Liquidation & Dissolution

Question 1

When is a company insolvent? (3)

Answer 1

• A company is insolvent when it cannot pay its debts
• S.123(1) IA1986 = a company is unable to pay its debts if:
1. A creditor who is owed more than £750 leaves a statutory demand requiring the company to pay and company has not paid within 3 weeks
2. A judgement has been executed against the company in the UK, and the company fails to satisfy that judgment; or
3. It is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due

S.123(2) IA1986 = company is deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its contingent and prospective liabilities

Question 2

What is liquidation and what are the 2 types?

Answer 2

• Liquidation or winding up = process by which the company’s assets are collected and distributed to persons so entitled. The company will then be dissolved.
• 2 types of liquidation: voluntary winding up and winding up by the court

Question 3

What are the benefits of a voluntary winding up?
How is it commenced?
What are the consequences once it has commenced? (2)

Answer 3

• The Cork Committee stated purpose = avoid involving the courts - company and creditors settle affairs between themselves with recourse to the court if necessary
• Are faster and less expensive than court winding up
• S.84(1)(b) IA1986 = commenced by company passing a special resolution
• As soon as resolution passed = winding up has commenced

• Consequences:

a. S.86 IA1986 = company will cease to carry on business except as required to be wound up
b. S.88 IA1986 = any shares and any alteration in the status of the company’s members is void

Question 4

What are the 2 differences between a members winding up and a creditors winding up?

Answer 4

• First difference = whether the directors make a declaration of solvency
• If directors do within 5 weeks before the special resolution is passed = member’s voluntary winding up
• If not = creditors’ voluntary winding up

• S.89(1) IA1986 = declaration of solvency declares that:

1. the directors have made a full inquiry into the company’s affairs; and
2. they have formed the opinion that the company will be able to pay its debts in full within a specified period

• S.95 and 96 IA1986 = also a creditors’ winding up if liquidator disagrees with this opinion

Second difference:
• Members’ voluntary winding up is only available to solvent companies
• Creditors’ winding up is available to both solvent and insolvent companies

Question 5

Who can apply to the court for a court winding up order (compulsory winding up)? (7)

Answer 5

• s.124(1) IA1986 = following persons can apply to the court:
1. the company
2. the directors
3. any creditor(s)
4. a contributory or contributories
○ s.79(1) = contributory = a person liable to contribute to the assets of the company upon it being wound up (e.g. a shareholder whose shares are not fully paid for)
5. a liquidator
6. the designated officer in a magistrates’ court
7. s. 124(4) IA1986 = The Secretary of State where it is expedient in the public interest

Question 6

What are the 7 grounds for a company to be wound up under s.122 IA1986?

Answer 6

• S.122(1) IA1986 = a company may be wound up by the court if:

1. The company passes a special resolution to that effect
2. A public company has not received a trading certificate within one year after registration
3. The company ceases trading for a year or does not trade in the year after incorporation
4. The number of members in a public company is reduced to below two
5. The company is unable to pay its debts
6. It is an old public company
7. The court believes it is just and equitable to wind up the company

Question 7

When does a compulsory winding-up commence?

What are the 5 effects?

Answer 7

• S.129(2) IA1986 = commences when winding up application is presented to the court
• Consequences:

1. A liquidator will be appointed.
2. S.130(2) IA1986 = no action shall be proceeded with or commenced against the company or its property without court leave
3. S.144 IA1986 = liquidator takes custody or controls all company’s property
4. Directors cease to hold office and liquidators takes over their powers
5. S.127(1) IA1986 = all transfers of company’s property and shares, and any alteration in the status of the company’s members, is void

Question 8

What is the role of the liquidator?
Who do they owe a duty to?
What are 5 of their powers?

Answer 8

• S.143(1) IA1986 = functions = collect, realise, and distribute the company’s assets to creditors, and persons entitled (if there is a surplus)
• Liquidator is an agent of the company = owes his duties to the company
• Powers:

1. Sell company’s assets by commencing legal proceedings against those who have engaged in forms of malpractice
2. Adjust certain transactions that occurred prior to liquidation
3. Exercise powers in S.165-167 IA1986
4. Disclaim onerous property
5. Demand a person to deliver certain property, books, papers or records

Question 9

What must the liquidator / administrator do if the company enters insolvent liquidation?
What must they do if a winding-up order is made by the court?

