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Company Law > Liquidation > Flashcards

Liquidation Flashcards

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1
Q

What is liquidation?

A

Liquidation is the process by which a company’s business is wound up and its assets transferred to creditors and (if there is a surplus of assets over liabilities) to its members

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2
Q

Does a company need to be insolvent to be liquidated?

A

No, nor is it uncommon

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3
Q

What is pari passu?

A

Creditors of the same rank

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4
Q

Where is the ranking of creditors claims found?

A

Set out in the IA 1986, the IR 2016 and by general law.

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5
Q

Two types of liquidation?

A

Voluntary - by members or by creditors

Compulsary

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6
Q

Following liquidation, how is a company finished?

A

Dissolution

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7
Q

When does dissolution happen in compulsory liquidation?

A

Three months after notice by the liquidator to the Registrar of Companies that the winding up of the company has been completed.

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8
Q

When does dissolution happen in voluntary liquidation?

A

Three months from the filing by the liquidator of the final accounts and return

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9
Q

What type of procedure is compulsory liquidation?

A

Court-based

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10
Q

How is CL initiated?

A

Applicant presents a winding up petition to the court under which the applicant requests the court to make a winding up order against the company on a number of statutory grounds.

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11
Q

Who does a winding up order operate in favour of?

A

In favour of all the creditors and contributories (members and some former members) of the company

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12
Q

Who can apply for a winding up order?

A

1) A creditor
2) The company (acting by the shareholders; this would happen where there are insufficient assets in the company to fund a voluntary liquidation)
3) The directors (by board resolution); again, only where there are insufficient assets to fund a voluntary liquidation
4) An administrator
5) An administrative receiver
6) The supervisor of a CVA
7) The Secretary of State for Business, Energy & Industrial Strategy (on public policy grounds).

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13
Q

How many grounds are there for a Compulsory Winding-up Petition?

A

Seven

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14
Q

Where are the grounds for a compulsory winding up petition found?

A

s 122(1) IA 1986

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15
Q

s 122(1) IA 1986?

A

Seven grounds for a compulsory winding up petition

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16
Q

What are the seven grounds for a compulsory winding up petition>

A

1) Company unable to pay debts
2) Just and equitable to be wound up
3) Public company and has not issued the requisite share capital and more than a year has passed since its registration as a public company
4) Old public company within the meaning of the Consequential Provisions Act
5) Does not commence its business within a year from its incorporation or suspends its business for a whole year
6) Company has passed a special resolution
7) Moratorium for the company under s 1A IA 1986 which has come to an end and no voluntary arrangement has been approved in relation to the company

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17
Q

Which is the most common ground for winding up petitions?

A

Inability to pay debts - s123 IA 1986

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18
Q

What is the evidence of being unable to pay debts under s123 IA 1986?

A

1) Failure by the company to comply with a creditor’s statutory demand
2) The creditor sues the company, obtains judgment and fails in an attempt to execute the judgment debt.
3) Proof to the satisfaction of the court that the company is unable to pay its debts as they fall due (the “cash-flow test”).
4) Proof to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account contingent and prospective liabilities(the “balance sheet test”)

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19
Q

What is a creditors statutory demand?

A

A statutory demand is a written demand in a prescribed form requiring the company to pay a specific debt.
Can only be used if the debt exceeds £750 and is not disputed on substantial grounds.
21 days to pay, failing which the creditor has the right to petition the court to wind up the company.

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20
Q

What is the cash-flow test?

A

Proof to the satisfaction of the court that the company is unable to pay its debts as they fall due

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21
Q

What is the balance-sheet test?

A

Proof to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities

22
Q

Case for the balance sheet test?

A

Re Cheyne Finance plc [2008]

23
Q

BNY Corporate Trustee Services Ltd v Eurosail-UK 2007 [2013]

A

In this case the Supreme Court considered the meaning of “unable to pay its debts” and particularly the distinction between the cash flow and balance sheet tests

24
Q

BNY Corporate Trustee Services Ltd v Eurosail-UK 2007 [2013]

What did the court say about the cash-flow and balance sheet tests?

A
  • The cash-flow test must include a consideration of debts falling due in the reasonably near future. What this means will depend on all the circumstances, but especially on the nature of the company’s business.
  • Once the court has moved beyond the reasonably near future, then the balance sheet test becomes the only sensible test.
  • The burden of proof must be on the party asserting balance-sheet insolvency
25
Q

How to prevent an insolvent company from transferring its assets to third parties at the expense of its creditors?

A

s127 IA 1986

26
Q

What is s127 IA 1986

A

To prevent an insolvent company from transferring its assets to third parties at the expense of its creditors, under s 127 IA 1986 certain dispositions of a company’s property, transfers of its shares and changes to its members will be void if made after the start of the winding up.

27
Q

What happens once a compulsory winding up order is made?

A
  • Automatic stay will be granted on commencing or continuing with proceedings against the company
  • All employees will be automatically dismissed
  • Directors lose their powers and they are automatically dismissed from office.
28
Q

Section on voluntary winding up?

A

Section 84(1) IA 1986

29
Q

Section 84(1) IA 1986

A

Three circumstances for voluntary winding up

30
Q

Three circumstances for voluntary winding up under s84(1)?

