INSOLVENCY TESTS & PROCEDURES
Just because a company is profitable, does not mean it is solvent.
The company is paying its debts Debts could be paid by selling assets or obtaining a loan Debts in the future can be paid as fall due A debtor is not solvent just because if sufficient time was given the debts would be paid | Liabilities outweigh assets Liabilities include legal liabilities Future liabilities are included Contingent and prospective assets are not included but uncalled capital is included |
Insolvency Procedures – The purpose of all three of these processes is to collect and distribute the company’s assets and terminate the company’s existence.
Compulsory Liquidation | Insolvent (and solvent) companies | 1. PRESENT PETITION (liquidation commences – s.129(2), if the petition is successful) S.124(1) – Petition by company (directors resolve on its behalf), directors, any creditor (prospective or contingent), members or a clerk of the magistrates’ court S.122(1) – On one of the 7 grounds, usually ground (f) that the company is unable to pay its debts S.123 – Unable to pay debts means one of 4 circumstances S.123(1)(a) – Failure to pay or secure compound of a statutory demand exceeding 750 within 3 weeks of service on debtor* S.123(1)(b) – By unsatisfied judgement S.123(1)(e) – Cash flow test** S.123(2) – Balance sheet test 2. CHECK THAT NO OTHER PROCEDURE IN PLACE 3. COST BENEFIT ANALYSIS 4. SERVE PETITION 5. ADVERTISE PETITION: The Gazette IR (Rules) 2016 7.10(3) 6.HEARING S.125 – If court is satisfied that the ground exists and the petitioner is eligible, it may exercise its discretion to grant the petition S.125(2) – It is possible for members to petition on grounds that it is fair, just and equitable that the company be wound up, but only where there is no other remedy available If the court has a good reason it can refuse to grant the petition*** 7. ORDER/EFFECT The official receiver (OR) becomes liquidator unless/until the creditors decide to appoint one of their choice (who is a qualified insolvency practitioner) Control of the company passes from the directors to the liquidator, who will manage the winding up S.109 – The OR has to advertise his appointment in the London Gazette and notify the Registrar of companies The company remains a legal personality but its business is not carried on except for the limited purpose of winding up All company papers must state that the company is in liquidation – [Company name] (In Liquidation) All employees are automatically dismissed from date of publication of winding up order and this may entitle them to claim damages for breach of contract S.130(2) – All actions stayed automatically | Liquidator (either official receiver or replacement chosen by creditors and/or shareholders). |
Voluntary Liquidation (Members) | Solvent companies only | S.89 – STATUTORY DECLARATION of solvency by directors S.84(1)(b) – Members’ SPECIAL RESOLUTION within 5 weeks of declaration of solvency 89(2)(a) (86 a voluntary winding up is deemed to commence at the time of the passing of the resolution for voluntary winding up) S.84(2A) – Written notice of special resolution to be given to holder of any qualifying floating charge, allowing the charge holder a brief chance to appoint an administrator S.84(2B) – The special resolution may only proceed (a) five business days after the notice was given or (b) if the charge holder gives written consent Members APPOINT LIQUIDATOR at same GM. Directors’ powers cease FILE SR and DECLARATION OF SOLVENCY with Registrar of Companies Special resolution and liquidator’s appointment ADVERTISED in London Gazette within 14 days of SR/liquidator’s appointment ASSETS COLLECTED IN AND DISTRIBUTED in required order FINAL ACCOUNT SENT to members and Registrar of Companies Company DISSOLVED 3 months later If it becomes clear that the company will not be able to pay debts within 12 months of commencement of winding up, the liquidator must report to creditors and potentially convert to a creditors’ voluntary winding up using a ‘qualifying decision procedure’ (IR 2016) | Liquidator (chosen by shareholders). |
Voluntary Liquidation (Creditors) | Insolvent companies only | Company is INSOLVENT so NO STATUTORY DECLARATION OF SOLVENCY is filed Directors request LIQUIDATOR NOMINATIONS from creditors Creditors decide nominee in VIRTUAL MEETING or via DEEMED CONSENT PROCEDURE Members’ SPECIAL RESOLUTION to start liquidation (s.86 a voluntary winding up is deemed to commence at the time of the passing of the resolution for voluntary winding up) S.84(2A) – Written notice of special resolution to be given to holder of any qualifying floating charge, allowing the charge holder a brief chance to appoint an administrator S.84(2B) – The special resolution may only proceed (a) five business days after the notice was given or (b) if the charge holder gives written consent Directors powers cease on appointment of administrator FILE SPECIAL RESOLUTION with Registrar of Companies Special resolution and liquidator’s appointment ADVERTISED in London Gazette within 14 days of SR/liquidator’s appointment ASSETS COLLECTED IN AND DISTRIBUTED in required order FINAL ACCOUNT SENT to CREDITORS, members and Registrar of Companies Company DISSOLVED 3 months later | Liquidator (chosen by creditors and/or shareholders). |
NB: Unlike compulsory liquidation, in the case of voluntary liquidation there is no automatic moratorium on proceedings against the company
* STATUTORY DEMAND – A demand for payment served on a debtor by a creditor containing information prescribed by IR (Rules) 2016; COMPOUNDING A DEBT – Creditor and debtor come to a mutual agreement regarding an existing debt ‘to the reasonable satisfaction of the creditor’ at the time
** The court will take into account indicators such as (1) the creditor having demanded money and the company (without reasonable excuse) having failed to comply with that demand and (2) the company admitting it cannot pay the debt (e.g. in correspondence)
***Good reasons include:
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Debt is bona fide disputed by the company
The petition constitutes an abuse of process
The company has paid or tendered payment of the debt
Winding up is opposed by other creditors
The company is being wound up by other creditors
The courts of England and Wales do not have jurisdiction
Functions and powers of a liquidator
General functions s.143(1) IA
Collect and realise the company’s assets
Pay creditors according to statutory order
Pay any surplus to the members
Powers (Contained in; ss.165, 166, 167)
Compromise creditors (Sch. 4 Part I(2-3))
Carry on the business (Sch. 4 Part II(5))
Sell assets (Sch. 4 Part III(6))
Do anything else necessary (Sch. III(13)
Getting in the Assets
The liquidator needs to identify the company assets and is obliged to investigate the company’s affairs; may be required to engage in litigation to recover assets.
Take custody/control of the company’s property (s.144(1) IA) Force people to deliver up company property (s.234 IA) Disclaim any unprofitable contract (e.g. lease) (s.178(3)(a) IA) or property which cannot be sold or is difficult to sell (s.178(3)(b) IA) | Realise assets subject to a retention of title clause (Sale of Goods Act 1979 s.19(1)) [NB: an administrator can with court approval sell goods subject to an ROT clause (Sch. B1 Para 72) subject to conditions; see administration doc.] Realise assets held on trust |
Must pay creditors in accordance with the statutory list (ss.175-176A)
| 1 | Holder of fixed charge over X premises created and registered on 1/9/2000 | Fixed charge |
| 2 | Holder of fixed charge over X premises... |
