Insolvency

Question 1

What situations may a court attempt to wind up a company?

Answer 1

Chu v Lau - Court explained different situations they may attempt to wind up a company.

1. ‘functional deadlock’ - inability of members to co-operate
2. Operating as a ‘corporate quasi partnership’
3. An irretrievable breakdown in trust and confidence

Question 2

What is insolvency?

Answer 2

Insolvency is when a company is sick. Liquidation is when a company dies and cannot occur without insolvency.

There are three main events which can occur if a company cannot pay its debts:

1. Receivership
2. Administration
3. Liquidation

Party autonomy has very limited effect regarding insolvency.

Question 3

Do companies have a right to borrow money?

Answer 3

A company’s power to borrow money can be expressed or implied.

If the company does not have this power under its constitution or the directors’ powers are limited by the constitution, as well as s39, 40 & 41.

Implied power attached to power to borrow is power to grant security over
the loan.

General Auction Estate v Smith - It was competent for the company to borrow money for the purpose of repaying the creditor and to give security for the advance.

Question 4

What is a debenture? What does the law say?

Answer 4

A debt instrument that allows a company or individual to borrow money from a lender.

Section 738, Companies Act 2006 - Debentures (to be indebted), an agreement stating the terms of how indebted the company is.

Section 739, Companies Act 2006 - Debentures may be (1) irredeemable or (2) redeemable when a contingency takes place or when a period expires.

Question 5

What does security do? What may an unsecured debenture holder do?

Answer 5

Security gives the lender rights if the company fails to repay the loan.

The unsecured debenture holder can:

1. Sue the company for the debt (action for payment) and then conduct diligence on the debtor’s property if the court order not complied with;
2. Petition the court for compulsory liquidation of the company;
3. Petition the court for an administration order.

Question 6

How may debentures be secured and what is their rank?

Answer 6

Secured debentures may be secured by:

1. Fixed Security
2. Floating Charge

Section 60, IA 1986 - Fixed security ranks ahead of a floating charge in winding up a company.

Fixed securities may also be called standard security.

Question 7

Explain floating charges.

Answer 7

Only available to incorporated companies and LLPs.

A floating charge is not fixed to an asset like a fixed security but floats over assets until it “crystallises”.

See sections 59 and 60, IA 1986.

Question 8

What triggers crystallisation?

Answer 8

Crystallisation (attachment) is triggered by:

1. Company goes into liquidation.
2. Floating charges granted before September 2003.

Question 9

What is crystallisation?

Answer 9

The process of a floating charge converting into a fixed charge when certain events occur.

Question 10

What is receivership?

Answer 10

Receivership is when a person (the receiver) has control over assets concerned when a company defaults on the terms of a debenture.

The receiver is appointed to enforce repayment of sums owed to the holder of the floating charge.

Question 11

Who may appoint a receiver?

Answer 11

Insolvency Act 1986, s51 -

(1) The holder of a floating charge over all or any part of the property may appoint a receiver of such part of the property of the company as is subject to the charge.

(2) The court, on the application of the holder of such a floating charge, may appoint a receiver of such part of the property of the company as is subject to the charge.

Insolvency Act 1986, s72A -

(1) The holder of a qualifying floating charge in respect of a company’s property may not appoint an administrative receiver of the company.

(2) The holder of a qualifying floating charge in respect of a company’s property may not appoint or apply to the court for the appointment of a receiver who on appointment would be an administrative receiver of property of the company.

Question 12

Why is a receiver be appointed?

Answer 12

Insolvency Act 1986, s52 -

(1) by the holder of a floating charge
(2) by the court

Under one or more of the following circumstances:

• The company fails to pay within 21 days of a demand for payment;
• The company is 2 months in arrears in the payment of interest;
• An order is made to wind up the company;
• A receiver is appointed by another holder of a floating charge.

Question 13

How can a receiver be terminated?

Answer 13

Upon removal or resignation.

Insolvency Act 1986, s62 -
They must give a 14-day notice to the Registrar that they are ceasing to act.

Question 14

What court has the jurisdiction to wind up a company?

Answer 14

The court of session

Question 15

What powers do receivers have?

Answer 15

In exercising his duties include (Sch. 2):

• Taking possession of any attached property and selling or disposing of it;
• Borrowing money or granting securities in the company’s name;
• Bringing or defending legal proceedings on the company’s behalf;
• Carrying on the business of the company;
• Calling up unpaid capital;
• Presenting or defending a petition for the winding up of the company.

Question 16

What duties do the receivers have?