A

1) Where the company’s purpose according to the articles has expired and resolution of the shareholders (Rare)
2) Where the company resolves by special resolution to wind up the company. The company must be solvent. (MVL)
3) Where the company resolves that it is advisable to wind up the company due to its inability to carry on its business. Here the company is insolvent.(CVL)

31
Q

What does MVL stand for?

A

Members voluntary winding up

32
Q

What does CVL stand for?

A

Creditors voluntary winding up

33
Q

What is the requirements for MVL?

A
  • Directors must swear a declaration of solvency
  • Members pass a special resolution to place the company in MVL
  • Ordinary resolution to appoint a liquidator
  • Winding up starts when the special resolution passes -s84(1)
34
Q

What is a declaration of solvency?

A

Document stating:

  • they have made a full enquiry into the company’s affairs and they have formed the opinion that the company will be able to pay its creditors in full, together with interest at the official rate, within a period not exceeding 12 months from the commencement of the winding up
  • s 89(1) IA 1986
  • must also contain a statement of the company’s assets and liabilities as at the latest practicable date
35
Q

S89(1) IA 1986?

A

Declaration of solvency requirement

36
Q

Is it possible for a director to lie in a declaration of solvency?

A

No - director who does not have reasonable grounds for their opinion is liable to a fine or imprisonment

  • s 89(4) IA 1986
  • If the debts are not actually paid in full within the specified period it will be presumed that the director did not have reasonable grounds for their opinion.
37
Q

s89(4) IA 1986?

A

Any director making a declaration of solvency who does not have reasonable grounds for their opinion is liable to a fine or imprisonment
If the debts are not actually paid in full within the specified period it will be presumed that the director did not have reasonable grounds for their opinion.

38
Q

What is liquidator disagrees with directors declaration?

A

They must change the members’ winding up into a creditors’ winding up by going through the procedural conditions in s 95.

39
Q

What is a CVL?

A

Form of insolvent liquidation commenced by resolution of the shareholders, but under the effective control of the creditors who can choose the liquidator. Where a directors’ declaration of solvency has not been made, the liquidation will be a creditors’ voluntary liquidation

40
Q

Procedure for CVL?

A
  • SHs to pass a special resolution to place the company into a CVL.
  • SHs may also nominate a person to be liquidator, but in any event within 14 days of the special resolution being passed the directors of the company must ask the company’s creditors to either approve the nominated liquidator or put forward their own choice of liquidator.
  • Where the creditors’ choice of liquidator differs from that of the SHs, the creditors’ nomination will take precedence.
  • The directors must also draw up a statement of the company’s affairs (setting out the company’s assets and liabilities) and send it to the company’s creditors.
41
Q

Role of the liquidator?

A

Appointment of a liquidator terminates the management powers of the company’s directors then transferred to the liquidator together with their fiduciary duties,

42
Q

What are the liquidator’s fiduciary duties?

A

Liquidators must act in good faith, avoid conflicts of interest and not make a secret profit

43
Q

Case for liquidators taking both director’s managerial powers and fiduciary duties?

A

Silkstone and Haigh Moore Coal Co v Edey [1900]

44
Q

Silkstone and Haigh Moore Coal Co v Edey [1900]?

A

Case for liquidators taking both director’s managerial powers and fiduciary duties?

45
Q

Who can be a liquidator?

A

A qualified Insolvency Practitioner (s 230 IA 1986) or the Official Receiver (appointed by the court in the short term) and acts as an officer of the court.

46
Q

Principle functions of a liquidator?

A
  • To secure and realise the assets of the company then distribute to the company’s creditors (s 143 IA 1986)
  • To take into their custody or under their control all the property of the company (s 144 IA 1986).
47
Q

Where are the liquidators powers to manage the company found?

A

Part I - III, Schedule 4 IA 1986

48
Q

What powers to liquidators have to avoid transactions?

A

Duty to preserve the company’s property and to maximise the value of the company’s assets available for distribution. They are empowered to avoid certain antecedent transactions in order to maximise the amount of assets available for distribution to creditors

49
Q

What transactions can liquidators avoid?

A
  • Disclaim onerous property (s178 IA 1986);
  • Apply to court to set aside a transaction at an undervalue (s238 IA 1986);
  • Apply to court to set aside a preference (s 239 IA 1986);
  • Apply to court to set aside/vary the terms of an extortionate credit transaction (s 244 IA 1986);
  • Claim that a floating charge created for no new, or inadequate, consideration is invalid (s 245 IA 1986);
  • Apply to court to set aside a transaction that will defraud creditors (s 423 IA 1986).
50
Q

What is the statutory order of priority?

A

1) Liquidator’s fees and expenses of preserving and realising assets subject to fixed charges.
2) Amount due to fixed charge creditor out of the proceeds of selling assets subject to the fixed charge.
3) Other costs and expenses of the liquidation.
4) Preferential creditors (the first tier and then the secondary tier).
5) Creation of the prescribed part fund (if available) for unsecured creditors.
6) Amount due to creditors with floating charges.
7) Unsecured/trade creditors (including payment of the prescribed part).
8) Interest owed to unsecured creditors.
9) Shareholders.

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