W1 - INSOLVENCY AND LIQUIDATION

BM = board meeting

GM = General meeting

SH = shareholders

D/Dirs = Directors

CoHo = companies house

OUTCOME 1 – Identify when a company has become insolvent

s.122(1) – Co may be ordered to be wound up by court when it’s unable to pay debts

s.123 – Unable to pay debts = MAIN TESTS

(1)(e) if…the company is unable to pay it’s debts AS THEY FALL DUE (= “THE CASHFLOW TEST”) (ie. Not enough cash in the bank!) – current assets v current liabilities

[nb. Re Chengue Finance – do sometimes consider future liabilities)

(2) if…the value of the company’s assets is less than the amount of it’s liabilities (i.e. net assets =”THE BALANCE SHEET TEST”)

Also unable to pay its debts if fails to comply with: s.123(1)

(1)(a) a statutory demand for a debt over 750

(1)(b) failure to satisfy enforcement of a judgement debt

(1)(e) proof that the value of the company’s assets is less than the amount of it’s liabilities, taking into account contingent and prospective liabilities (EG. LITIGATION PENDING/INSURANCE CLAIMS – won’t be on balance sheet!!

How can you identify if a company is insolvent?

NB. Expert advice should be sought from an insolvency practitioner in the event of a co facing insolvency. A key message to get across to D’s is to seek expert advice earlier, rather than later, at a point when the business may still be rescued!!

BALANCE SHEET:

FIXED ASSETS – Sometimes even if the company has enough net assets and appears solvent, the assets may be overvalued in the balance sheet (e.g. Because the market for those assets has changed since they were being valued for balance sheet purposes) will have a bearing on the current overall solvency;
CURRENT ASSETS – Often balance sheet value given to assets such as stock, debtors, or even fixed assets like plant and machinery bears no relation to the amount such assets might actually realise on liquidation care needs to be taken to adjust the values for the assets on the basis of information provided by the client about stock, plant and machinery and debtors;
NET CURRENT ASSETS less CURRENT LIABILITIES = THE CASH FLOW TEST – check this figure!!
IF CO WON’T GET ANYTHING FOR STOCK USE ACID TEST= Current assets (without stock and prepayments) – Current liability
NET ASSETS – if company has total assets of more value than its total liabilities – indicates that the company is SOLVENT. If total assets are worth LESS than total liabilities, then this shows company is INSOLVENT on the BALANCE SHEEET TEST

LIQUIDATION PROCESS:

“LIQUIDATION” - CAN BE SOLVENT (MVL) OR INSOLVENT (CVL/COMPULSORY)

involves the appointment of a liquidator (powers and duties at Sch4 IA 1986) who collects in and distributes the company's assets and dissolves the company:

3 STAGE PROCESS:

	Members voluntary liquidation		Creditors Voluntary liquidation
Who petitions?	Co when wish to cease trading		Co in response to creditor pressure
Co must be	Solvent		Insolvent
Process	1. D’s propose a BM 2. D’s draw up stat dec of solvency: full enquiry into co affairs conclusion that co can pay debts in full within 12 months s.89 IA86 D’s liable to a fine if no reasonable grounds 3. D’s call a GM that must take place within 5 weeks 21 days notice required 4. Either period fixed for duration of co has expired s.84(1)(a) or pass SR to wind up s.84(1)(b) and OR to appoint liquidator s.91 5. Lodge stat dec s.89(3) and SR at coho within 15 days of SR s.84(3) & s.30(1) CA06 6. Liquidator takes over and notification given to all creditors s.85 within 14 days of resolution give notice by advertisement in gazette		1. D’s propose BM 2. D’s propose GM to wind up co and recommend CVL 3. At the GM – SH pass an SR to wind up co s.84(b) because it’s insolvent and OR to nominate liquidator s.91(1) 4. Lodge SR at coho within 15 days of SR s.84(3) & s.30(1) CA06 5. within 14 days after passing, give notice by advertisement in gazette
Creditor position	No say in the liquidator apt or in process Usually paid in full (definition of solvency)		- s.100 – creditors in control but unlikely to be paid in full - s.98 creditors meeting is held within 14 days of the resolution. Appropriate notice (7 days) must be given in local press and London gazette - s.100(1) apt a liquidator/liquidation committee s.101(1) not exceeding 5 persons at meeting, they are chosen by simple majority of % of debt held (secured creditors cant vote)
Liquidator duties/ powers	1. Must place notice of his apt in London gazette s.109 2. L must send notice of apt to all creditors he is aware of within 28 days 3. s.115 IA86 – L expenses paid out of co assets in priority of other claims 4. L is appointed A of the co and can: Sell assets Use co bank account Apt A’s Carry on co business Do anything necessary to facilitate winding up
SH position	If surplus after creditors they will be paid	No
D position	No exercise of powers unless continuance sanctioned by liquidator or members at GM - but still officially hold office s.91(2)	D’s powers cease on apt of L s.103
After liquidation	- L places accounts before members at GM s.94(1) then L released - Accounts then sent to coho and 3 months later co dissolved by registrar - (If MVL is commenced and liquidator discovers company insolvent, he calls meeting and changes to CVL)	As soon as affairs fully wound up, liquidator shall make account of winding up and thereupon call GM to lay account before the meeting (s.106) – called by advertising in Gazette one month before

