#3189 - Fourteen Liquidation - Business Law and Practice

Company Law – Private Limited Companies

Liquidation

1. Liquidation

Objective: to bring the existence of the company to an end and to distribute its assets to those entitled to them. [Can often follow administration where company cannot continue despite efforts in moratorium].

How:

Appoint liquidator (qualified insolvency practitioner)
Liquidator takes control of the company
Collects assets [includes challenging certain past transactions in order to increase company assets – if necessary]
Pay off debts and distribute between members [in prescribed order]
Company is dissolved. Struck of register.

Types of liquidation

Compulsory

Imposed by court order
Usually when company is insolvent
Who to present petition: S.124 & 124A IA 1986 [company; directors; creditor or creditors; contributory (incl. members and former members – e.g. anyone liable to contribute to assets of company on winding up; Secretary of State (but only on grounds of public interest); any administrative receiver, administrator or supervisor of a CVA
Grounds for the petition [e.g. unable to pay debts] See lecture slides (just and equitable etc)
Court’s discretion: Court can refuse to make winding up order even if grounds have been satisfied [e.g. majority creditors oppose winding up; or petition creditor is owed 750 or less.
Winding up order: Official Receiver becomes liquidator until permanent appointment of liquidator is made. Call meeting of creditors. All creditors can have their own nominee to replace official receiver as permanent liquidator. Creditors’ nominee takes precedence.

Member’s Voluntary Liquidation [M.V.L]

Commenced by resolution of company
Directors make statutory declaration of solvency [S.89 IA 1986] - “the company is able to pay its debts in full within 12 months of commencement of liquidation” [COMPANY IS SOLVENT]
Director’s liable to imprisonment / fine if they make declaration without reasonable grounds.
Procedure: Shareholders Special Resolution to wind up [S.84 IA] and Ordinary Resolution to appoint liquidator [S.91 IA].
MVL can always be converted into a CVL if company becomes insolvent.

Creditor’s voluntary Liquidation

[C.V.L]

COMPANY IS INSOLVENT
Creditors begin the process – NO court order is required.
Procedure:

Special Resolution to wind up [S.84IA]; and

Ordinary Resolution to appoint liquidator [S.100 IA – this is only provisional appointment as creditor’s nominee may replace / take precedent.

Creditor’s meeting [within 14 days] – see slide / diagram

Role / powers of the liquidator:

Qualified insolvency practitioner

Duties: to collect in, realise and distribute company’s assets

Agent of the company

Statutory powers:

S.165/ 167 IA 1986	Making any compromise or arrangement with creditors, selling company’s property, borrowing on security of the company’s assets, bringing legal proceedings and carrying on the business of the company so far as may be necessary for the beneficial winding up.
S.178 IA 1986	Collection of assets – power to disclaim onerous property, which includes unprofitable contract, any property which is un-saleable or not readily saleable etc.

Pay-out following liquidation

Order of priority:	Fixed charge holders Costs of winding up [use unsecured assets / free assets first] Preferential creditors [to the extent that unsecured assets are insufficient] Prescribed part made available to unsecured creditors [ring fencing] Floating charge holders [after costs of any receiver appointed by such a holder]
Order of priority payment	Step one: consider the assets [find ‘Total Assets’] Charged assets (fixed security and floating security) Assets not charged NB. What is NOT assets which Liquidator can handle: Assets which company holds on trust for a third party Goods subject to retention of title clause, vendor can usually reclaim the goods before winding up begins. Step two: consider total liabilities Step three: paying off liabilities (in order of priority) Creditors with fixed charge (or mortgage) Expense of winding up [pay out of free assets first] Preferential creditors (pay out of any remaining free assets first) Floating charge holders [Subject to ring fencing which effects floating charges created on / after 15^th Sept. 2003] Unsecured creditors Interest on debts [interest from date of liquidation] Shareholders [preferential first, then ordinary]
Dissolution	This is a separate procedure to liquidation. After liquidation – notify register of companies – company automatically dissolves 3 months later.

Order of priority:

Fixed charge holders
Costs of winding up [use unsecured assets / free assets first]
Preferential creditors [to the extent that unsecured assets are insufficient]
Prescribed part made available to unsecured creditors [ring fencing]
Floating charge holders [after costs of any receiver appointed by such a holder]

Order of priority payment

Step one: consider the assets [find ‘Total Assets’]

Charged assets (fixed security and floating security)
Assets not charged

NB. What is NOT assets which Liquidator can handle:

Assets which company holds on trust for a third party
Goods subject to retention of title clause, vendor can usually reclaim the goods before winding up begins.

Step two: consider total liabilities

Step three: paying off liabilities (in order of priority)

Creditors with fixed charge (or mortgage)
Expense of winding up [pay out of free assets first]
Preferential creditors (pay out of any remaining free assets first)
Floating charge holders [Subject to ring fencing which effects floating charges created on / after 15^th Sept. 2003]
Unsecured creditors
Interest on debts [interest from date of liquidation]
Shareholders [preferential first, then ordinary]

Dissolution

This is a separate procedure to liquidation.

After liquidation – notify register of companies – company automatically dissolves 3 months later.

Challenging transactions

Challenging prior transactions

Transactions at undervalue
Preferences
Avoidance of certain floating charges
Transactions defrauding creditors

Checklist:

Who can bring challenge
What sort of transaction is caught?
What proof...

#3189 - Fourteen Liquidation - Business Law and Practice

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