Answer 16

Fiduciary duty

IA 1986, s57 - Act as an agent of company property

IA 1986, s65 - Notify the company and all known creditors of his appointment within 28 days

IA 1986, s64 - All documents issued in the company’s name must disclose that the company is in receivership

IA 1986, s66 - Request a statement of the company’s affairs from members verifying the assets and liabilities of the company.

IA 1986, s67 - Within 3 months, the receiver must prepare a report and send it to the Registrar and all creditors

Question 17

What must the receiver’s report contain?

Answer 17

IA 1986, s67 - The report must contain:

• details of the events leading to the receiver’s appointment,
• a summary of the statement of affairs,
• the disposal and proposed disposal of the company’s property,
• the amounts payable to the holder of the floating charge and to the preferential creditors and the sum available for other creditors.

IA 1986, s68 - This report must be laid before a meeting of the unsecured creditors who may form a committee which may request the receiver to attend a meeting with at least 7 days’ notice.

Question 18

What is corporate rescure?

What forms may corporate rescue take?

Answer 18

Corporate rescue is saving the company from liquidation

It can take the following forms:

1. Common law
2. Scheme of Arrangement under
3. Voluntary arrangement under
4. Administration orders under

Question 19

What is the scheme of arrangement?

Answer 19

Must be approved by members, creditors and the court.

Companies Act 2006, s895(2) - An arrangement includes a reorganisation of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both of these methods.

Question 20

What is a voluntary arrangement?

Answer 20

Insolvency Act 1986, s1-7 -

The opportunity for a proposal to be made to a company and its creditors for a mutually agreed arrangement to be put in place.

Question 21

Who makes the voluntary arrangement proposal?

Answer 21

Insolvency Act 1986, s1 -

• Made by directors, administrator or liquidator (winding up).
• It must provide that a qualified insolvency practitioner (the nominee) shall supervise the arrangement.

Insolvency Act 1986, s2 -

• If the nominee is not the administrator or liquidator, he must receive notice of the terms of the proposal and a statement of affairs of the company.

Question 22

What actions must a nominee take in a voluntary arrangement.

Answer 22

Insolvency Act 1986, s2 -

• Nominee must compile a report for submission to the court
• The report must state whether a meeting should be called to consider the proposal
• Certain items may not be open to approval at the meeting (course of action regarding secured creditors rights or withdrawal of debt priority) unless otherwise approved
• The proposed voluntary arrangement must be approved with or without modifications.

Insolvency Act 1986, s5(3) - The court may assist all the proceedings in the winding up or discharge the administration order or give such directions as it thinks appropriate to facilitate the implementation of the voluntary arrangement.

Question 23

How may voluntary arrangements be challenged?

Answer 23

Insolvency Act 1986, s4A & s6 - Challange on the grounds of unfair prejudice which there is a 28-day period for application to the court

Prudential Assurance Co v PRG - Claim against P that receiver was ineffective or invalid. The question was of unfair prejudice.

Held: No single test for unfair prejudice but did evaluate a number of factors. They concluded that under the IA 1986, there was unfair prejudice.

Question 24

What is the procedure of a voluntary arrangement?

Answer 24

• The nominee becomes the “supervisor” over the composition of the arrangement.
• The supervisor may apply for a winding up order or an administration order to be made.

Insolvency Act 1986, s7 -

• Any third party affected by the arrangement has the right to apply to the court if he is dissatisfied with any act, omission or decision of a supervisor.
• The court may confirm, reverse or modify the act or decision, give the supervisor directions or make any other order as it thinks fit.

Question 25

What is administration?

Answer 25

Administration is a process to save a company

Question 26

What should be the administrator's objectives?

Answer 26

Insolvency Act 1986, Sch. B1, para 3(1) - The administrator of a company must perform his functions with the objective of: - Rescuing the company - Achieving a better result for the company's creditors - Realising property in order to make a distribution to one or more secured or preferential creditors

Question 27

When may the administrator's objectives change?

Answer 27

Insolvency Act 1986, Sch. B1, para 3 - (3) The administrator must perform his functions with the objective specified unless he thinks either: - that it is not reasonably practicable to achieve that objective, or - That the objective would achieve a better result for the company's creditors as a whole.

Question 28

What are the three methods by which the process of administration may be commenced?

Answer 28

- Appointment of administrator by the court - Appointment of administrator by the holder of a floating charge - Appointment of administrator by the company or directors

Question 29

When may an administration order be made by the court?

Answer 29

An administration order is made by the court only - - Company is likely to become, unable to pay its debts, or - The court is satisfied, partially or entirely an order is likely to achieve one or more of the purposes set out in Sch. B1, para 3: - The company will survive as a going concern in whole or in part; - A better result will be achieved for the company's creditors than would be likely if the company were wound up; or - Such an order would result in the realisation of property in order to make a distribution to one or more secured or preferential creditors.