Answer 9

If a company enters insolvent liquidation or administration:

1. Liquidator / administrator must send a report to the Secretary of State describing director’s conduct in the previous 3 years
2. Secretary of State decides whether to seek a disqualification order / accept a disqualification undertaking

• S.132(1) IA1986 = If a winding up order is made by the court
• Official receiver must investigate and report to court:
a. the causes of the company’s failure (if it did fail); and
b. the promotion, formation, business dealings, and affairs of the company

Question 10

How are the company’s assets distributed during liquidation?

Answer 10

• Must distribute assets in satisfaction of the company’s liabilities pari passu
• Pari passu principle = distribute to creditors in proportion to the size of their claim

1. Fixed chareholders take their security i.e. takes possession of charged property and sells it to cover debt
   ○ Any excess revived is given to the liquidator
   ○ Any debt outstanding (not paid) ranks unsecured
2. Liquidation expenses
   ○ ss.115 and 175(1)–(1A) IA1986 = liquidator pays off the costs of winding up first
3. Preferential debts (ordinary and secondary)
   ○ Include = remuneration (up to a maximum of £800) to employees and pension contributions
   ○ Any outstanding ranks unsecured
   ○ Ordinary paid first then secondary
4. Debts secured by floating charges (minus the ‘prescribed part’)
   ○ S.176A IA1986 = prescribed part consists of 50% of the first £10,000 received from the sale of assets secured with a floating charge, and a further 20% up to the maximum total of a £600,000
   ○ This prescribed part is set aside to be used to satisfy the claims of the unsecured creditors
   ○ Note: proceeds of claims brought by the liquidator for fraudulent or wrongful trading cannot be used to satisfy the debts of floating chargeholders
5. Unsecured creditors
   ○ The prescribed part will be used to pay unsecured creditors
   ○ Crown debts e.g. payments to HMRC will be unsecured
6. Deferred debts
   ○ Include = dividends due to a member
7. Members
   ○ All remaining assets will be disturbed to the members

Question 11

What are the offences under section 206-211 IA1986 that impose criminal liability? (6)

Answer 11

• Offences that impose criminal liability on persons who have engaged in:
• S.206 IA1986 = fraud in anticipation of the company being wound up
• S.207 IA1986 = transactions in fraud of creditors
• S.208 IA1986 = misconduct in the course of winding up
• S.209 IA1986 = falsification of company books
• S.210 IA1986 = material omissions from the statements
• S.211 IA1986 = false representation to creditors

Question 12

What is a summary remedy?
When does it apply?
Who can bring a claim to the court?
What may the courts compel the defendant to do?

Answer 12

• s.212 IA1986 = provides a simple remedy for breaches of company law rules
• Applies where (in the course of winding up) a liquidator or current/former officer has misapplied any money or property, - or been guilty of a breach of duty
• Allows an official receiver, a liquidator, any creditor, or contributory to bring a claim to the court where normally the company itself would have to
• The court may compel the defendant to:

1. Repay, restore or account for the money/property
2. Contribute to the company’s assets by way of compensation

Question 13

When has a person engaged in fraudulent trading under IA1986?
What are the 3 elements that must be proven?
Who can apply to the court?
What are the 2 remedies?

Answer 13

• S.213 and 246ZA IA1986 applies where in the course of winding up or during administration, it appears that any business of the company has been carried out with the intent to defraud creditors or for any fraudulent purpose

• Morris v Bank of India [2003] = 3 elements must be proven:
1. Establish business has been carried on with the intended to defraud creditors or for any fraudulent purpose
2. Establish defendant participated in this business
3. Show defendant knowingly participated in the fraudulent conduct
•
Only a liquidator or administrator may apply to the court

• Remedies:

1. • Court orders defendant to make contributions to the company’s assets as it thinks fit
2. • If defendant is a director, disqualify for up to 15 years

Question 14

What are the 2 key differences between fraudulent trading under s.993 CA2006 and IA1986?
Can both apply?

Answer 14

• The conduct that can constitute fraudulent trading under s.993 is largely the same as that under IA1986
• 2 key differences:
1. IA1986 provisions only apply where the company is in liquidation or administration. S.993 can apply at any time; and
2. IA1986 provisions impose civil liability. S.993 imposes criminal liability

• If fraudulent trading has occurred in relation to a company in liquidation or administration, then both sets of provisions can apply
• This means civil and criminal liability can be imposed.

