Winding up/Liquidations/Reconstructions Chp 20-23

Question 1

What are the grounds for presenting a petition for compulsory winding-up?

Answer 1

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

Question 2

What is definition of a company’s inability to pay its debts?

Answer 2

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)

Question 3

Who can petition for compulsory winding-up?

Answer 3

Creditors

Contributory

Company

Company’s directors

Question 4

What is a contributory?

Answer 4

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

Question 5

What date does a compulsory winding up order take effect from?

What are the effects of the order?

Answer 5

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

Question 6

What are the three immediate tasks of the Official Receiver?

Answer 6

1. Secure appointment of liquidator by meetings of creditors and contributories at which they agree s139 IA
2. Obtain statement of affairs s131 IA
3. Submit report to the court (cause of failure and whether further enquiry necessary) s132 IA

Question 7

What is the role of a liquidator?

Answer 7

Must be authorised insolvency practitioner

Realise assets and distribute them among creditors according to their entitlements

Wide range of statutory powers

Question 8

What is a liquidation committee?

Answer 8

Oversees/assist process of winding-up

3-5 creditors chosen by creditors meeting (if solvent, 3 contributories)

Question 9

What can the court do in overseeing the process of winding-up?

Answer 9

1. Stay proceedings
2. Require parties to hand over property and books etc
3. Compel contributors to pay money they owe
4. Appoint special manager if necessary

Question 10

What triggers a voluntary winding-up?

Answer 10

A special resolution

Question 11

When does winding-up begin for a voluntary winding-up?

Answer 11

From date of members resolution.

Question 12

What are the consequences of the commencement of voluntary winding-up?

Answer 12

Ceases to carry on business

Cannot transfer shares without liquidator approval

Directors powers cease on appointment of liquidator

Question 13

What are the two types of voluntary winding-up?

Answer 13

Members’ voluntary winding-up; and

Creditors’ voluntary winding-up

Question 14

What determines the type of voluntary winding-up it is?

Answer 14

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

Question 15

Who controls a members’ voluntary winding-up?

What do they do?

Answer 15

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

Question 16

When does a creditors’ voluntary winding-up take place?

Answer 16

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

Question 17

What powers does a liquidator have in a creditors’ voluntary winding up?

Answer 17

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

Question 18

What are the order of repayment of debts in an insolvent company winding-up

Answer 18

Free assets (not subject to charges) used in following order:

1. cost of preserving/realising free assets
2. liquidators remuneration and costs of liquidiation
3. preferential debts (wages, pension contributions) (paid out of floating charge assets if not enough left after above)
4. Holder of any floating charge
5. 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.

Question 19

What ways can a liquidator swell the assets available for distribution?

Answer 19

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

Question 20

What can a liquidator do in relation to challenging preference transactions?

Answer 20

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

Question 21

What can a liquidator do in relation to invalid floating charges?

Answer 21

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

Question 22

What can a liquidator do in relation to transactions at an undervalue?

Answer 22

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

Question 23

What can a liquidator do in relation to fraudulent trading to swell company assets?

Answer 23

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.

Question 24

What can a liquidator do in relation to wrongful trading to swell company assets?

Answer 24

s214 IA 1986

Director/former (inc. shadow/de facto) of insolvent company can be held liable to contribute to assets if:

1. knew/ought to insolvent liquidation inevitable
2. 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

Question 25

Are directors/shadow directors of companies that have gone into insolvent liquidation prevented from re-using the company’s name?

Answer 25

Yes.

For five years from date insolvent company goes into liquidation.

Breach is criminal offence.

Question 26

How does the Registrar strike off a defunct company?

Answer 26

s1000 CA 2006. Reason to believe not carrying on business / not in operation.

Registrar enquires of company and notifies London Gazette.

Question 27

How can a company be restored to the register?

Answer 27

Administrative restoration; or

By court following application.

Question 28

Name the ways a company can be reconstructed/reorganised (six)

Answer 28

Voluntary arrangements under ss1-7 IA 1986

Administration

Small company moratorium

Part 26 CA 2006

Reconstruction under s110 IA 1986

Takeovers

Question 29

How does a company reorganise/reconstruct their liabilities under a voluntary arrangement (ss1-7 IA 1986)?

Answer 29

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

Question 30

How does a company reorganise/reconstruct itself through administration?

Answer 30

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

Question 31

How does a company reorganise/reconstruct itself in a small company moratorium?

Answer 31

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

Question 32

What is Part 26 Companies Act 2006 (s899)?

Answer 32

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.

Question 33

Explain reconstructions under s110 IA 1986

Answer 33

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.

Question 34

Explain takeovers

Answer 34

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.