Lecture 6: Liquidation Flashcards
When is liquidation used?
• Used where it is not possible to rescue the company or sell the business
What is liquidation?
- The end of the road for the company
- Company is dissolved and removed from the companies register
- Companies may enter liquidation following receivership, administration or CVA or enter directly
- A form of pre-pack - elements of business are transferred to new owners.
What is creditors’ Voluntary Liquidation (CVL) and how does it work?
Triggered by company members (shareholders not creditors)
- A special resolution is passed in favour of a voluntary liquidation
- Need 75% of shareholders to agree to CVL
- 75% of shareholders need to realise that the company is insolvent and needs to be wound up.
A creditors meeting is called within 14 days.
Creditors nominate a liquidator.
Creditors may form a liquidation committee.
Court supervision of CVL is light.
What are the powers of a liquidator?
- Pay any class of creditor
- To compromise with creditors
- Realise property
- Bring or defend legal actions
- To carry on the business if necessary for beneficial winding up.
- Can apply for an order that directors or former directors make a contribution to the assets.
• The liquidator can only be removed by the court or the creditors. Liquidators (IP) want to be paid, there are no or minimal assets to be realised (may be an issue).
What are the duties of the liquidator?
- Primary duty is to realise assets and to apply property in satisfaction of the company’s liabilities.
- A duty to contact known creditors.
- Must pay dividends when it is possible.
- Liquidator calls a final meeting of members and creditors. (accounts sent to companies registry, company is dissolved three months from the registration of the return)
- Liquidator has to ensure that it has all creditor claims in.
What is Members’ Voluntary Liquidation?
- Used for solvent companies.
When is members voluntary liquidation used?
- May be useful where the group is being restructured.
- The company was set up for a fixed period of time.
- Or where owner managed business and owner is seeking to retire.
- Directors must sign a declaration of solvency (company can pay its debts within 12 months.
What is a compulsory liquidation?
Winding up by the court.
Petition to court looking to wind up the company.
Petition may be presented by creditors, the company, the directors or the shareholders.
Liquidation is being forced on the company.
Courts may or may not grant the petition - counter-claim or issue with the claim.
When granted, no legal actions may be taken without leave of the court, directors’ powers come to an end and liquidator takes over
What are the primary grounds for a winding up petition for a compulsory liquidation?
Primary grounds for a winding up petition are:
- The company is unable to pay its debts, in turn meaning
- a creditor is owed more than £750
- Unpaid after 3 weeks.
Or proved to the court that the company cannot pay debts as they fall due.
Or value of assets
What is there a risk of occuring between the serving of the petition and the court hearing?
There is a risk of asset depletion.
May appoint an interim liquidator (if risk is substantial) - to safeguard assets.
What is a public interest liquidation?
Secretary of State can petition court to wind up a company where it would be in the public interest.
• The court will grant petition where it thinks it is just and equitable to do so.
- Secretary of state arguably concerned with commercial morality (taking advantage of people, making false claims, committing fraud)
- Companies do not need to be insolvent for petitions to be made
• Courts will take into account broad range of interests and also consider ‘blameworthiness’. Look to see if directors acted in good faith.
Describe the case of Carillion
Public interest liquidation.
• Entered compulsory liquidation at the start of 2018
• The Official Receiver was appointed as liquidator
• [in England and Wales, the Official Receiver is appointed as liquidator in compulsory liquidations.
• The Official Receiver is a civil servant in the Insolvency Service and an officer of the court].
• PwC also appointed as “Special Managers”
- The largest ever compulsory liquidation in the UK.
- Second largest construction company in the UK and one of the largest suppliers of public sector services.
• There has been some media coverage and parliamentary discussions of the level of fees paid to PwC and conflicts of interest (and the other Big 4 firms for advisory and audit work).
○ Need to think about fees relative to complexity of the case.
Who is the liquidator in a public interest liquidation? (E+W and Scotland)
E+W - in England and Wales, the Official Receiver is appointed as liquidator in compulsory liquidations.
The Official Receiver is a civil servant in the Insolvency Service and an officer of the court
In Scotland IPs are from the private sector in these cases.
Why were Carillion placed into compulsory liquidation?
- Manipulation of accounts – painting a “rosy” picture. Made optimistic assessments of revenues, in defiance of internal controls.
- Owed £2 billion to its 30,000 suppliers.
- KPMG – auditor for 19 years (conflict of interest), too close a relationship.
- Lack of pension distributions.
- Speculation that administration was not chosen because administrators need paid. Paid out of asset realisations, if there are no realisations, the administrators will get nothing. No firms willing to be an administrator (speculation).
- Offical receiver and PwC are paid by the government.
What safeguards can be put in place to mitigate conflicts of interest?
- Comply with regulations and code of ethics.
- Self-regulation
- PwC is allowed to work for different clients in relation to the same situation provided appropriate safeguards are in place.
- Have different people working on the liquidation than who were previously involved with the company.
- Or ensure a long enough period of time has passed since they have worked with the company.