Question 15

When has a person engaged in wrongful trading? (3 conditions)
Who can apply to the courts?

Answer 15

• S.214 and 246ZB IA1986 = a person has engaged in wrongful trading if 3 conditions are satisfied:
1. The company has gone into insolvent liquidation or administration

2. The person continued to trade when they knew or ought to have known there was no reasonable prospect to avoid insolvent liquidation or administration
   ○ S.214(4) and 246ZB(4) IA1986 = ought to have known = what would a reasonably diligent person ought to know with the general knowledge, skill, and experience reasonably expected from a director and that which the director actually has
   (Is objective and subjective)
3. That person was a director or shadow director at that time

Only a liquidator or administrator may apply to the cour

Question 16

What is a defence for wrongful trading?

What are the 2 remedies?

Answer 16

• S.214(3) and 246ZB(3) IA1986 = defence = director took sufficient steps to minimise the potential loss
• Could include:
a. keeping themselves informed of the company’s financial position;
b. reviewing the company’s financial position with professional assistance;
c. raising concerns with the board and suggesting solutions;
d. minuting board discussions and recording board decisions; or
e. advising creditors of the risks of advancing further credit.

• Court orders defendant to make contributions to the company’s assets as it thinks proper
• Director can be disqualified for up to 15 years.

Question 17

What are the restrictions on re-using company names?
Who do the restrictions apply to?
What can I person not do? (3 things)
What is a prohibited name?
What are the liabilties?

Answer 17

• S.216 IA1986 = aims to prevent Phoenix companies
• = where a person allows a company to become insolvent and then forms a new company of the same name and continues trading
• Applies to a person that was, within 12 months prior to the liquidation date, a director /shadow director of a company that has gone into insolvent liquidation
• Unless person obtains leave from the court, they can’t for 5 years:

1. Be a director of any other company known by a prohibited name
2. Be in any way concerned or take part in the promotion, formation, or management of a company with a prohibited name; or
3. Be in any way concerned or take part in the carrying on of a business under a prohibited name

• S.216(2) IA1986 = prohibited name is:

1. A name the liquidating company was known by during 12 months prior to liquidation or;
2. A name which is similar to a name falling within (1) and suggests an association with that company

Liability:
• S.216(4) IA1986 = person who breaches s. 216 commits a criminal offence
• S.217 IA1986 = can be made personally liable for the debt and liabilities the new company incurred while they were involved in its management

Question 18

What are the 4 types of pre-liquidation transactions a liquidator or administrator can adjust?
When can they adjust?

Answer 18

1. Transactions at an undervalue - S.238 IA1986 = liquidator or administrator can petition to the court if the company enters a transaction at an undervalue at a relevant time
2. Preferences - S.239 IA1986 = liquidator or administrator can petition to the court if the company has given a person a preference at a relevant time
3. Extrodinate credit transactions - S.244 IA1986 = liquidator or administrator can petition to the court if the company enters an extortionate credit transaction
4. Invalid floating charges - S.245 IA1986 = liquidator or administrator can invalidate certain floating charges made prior to insolvency if made at a relevant time

S.238–246 IA1986 = a liquidator (or administrator) can adjust certain pre-liquidation transactions if these transactions harm the creditors’ interests or undermine the pari passu principle

Question 19

When will a company enter a transaction at an undervalue? (2)
When will it be at a relevant time?
What is the remedy?
When will the remedy not be given?

Answer 19

• S.238(4) IA1986 = company enters a transaction at an undervalue if:

(1) Company makes a gift or transaction terms provide company receives no consideration; or
(2) Consideration value is significantly less than the consideration provided by the company

• Company enters a transaction at a relevant time if:
(1) Entered within 2 years before the insolvency
(2) When company was unable to pay its debts or transaction resulted in the company being unable to pay its debts
• Condition (2) is presumed satisfied if company enters a transaction at an undervalue with a connected person

• Remedies:
(1) Court may make any order it thinks fit for the position before the transaction to be restored
○ Unless company entered transaction in good faith and at time the transaction was made, there were reasonable grounds to believe the transaction would benefit the company

Question 20

When will a company give a preference?
What is the relevant time?
When will the court give a remedy?
What is the remedy?

