Winding up/Liquidations/Reconstructions Chp 20-23 Flashcards
What are the grounds for presenting a petition for compulsory winding-up?
s122 Insolvency Act 1986
Unable to pay debts
Not commenced business within a year/suspends for a year
Spec. res passed by company
If co re-registered as public but not obtained min. capital requirement certificate
just & equitable
What is definition of a company’s inability to pay its debts?
s123 IA 1986
creditor owed more than £750 has served a demand, unpaid for three weeks
execution on judgment gone unsatisfied
been proved to court that company cannot pay debts (balance sheet test where company owes more than it owns)
Who can petition for compulsory winding-up?
Creditors
Contributory
Company
Company’s directors
What is a contributory?
Contributory = every person liable to contribute to assets of the company in the event of its being wound up
s79 IA 1986
Includes members with partly paid shares, past members with party paid in certain cases and members of a company limited by guarantee
What date does a compulsory winding up order take effect from?
What are the effects of the order?
Deemed to have commenced from date of presentation of the petition s129
Disposition of property void s127
Attachments/executions against property void s128
actions stayed s130
director powers cease
employees deemed dismissed
OR becomes company’s provisional liquidator
What are the three immediate tasks of the Official Receiver?
- Secure appointment of liquidator by meetings of creditors and contributories at which they agree s139 IA
- Obtain statement of affairs s131 IA
- Submit report to the court (cause of failure and whether further enquiry necessary) s132 IA
What is the role of a liquidator?
Must be authorised insolvency practitioner
Realise assets and distribute them among creditors according to their entitlements
Wide range of statutory powers
What is a liquidation committee?
Oversees/assist process of winding-up
3-5 creditors chosen by creditors meeting (if solvent, 3 contributories)
What can the court do in overseeing the process of winding-up?
- Stay proceedings
- Require parties to hand over property and books etc
- Compel contributors to pay money they owe
- Appoint special manager if necessary
What triggers a voluntary winding-up?
A special resolution
When does winding-up begin for a voluntary winding-up?
From date of members resolution.
What are the consequences of the commencement of voluntary winding-up?
Ceases to carry on business
Cannot transfer shares without liquidator approval
Directors powers cease on appointment of liquidator
What are the two types of voluntary winding-up?
Members’ voluntary winding-up; and
Creditors’ voluntary winding-up
What determines the type of voluntary winding-up it is?
Declaration of solvency
If directors make and file declaration of solvency (no more than five weeks before resolution, states able to pay debts within no more than 12 months from commencement of w/up. Criminal offence to make declaration without reasonable grounds for their opinion) - members’ voluntary winding-up
If insolvent or do not make a declaration - creditors’ voluntary winding-up
Who controls a members’ voluntary winding-up?
What do they do?
Members. They choose the liquidator.
Usually sell assets and distribute cash among members.
They may transfer property to another company in return for shares in that company and then distribute those shares to members
When does a creditors’ voluntary winding-up take place?
Occurs in insolvent companies or where directors will not make a declaration of insolvency.
More rigorous process to protect creditors
Members meeting to resolve the winding up
Creditors meeting (they will effectively control process of w/up) (their choice of liquidator prevails)
Offence for liquidator nominated by members to exercise powers until creditors mtg held
As with compulsory w/up creditors can choose to appoint liquidation committee of up to 5. Company can also choose up to 5 but creditors can vote against them
What powers does a liquidator have in a creditors’ voluntary winding up?
Wide range of powers including:
pay off creditors in full and make compromise or arrangements with them
bring or defend proceedings in company’s name
propose to company and creditors a scheme of arrangement to replace the winding-up
What are the order of repayment of debts in an insolvent company winding-up
Free assets (not subject to charges) used in following order:
- cost of preserving/realising free assets
- liquidators remuneration and costs of liquidiation
- preferential debts (wages, pension contributions) (paid out of floating charge assets if not enough left after above)
- Holder of any floating charge
- ordinary unsecured creditors
Assets subject to fixed/floating charges are available to chargee to settle liabilities. If security is inadequate, balance deemed unsecured creditor.
Under Enterprise Act 2002 a proportion of floating charge assets are to be used to settle claims of unsecured creditors.
Remaining assets to members in order according to articles.
What ways can a liquidator swell the assets available for distribution?
Preferences s239 IA 1986
Invalid floating charges s245 IA 1986
Transactions at an undervalue s238 IA 1986
Fraudulent trading s213 IA 1986
Wrongful trading s214 IA 1986
What can a liquidator do in relation to challenging preference transactions?
s239 IA 1986
Transaction can be set aside if it prefers one creditor to another
Won’t be set aside unless influenced by a desire to improve creditors position (payment due to creditor pressure if not a preference) Re Bacon 1990
TIME: TRANSACTION WITH CONNECTED PERSON WITHIN TWO YEARS OF COMMENCEMENT OF WINDING-UP
TRANSACTION WITH ANYONE ELSE SIX MONTHS
Company must have been insolvent when transaction made or became insolvent because of transaction
What can a liquidator do in relation to invalid floating charges?
s245 IA 1986
Floating charge for pre-existing debt invalid if given
TIME: IF CHARGEE CONNECTED WITH COMPANY TWO YEARS OF ONSET OF INSOLVENCY
IF NOT CONNECTED, TWELVE MONTHS
If debt created so shortly before time it may be valid Power v Sharp 1993
Rule affects only validity of the charge, the debt remains enforceable
What can a liquidator do in relation to transactions at an undervalue?
s238 IA 1986
Undervalued transactions can be undone
TIME: ENTERED INTO WITHIN TWO YEARS OF COMMENCEMENT OF LIQUIDATION, unless company was solvent at that date and did not become insolvent as a result of the transaction.