	Compulsory Liquidation
Most common grounds Court must always consider all factors and may dismiss petition if co can show it will recover.	Stat demand s.123(a) - served for debt over 750 - payment within 21 days has been served - no payment by end of period If debt disputed ground cannot apply Re Cooling Equipment	Unsatisfied judgement s.123(1)(b) - C has judgement against co for debt - judgement unsatisfied	Cash flow test s.123(1)(e) - proved to satisfaction of court that co unable to pay debts as they fall	Balance sheet s.123(2) - proved to satisfaction of court that co’s assets less than amount of liabilities (taking into account contingent/prospective liabilities)
Who can apply	Any creditor: s 124(1) or directors, Secretary of State, the company itself Note, any secured creditor must renounce their security to do so. Better option for them is just to enforce the security. So secured creditors will not petition for winding up unless the security is worthless – e.g. not registered - Should be a last resort for any creditor - If concerned that assets of company in danger of being dissipated then make urgent app to court for provision liquidation or injunction
Application	Petition made to court and facts are verified by affidavit Petition advertised in the London Gazette not less than 7 days after service of the petition on the co and not less than 7 days before the hearing. Bank will usually freeze the co’s accounts (e.g. because floating charges crystallise) A court hearing will be fixed (co and creditors represented at hearing to oppose/support petition) N.B often expensive so there may be JOINT PETITION – allowed under s.124(1)
What happens next?	Judge may dismiss, adjourn the hearing conditionally, make interim or any other order he sees fir s.125 s.126 – company, creditor or contributory may apply to court for stay of proceedings If the majority of creditors support the petition court likely to grant the order, the Official Receiver (civil servant and court official) will be appointed as liquidator (s.136(2)) -> he must decide whether to call meeting of creditors, who may appoint an insolvency practitioner as liquidator in his place (s.136(4)) (must be sufficient assets to pay his fee) Any disposal of the co’s assets is void after presentation of the petition without court’s permission (s 127 IA86)
FIRST MEETINGS	1. Appoint liquidator - When a winding-up order has been made, the official receiveris initially appointed as L s136. The co’s creditors and contributories may appoint another individual, being a registered insolvency practitioner, to act as liquidator s139. More than one L can be appointed to act jointly. The L is an officer of the court (Re Oasis Merchandising Ltd [1998] Ch 170). As such, he has a duty to act fairly and impartially (Condon, ex parte James [1874-80] All ER Rep 388). 2. Establish liquidation committee - A L’s function is to collect in and realize the company's assets, and to distribute the proceeds to the company's creditors and, if there is a surplus, to the persons entitled to it (s143(1)
Official Receiver	Investigates conduct and will REPORT – Criminal activity and unfit directors
Liquidator’s powers	As the agent of the co., the liquidator may: Sell assets Use the co. bank account Appoint agents Carry on the co’s business Needs permission of court or liquidation committee in order to litigate, carry on business and pay debts : Sch 4 IA86 Do all things necessary to facilitate the winding up

Sanctions required:

Sch 4 - whether or not the liquidator needs sanction to exercise the relevant power.

ss. 165-167 IA - determine who should give that sanction.

Effects of liquidation generally:
Main effects:	D’s powers cease, except so far as liquidation committee sanctions them (s.91 MVL, s.103 CVL) L takes over running of the co in a CL, D’s appointments are terminated (Measure Brothers Ltd v Measures)
liquidation concludes when:	L sells available assets distributes money to...

#10473 - Insolvency And Liquidation - Insolvency and Liquidation

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