INSOLVENCY AND ADMINISTRATION

WHAT IS LIQUIDATION?

 Liquidation is the dissolution or 'winding up' of a company.

 Liquidation means that the company must be dissolved and its affairs 'wound up', or brought to
an end.

The assets are realised, debts are paid out of the proceeds, and any surplus amounts are returned to
members. Liquidation leads on to dissolution of the company. It is sometimes referred to as winding
up
 WHO DECIDES TO LIQUIDATE?

 There are three different methods of liquidation: compulsory, members' voluntary and creditors'
voluntary.
 Compulsory liquidation and creditors' voluntary liquidation are proceedings for insolvent
companies, and members' voluntary liquidation is for solvent companies.
 WHO DECIDES TO LIQUIDATE?

 The parties most likely to be involved in the decision to liquidate are:

 The directors
 The creditors
 The members
 ROLE OF THE LIQUIDATOR

 A liquidator must be an authorized, qualified insolvency practitioner.

 Once the decision to liquidate has been taken, the company goes under the control of a liquidator
who must be a qualified and authorised insolvency practitioner.
 COMMON FEATURES OF LIQUIDATIONS

 In addition, the following factors are true at the start of any liquidation:

1. No share dealings or changes in members are allowed

2. All company documents (eg invoices, letters, emails) and the website must state the company
is in liquidation
3. The directors' power to manage ceases
 VOLUNTARY LIQUIDATION

 A winding up is voluntary where the decision to wind up is taken by the company's members,
although if the company is insolvent, the creditors will be heavily involved in the proceedings.

There are two types of voluntary liquidation:

 A members' voluntary winding up, where the company is solvent and the members merely decide
to 'kill it off’
 A creditors' voluntary winding up, where the company is insolvent and the members resolve to
wind up in consultation with creditors
VOLUNTARY LIQUIDATION
 TYPE OF RESOLUTION TO BE PASSED

Ordinary This is rare, but if the articles specify liquidation at a certain point, only an ordinary
resolution is required

Special A company may resolve to be wound up by special resolution

 CENTREBINDING

The powers of the members' nominee as liquidator are now restricted to:
 Taking control of the company's property
 Disposing of perishable or other goods which might diminish in value if not disposed of
immediately
 Doing all other things necessary for the protection of the company's assets.
 RE CENTREBIND LTD 1966

The facts: The directors convened a general meeting, without making a statutory declaration of
solvency, but failed to call a creditors' meeting for the same or the next day. The penalty for this was
merely a small default fine. The liquidator chosen by the members had disposed of the assets before
the creditors could appoint a liquidator. The creditors' liquidator challenged the sale of the assets (at
a low price) as invalid.

Decision: The first liquidator had been in office when he made the sale and so it was a valid exercise
of the normal power of sale.
 COMPULSORY LIQUIDATION

Statutory reasons for compulsory liquidation

Company is unable to pay its debts

It is just and equitable to wind up the company

 COMPULSORY LIQUIDATION

The Government may petition for the compulsory winding up of a company:

 If a public company has not obtained a, trading certificate within one year of incorporation
 Following a report by government inspectors that it is in the public interest and just and equitable
for the company to be wound up
 COMPANY UNABLE TO PAY ITS DEBTS

There are three permitted ways to do that.

 A creditor owed more than £750 serves the company at its registered office a written demand for
payment and the company fails to pay the debt or to offer security for it within 21 days.

If the company denies it owes the amount demanded on apparently reasonable grounds, the court
will dismiss the petition and leave the creditor to take legal proceedings for debt.
 A creditor obtains judgement against the company for debt, and attempts to enforce the
judgement. However, they are unable to obtain payment because no assets of the company have
been found and seized.
 COMPANY UNABLE TO PAY ITS DEBTS

A creditor satisfies the court that, taking into account the contingent and prospective liabilities of the
company, it is unable to pay its debts. The creditor may show this in one of two ways:

I. By proof that the company is not able to pay its debts as they fall due – the commercial
insolvency test
II. By proof that the company's assets are less than its liabilities – the balance sheet test
This is a residual category.Any evidence of actual or prospective insolvency may be produced.
 THE JUST AND EQUITABLE GROUND

 A dissatisfied member may get the court to wind the company up on the just and equitable
ground.