Undervalue must be significant
Speculative values must not be taken into account Phillips v Dolphin 2001
What can a liquidator do in relation to fraudulent trading to swell company assets?
s213 IA 1986
Applies where company’s business carried on fraudulent purpose
Liquidator, OR, creditor, contributor can all apply to court.
Intention to defraud Patrick and Lyon 1933
Outcome - may order knowingly party to transaction to contribute to company assets as it thinks fit.
What can a liquidator do in relation to wrongful trading to swell company assets?
s214 IA 1986
Director/former (inc. shadow/de facto) of insolvent company can be held liable to contribute to assets if:
- knew/ought to insolvent liquidation inevitable
- from that point they failed to take all steps they ought to have taken to minimise the loss to creditors
Does not require dishonesty
objective standard of what reasonable director would have done/realised
subjective re higher skills if applicable
Are directors/shadow directors of companies that have gone into insolvent liquidation prevented from re-using the company’s name?
Yes.
For five years from date insolvent company goes into liquidation.
Breach is criminal offence.
How does the Registrar strike off a defunct company?
s1000 CA 2006. Reason to believe not carrying on business / not in operation.
Registrar enquires of company and notifies London Gazette.
How can a company be restored to the register?
Administrative restoration; or
By court following application.
Name the ways a company can be reconstructed/reorganised (six)
Voluntary arrangements under ss1-7 IA 1986
Administration
Small company moratorium
Part 26 CA 2006
Reconstruction under s110 IA 1986
Takeovers
How does a company reorganise/reconstruct their liabilities under a voluntary arrangement (ss1-7 IA 1986)?
A voluntary arrangement under ss1-7 IA 1986 overcomes the difficulty of an arrangement that any creditor may refuse to join, undermining the arrangement
Proposed by: directors, liquidator (if coming being w/up) or administrator
If by directors, they must appoint a qualified insolvency practitioner to supervise
Credit and members meeting convened to approve. Over 50% members and 75% value of creditors (both present and voting) must approve
Then binding of every person had notice of the meeting and entitled to vote.
Does not affect secured or preferential creditors unless they consent.
Court critical of arrangements that terminate parent company guarantees Prudential v PRG Powerhouse 2007
How does a company reorganise/reconstruct itself through administration?
Gov. by Sch B1 IA 1986
Administration - company is placed under control of insolvency practitioner who holds office of administrator.
Object to try and avoid liquidation
Administrator appointed (owe duty to company only):
by court making and admin order (on app by dir/creditors)
by holder of qualifying floating charge
by company or directors in accordance with articles
EFFECT
any pending petition to w/up dismissed
no resolution may be passed to w/up & no order made
cannot enforce security over property or repossess goods without consent of administrator/court
ADMINISTRATORS CAN CHALLENGE PREFERENCE, FLOATING, UNDERVALUE
CAN BRING ACTIONS FOR FRAUDULENT S213 AND WRONGFUL S214 TRADING
no legal process can be instigated without consent of administrator/court
How does a company reorganise/reconstruct itself in a small company moratorium?
Cheaper alternative to administration for small companies (def. s382 CA 2006) in financial difficulties
Agreement of insolvency practitioner to act as nominee
company activities restricted during period of moratorium
stationery must disclose moratorium
credit of £250+ cannot be secured without informing lender of moratorium
What is Part 26 Companies Act 2006 (s899)?
Part 26 allows companies to facilitate a compromise/arrangement between
Company - members (or any class)
company - creditors (or any class)
Court approval and 75% in value or members or creditors required.
Explain reconstructions under s110 IA 1986
Assets old co - new company
Shareholders old co - new co pro rata their old holdings
old company dissolved
company is remade with new company, having whatever feature they wanted
old co may be subject to voluntary liquidation or if already being wound up, process under s110 can begin at any time
MUST BE APPROVED BY 75% OF MEMBERS. DISSENTING MEMBERS HAVE RIGHT TO BE BOUGHT OUT.
Explain takeovers
Predator acquires sufficient shares to control target (then becoming a subsidiary).
Hostile - directors do not recommend
If recommended can use schedule of arrangement under Part 26 (s899) (you only need 75% shareholders under s899 whereas you need 90% in a standard takeover procedure)
Governed by City Code on Takeovers and Mergers to ensure equal treatment of all target shareholders
Predator acquiring 90% can compel remaining shareholders to sell to it.
