a decision provide a declaration of solvency (s 89 IA 86) then the voluntary winding up is a members voluntary winding up that the shareholders have control of. ⁃ If the directors in the 5 weeks before the company declare that the company is NOT solvent (s 89 IA 86) then the voluntary winding up is a creditors voluntary winding up that the shareholders have control of.
What is the date of winding up?
The date that the resolution is passed by the company
What is a compulsory winding up?
(I think that most of these principles will apply equally to voluntary winding up too - I think this was focused on because it is unlikely their will be a voluntary winding up in the exam)
What is required for a compulsory winding?
For a compulsory winding up there must be an application to court:
⁃ Court of Session
⁃ Sheriff Court in sheriffdom where company located (if authorised share capital < £120k)
Who can petition for a compulsory winding up?
⁃ The company itself ⁃ The creditors ⁃ The directors ⁃ The receiver ⁃ The administrator etc.
What are the grounds for winding up?
⁃ Under s 122 IA 86:
⁃ Company unable to pay its debts (s 123[ If absolutely insolvent or practically insolvent.])
⁃ Company has by special resolution resolved that company be wound up by court.
⁃ Company does not commence business within one year of incorporation or suspends business for a whole year.
⁃ Court is of the opinion that it is just and equitable to wind up the company. – minority shareholder protection
⁃ In Scotland, a company over which the Court of Session has jurisdiction, can be wound up by the Court if there is subsisting a floating charge over property comprised in the company’s property and undertakings and the court is satisfied that the security of the creditor entitled to the benefit is in jeopardy.[ No cases on this.]
How does the court react to winding up?
⁃ The court has discretion as to whether to grant a winding up order - it is not automatic.
⁃ The debtor company can ask for time to pay their debts or argue that they’ve actually paid their debts etc.[ I.e. defences - similar to the defences available where there is a creditor petition for sequestration.]
⁃ If the court is satisfied the court will grant a winding up order see 6 below
What is the date of winding up?
⁃ Since defences can be raised the date of winding up is the date of petition in a compulsory winding up.
What is the effect of a winding up order?
⁃ This puts an interim liquidator in place who takes assets into custody and replaces the management of the company. But the interim liquidator DOES NOT ACQUIRE OWNERSHIP OF THE ASSETS UNLIKE IN SEQUESTRATION.
⁃ The liquidator is an agent for the company and has power to deal with the property on behalf of the company - so they don’t need ownership.
⁃ The interim liquidator must call a meeting of creditors at which point there will be a permanent liquidator appointed. The creditors will typically appoint the interim liquidator.
What are the liquidator duties and functions?
⁃ The liquidator must realise the assets but they can keep trading in the interim[ It might be in the interests of the company to keep on implementing contracts because this may bring more money in than if they simply stopped trading immediately.].
⁃ Once the assets are realised they must pay off the creditors in order.
What is the order of payment on liquidation?
⁃ First: Secured creditors including those who have done diligence.
⁃ Paid on an asset specific basis based on the priority in relation to the particular assets.
⁃ Again the securities must not have been struck down under unfair preferences or equalised or struck down under s 37(4) 1985 as applied to corporate insolvency by s 185 IA 86.
⁃ Second: The liquidator expenses
⁃ Including the costs of ongoing trading because the liquidator is personally authorising these - they are expenses of the liquidation.
⁃ Third: Preferred creditors
⁃ The employees - pari passu ranking.
⁃ Fourth: Ordinary unsecured creditors
⁃ Pari passu ranking.
⁃ Fifth: Postponed creditors
⁃ The people who have had gratuitous alienations struck down.
⁃ Sixth: Shareholders
⁃ Where there is money left over, and where it is a members voluntary liquidation there will be, the shareholder will receive the balance based on the relative proportions of their shareholding.