For such a petition to be successful, the member must show that no other remedy is available.
It is not enough for a member to be dissatisfied to make it just and equitable that the company
should be wound up, since winding up what may be an otherwise healthy company is a drastic step.
 RE GERMAN DATE COFFEE CO 1882

The facts: The objects clause specified very pointedly that the sole object was to manufacture coffee
from dates under a German patent. The German government refused to grant a patent. The company
manufactured coffee under a Swedish patent for sale in Germany. A member petitioned for
compulsory winding up.

Decision: The company existed only to 'work a particular patent' and as it could not do so it should
be wound up.
 RE YENIDJE TOBACCO CO LTD 1916

The facts: Two sole traders merged their businesses in a company of which they were the only
directors and shareholders. They quarrelled bitterly and one sued the other for fraud. Meanwhile
they refused to speak to each other and conducted board meetings by passing notes through the
hands of the secretary. The defendant in the fraud action petitioned for compulsory winding up.

Decision: 'In substance these two people are really partners' and by analogy with the law of
partnership (which permits dissolution if the partners are really unable to work together) it was just
and equitable to order liquidation.
 EBRAHIMI V WESTBOURNE GALLERIES LTD 1973

The facts: E and N carried on business together for 25 years, originally as partners and for the last 10
years through a company in which each originally had 500 shares. E and N were the first directors and
shared the profits as directors' remuneration; no dividends were paid. When N's son joined the
business he became a third director and E and N each transferred 100 shares to N's son. Eventually
there were disputes. N and his son used their voting control in general meeting (600 votes against
400) to remove E from his directorship.

Decision: The company should be wound up. N and his son were within their legal rights in removing
E from his directorship, but the past relationship made it 'unjust or inequitable' to insist on legal
rights and the court could intervene on equitable principles to order liquidation.
 OTHER CIRCUMSTANCES FOR COMPULSORY
LIQUIDATION
 As mentioned previously, there are a number of other circumstances where compulsory
liquidation may be commenced.
These are:
 The company passed a special resolution that it should be wound up by the court
 The company registered as a public limited company more than a year previously but has not yet
been issued with a trading certificate
 OTHER CIRCUMSTANCES FOR COMPULSORY
LIQUIDATION
 The company is an 'old' public company (a PLC that existed on or before 22nd December 1980 and
has remained as a PLC since)
 The company has not begun trading within a year of its incorporation or has suspended its
trading for a whole year
 A moratorium for a voluntary arrangement for the company has passed and no voluntary
arrangement is in place
 PROCEEDINGS FOR COMPULSORY LIQUIDATION