Answer 20

• A company gives a preference to a person if:

(1) That person is a creditor; and
(2) The company does anything which puts that person in a better position during the liquidation than he would have been

• S.240 IA1986 = relevant time is:
a. Within 2 years before insolvency if preference is given to a connected person
b. Within 6 months before insolvency if preference is not a transaction at an under value and not given to a connected person
c. Given when company was unable to pay its debts or transaction resulted in company being unable to pay its debts
• Condition (3) is presumed satisfied if company enters a transaction at an undervalue with a connected person

• Court will only make an order if the company desired to give the person a preference

• Remedy:
Court may make any order it thinks fit for the position before the preference to be restored

Question 21

What 3 conditions must be satisfied for a credit transaction to be extortionate?
What are the 4 remedies?

Answer 21

• Following 3 conditions must be satisfied:

1. Company is a party to a credit transaction
2. Transaction is extortionate if :
   a. The terms require grossly unreasonably high payments to be made; or
   b. Transaction is otherwise grossly unfair compared with the risk accepted by the creditor
3. Transaction was entered into within 3 years before onset of liquidation / administration

• S.244(3) IA1986 = transactions presumed extortionate unless shown otherwise

• Remedies:
○ Court can make an order to:
(1) Set the transaction aside
(2) Vary the terms of the transaction
(3) Require any property held as security to be surrendered
(4) Require a party to pay liquidator /administrator any sums paid by the company

Question 22

When can a liquidator or administrator invalidate a floating charge loan and when is a relevant time?
What happens to the debt?

Answer 22

• No application to the court is required
• S.245(3) IA1986 = can only be invalidated if made at the relevant time:
(1) Within 2 years before the onset of insolvency if charge is created in favour of a connected person
(2) Within 12 months before the onset of insolvency if charge is created in favour of any other person
(3) Made when company was unable to pay its debts or transaction resulted in company being unable to pay its debts

• Invalidating a floating charge does not invalidate the debt
○ Debt becomes unsecured

Question 23

What is dissolution?
When is a company dissolved?
What are the effects?
What are 5 ways a company can be dissolved?

Answer 23

• = process for ending a company’s existence
• A company is dissolved when it is removed from the register at Companies House
• Dissolution terminates the company’s separate personality and ends any legal relationships between the company and other persons
• S.1012(1) CA2006 = any property the company owns will be deemed bona vacantia and will pass to the Crown
• S.201 and 205 IA1986 = company is deemed to be dissolved 3 months after the registrar of companies has been notified the winding up is complete

• Ways a company can be dissolved:
1. If judicial review is granted
○ e.g. if company’s objects are illegal and unenforceable
2. If company has no property to distribute to creditors
○ Schedule B1, para 84 IA1986 = If administrator thinks this he will file a notice at CH and 3 months later the company is deemed to be dissolved
3. If company is (or believed) not to be carrying on business
○ S.1000 CA2006 = if register of companies think this it will send communication to the company enquiring
○ If no reply is received in 14 days, a second communication is sent
○ If no reply is received, a first Gazette notice will be published and company dissolved 2 month later
4. If company files a Form DS01 to the registrar of companies
○ Advertisement is published in The Gazette and company dissolved 2 months later
5. Act of Parliament may state a company is to be dissolved

Question 24

Can a dissolved company be restored?
What are the 2 ways?
Who can bring an application for the second way? (5)
When does restoration take effect and what will the registrar do?

Answer 24

• A dissolved company may be restored and placed back in the register of companies
• S.1028(1) and 1032(1) CA2006 = a company that has been restored will be regarded as if it was never dissolved or struck off the register

• 2 ways a dissolved company can be restored:
1. Administrative restoration
2. Application to court
• s.10029(2) CA2006 = people who can bring an application:
a. The Secretary of State
b. Any former director, member, or liquidator
c. Any person who would have a contractual relationship to it
d. Any person with a potential legal claim against the company
e. Any person who was a creditor at the time of dissolution

• S.1031(2) CA2006 = restoration takes effect when copy of court order is delivered to registrar of companies
• Registrar will publish a notice in The Gazette

Question 25

When does an administrative restoration apply?
Who can apply to have the company restored?
When will the register restore? (3 conditions)

Answer 25

• Applies where company was dissolved on the grounds it was not carrying on business
• S.1024(3) CA2006 = a former director or member applies to the registrar of companies to restore the company within 6 years of the dissolution
• Registrar will only restore if:

a. The company was carrying on business at time of dissolution
b. The crown representative consents in writing to company being restored (only if any property was deemed bona vacantia)
c. Applicant has delivered specified documents to the registrar