Question 30

What are the effects of an moratorium application of administrator by the court?

Answer 30

IA 1986, Sch. B1, paras 42 - Certain acts in the company’s name will be temporarily prohibited or susprnded: 1. no resolution may be passed or order made to wind up the company; 2. no steps can be made to enforce security of the company’s property or to repossess goods without leave of the court; 3. no legal proceedings may be commenced/continued; 4. no diligence can be carried out or continued against the company without leave of the court

Question 31

Explain an Appointment of Administrator by the Holder of a Floating Charge.

Answer 31

IA 1986, Sch. B1, para 14 - The holder of a qualifying floating charge may appoint an administrator providing that he has given at least 2 business days' written notice to the holders of any prior floating charges or the holders of such charges have consented in writing to the appointment. Once the administrator is appointed, a notice of appointment must be filed with the court which must include a statutory declaration.

Question 32

Explain an Appointment of Administrator by the company or its directors.

Answer 32

IA 1986, Sch. B1, para 22 - The company or its directors may appoint an administrator. IA 1986, Sch. B1, para 26 - At least 5 business days' written notice should be given to any other person entitled to appoint an administrator. The written notice and a statutory declaration must be filed with the court as soon as is reasonably practicable. The statutory notice should confirm that the company is unable or likely to become unable to pay its debts, is not in liquidation and that the appointment is made in compliance with the provisions of the Act.

Question 33

Who may be appointed as an administrator?

Answer 33

Regardless of how the process of administration is initiated, the administrator must be a qualified insolvency practitioner.

Question 34

What powers does the administrator have?

Answer 34

IA 1986, Sch. B, para 59 - The administrator has the power to do whatever is necessary for the management of the company’s affairs, business or property.

Question 35

What are the duties of an administrator?

Answer 35

The administrator has a fiduciary relationshipwith the company. Specific duties are as follows: - Must send a notice to the company and the Registrar within 14 days following his appointment. - Must also inform all known creditors of his appointment within 28 days. - Must request the company to prepare a statement of affairs. - May dispose of any property which is subject to a floating charge without the leave of the court.

Question 36

Discuss the administrator's report.

Answer 36

- Within 3 months of his appointment, the administrator must send a report detailing his proposals for achieving the purpose(s) set out in the order. - All the members are entitled to receive notice of the contents of the administrator’s report. - The administrator must present a copy of his report to a meeting of the company’s creditors at which the creditors may approve or modify the proposals.

Question 37

When will an administrator vacate office?

Answer 37

IA 1986, Sch. B, para 76 - An administrator will generally vacate his office at the end of a period of one year after his appointment when administration automatically ends. This can be extended by 1 year.

Question 38

What is liquidation?

Answer 38

Company is ending. The company’s name will be removed from the register and will be dissolved upon following the statutory procedure. A company can be wound up through compulsory or voluntary liquidation.

Question 39

What are the grounds for compulsory liquidation?

Answer 39

Section 122(1), IA 1986 - 1. The company has resolved, by special resolution, that the company be wound up; 2. The company is a public company which has not been issued with a trading certificate and more than a year has passed since it was registered; 3. The company is an old public company 4. The company has not commenced business within a year of incorporation; 5. The company is unable to pay its debts; 6. The court is of the opinion that it is just and equitable that the company be wound up 7. By the Court of Session if there is subsisting a floating charge over property comprised in the company’s property and undertaking, and the court is satisfied that the security of the creditor entitled to the benefit of the floating charge is in jeopardy.

Question 40

At what point is a company deemed unable to pay its debts?

Answer 40

Section 123, IA 1986 - A company will be deemed to be unable to pay its debts if: - a creditor is owed a debt exceeding £750 for three weeks after making a written request for payment of the debt; - execution or process on a judgment is returned unsatisfied in whole or in part; - the court is of the opinion that the company is unable to pay its debts as they fall due; - the company’s assets are worth less than its liabilities; a charge for payment on an extract decree or registered bond or protest have expired without payment. BNY Ltd [2011] - Company deemed unable to pay debts when the amount of debt exceeded the value of its assets and if it continued to use its cash or other assets for current purposes would amount to a fraud on future or contingent creditors.

Question 41

Who may raise a petition against winding up?

Answer 41

- Company - Directors - Creditor(s) - Contributories - Secretary of State However, there must be at least two members and the shares were originally allotted to them, transferred to them through a members death or held and registered for six months before winding up.

Question 42

When may voluntary liquidation occur?

Answer 42

Section 84, IA 1986 - 1. If a fixed period has been settled for the duration of the company and the fixed period has now passed or if the company is to come to an end, after a certain event, then the company may be wound up by special resolution. 2. If the company resolves by special resolution that it be wound up voluntarily. 3. If the company resolves by special resolution to be wound up on the basis that it cannot by reason of its liabilities continue its business.

Question 43

What are the two foundational steps of the voluntary liquidation procedure?

Answer 43

Section 85(1), IA 1986 - Once the required resolution is obtained, a notice of resolution must be published within 14 days in the Edinburgh Gazette. Section 86, IA 1986 - The winding up commences on the day the resolution is passed.

Question 44

What are the two procedures available under voluntary liquidation? Explain them.

Answer 44

Members’ Voluntary Winding up: - A statutory declaration of solvency is passed by a majority of the directors and delivered to Registrar. - A general meeting of the members must then be held to appoint a liquidator and fix his remuneration. -------------------------------------------- Creditors’ Voluntary Winding up: - Section 90, IA 1986 - If the directors are unable to make a declaration, the winding up proceeds as a creditors’ voluntary winding up. Section 101, IA 1986 - The directors must lay before the meeting a full statement of the company’s affairs together with a full list of creditors and of the amounts owing. The creditors may appoint a liquidation committee with a maximum of 5 persons.

Question 45

The liquidator must be a qualified insolvency practitioner. True or False.

Answer 45

True. IA 1986, s1(2)

Question 46

How may a liquidator be appointed?

Answer 46

The appointment of the liquidator will depend on the nature of the winding up: - Under a compulsory winding up by the court, an interim liquidator will be appointed until the creditors and members of the company meet to make such an appointment. - Often the interim liquidator will be retained by the members and creditors. - If the liquidation is voluntary, the appointment of the liquidator will depend on how the winding up was initiated.

Question 47

What are the liquidator's functions?

Answer 47

- Realise the company’s assets - Use assests for payment of its debts, and - Distribute any surplus among its members

Question 48

The actions of a liquidator are subject to the control of the court. True or False?

Answer 48

True. Section 167, IA 1986 - In a compulsory winding up, approximately half of the liquidator’s powers will be subject to the approval of the court. Section 165, IA 1986 - The liquidator can exercise his powers without the sanction of the court, except for the payment of creditors and the making of compromise agreements for which he will also need the approval of the creditors.

Question 49

What duty does the liquidator owe the company?

Answer 49

The liquidator owes a fiduciary duty to the company and must act for the success of the company.

Question 50

What action may be taken against parties by the liquidator?

Answer 50

Section 993, Companies Act 2006 - Criminal liability for fraudulent trading. Section 212, Insolvency Act 1986 - Misapplication of the company’s assets/breach of fiduciary duty Section 213, Insolvency Act 1986 - Fraudulent trading Section 214, Insolvency Act 1986 - Wrongful Trading Section 242-243, Insolvency Act 1986 - Gratuitous alienations and unfair preferences Section 244, Insolvency Act 1986 - Extortionate credit contracts Section 245, Insolvency Act 1986 - Avoidance of certain floating charges Section 246, Insolvency Act 1986 - Summoning relevant meetings of the members or contributories of a company considering their decisions

Question 51

What is the order of priority and distribution?

Answer 51

The relevant order of priority of floating charge holders and ordinary unsecured creditors is as follows: 1. Fixed charge secured creditors. 2. The liquidator’s (insolvency practitioner’s) fees and expenses. 3. Ordinary preferential creditors. 4. Secondary preferential creditors 5. Floating charge holders 6. Unsecured creditors 7. Shareholders Any surplus assets will be distributed to the company’s members according to their class rights. Any unclaimed assets will vest in the Crown.

Question 52

What is ring fencing?

Answer 52

Ring fencing – for unsecured creditors. The “prescribed part” s176A Insolvency Act 1986. This is essentially about where the liquidator (or administrator or receiver) shall make “a prescribed part of the company’s net property available for the satisfaction of unsecured debts”.

Question 53

Explain dissolution.

Answer 53

Once distribution is complete, the liquidator must call a meeting of the relevant parties to present the accounts of the winding up: Section 146, IA 1986 - In a compulsory winding up the creditors are entitled to attend Section 94, IA 1986 - In a members’ voluntary winding up the members are entitled to attend Section 106, IA 1986 - In a creditors’ voluntary winding up the members and creditors are entitled to attend Section 201, IA 1986 - The liquidator will be released at the meeting and his final accounts will be filed with Registrar, along with a return of the meeting. On receipt, the Registrar lodges the accounts and, within 3 months of receipt, the company will be dissolved.