 When a petition is presented to the court a copy is delivered to the company in case it objects. It is
advertised so that other creditors may intervene if they wish.
The petition may be presented by a member. If the petition is presented by a member they must
show that:
 The company is insolvent or alternatively refuses to supply information of its financial position
 They have been a registered shareholder for at least 6 of the 18 months up to the date of their
petition. However this rule is not applied if the petitioner acquired their shares by allotment direct
from the company or by inheritance from a deceased member or if the petition is based on the
number of members having fallen below two.
 EFFECTS OF AN ORDER FOR COMPULSORY
LIQUIDATION
The effects of an order for compulsory liquidation are:
 The official receiver becomes liquidator.
 The liquidation is deemed to have commenced at the time when the petition was first presented.
 Any disposition of the company's property and any transfer of its shares subsequent to the
commencement of liquidation is void unless the court orders otherwise.
 EFFECTS OF AN ORDER FOR COMPULSORY
LIQUIDATION
 Any legal proceedings in progress against the company are halted (and none may thereafter
begin) unless the court gives leave. Any seizure of the company's assets after commencement of
liquidation is void.
 The employees of the company are automatically dismissed. The liquidator assumes the powers
of management previously held by the directors.
 Any floating charge crystallises.
 ORDER OF PAYMENTS ON LIQUIDATION
Order Explanation
1 Costs These include the costs of selling the assets, the liquidator's remuneration and all
costs incidental to the liquidation procedure
2 Preferential debts • Employees' wages (subject to a statutory maximum)
• Accrued holiday pay
• Contributions to an occupational pension fund
3 Debts secured by Subject to the 'prescribed part' (see below)
floating charges
4 Debts owed to A proportion of assets (known as the 'prescribed part') is 'ring-fenced' for
unsecured ordinary unsecured creditors. This proportion (which is subject to a statutory maximum) is
creditors calculated as 50% of the first £10,000 of realisations of debts secured by floating
charge and 20% of the floating charge realisations thereafter (subject to a
prescribed maximum)
5 Deferred debts These include dividends declared but not paid and interest accrued on debts since
liquidation
6 Members Any surplus (unlikely in compulsory and creditors' voluntary liquidations) is
distributed to members according to their rights under the articles or the terms of
issue of their shares.
 COMPLETION OF COMPULSORY LIQUIDATION

 When the liquidator completes their task they report to the Government, which examines their
accounts. They may apply to the court for an order for dissolution of the company.

 An official receiver may also apply to the Registrar for an early dissolution of the company if its
realisable assets will not cover their expenses and further investigation is not required.
 DIFFERENCES BETWEEN COMPULSORY AND
VOLUNTARY LIQUIDATION
 The differences between compulsory and voluntary liquidation are associated with;
 Timing
 Role of the official receiver
 Stay of legal proceedings
 The dismissal of employees.
 DIFFERENCES BETWEEN COMPULSORY AND
VOLUNTARY LIQUIDATION
Differences
Control Under a members' voluntary liquidation the members control the liquidation process. Under a
creditors' voluntary liquidation the creditors control the process. The court controls the process under
a compulsory liquidation.
Timing A voluntary winding up commences on the day when the resolution to wind up is passed. It is not
retrospective. A compulsory winding up, once agreed to by the court, commences on the day the
petition was presented.
Liquidator The official receiver plays no role in a voluntary winding up. The members or creditors select and
appoint the liquidator and they are not an officer of the court.
Legal proceedings In a voluntary winding up there is no automatic stay of legal proceedings against the company, nor are
previous dispositions or seizure of its assets void. However, the liquidator has a general right to apply
to the court to make any order which the court can make in a compulsory liquidation. They would do
so, for instance, to prevent any creditor obtaining an unfair advantage over the other creditors
Management and staff In any liquidation the liquidator replaces the directors in the management of the company (unless the
liquidator decides to retain them). However, the employees are not automatically dismissed by
commencement of voluntary liquidation. Insolvent liquidation may amount to repudiation of their
employment contracts (provisions of the statutory employment protection code apply).
 WHAT IS ADMINISTRATION?

An administrator is appointed primarily to try to rescue the company as

a going concern. A company may go into administration to carry out an
established plan to save the company.

Administration puts an insolvency practitioner in control of the

company with a defined programme for rescuing the company from
insolvency as a going concern.
 WHAT IS ADMINISTRATION?

 Its purpose is to insulate the company from its creditors while it seeks:

 To save itself as a going concern, or failing that

 To achieve a better result for creditors than an immediate winding up would secure, or failing
that
 To realise property so as to make a distribution to creditors
 APPOINTMENT WITHOUT A COURT ORDER

Some parties – secured creditors and directors and the members by resolution – can appoint an
administrator without a court order. It is possible to appoint an administrator without reference to
the court.
There are three sets of people who might be able to do this:
 Floating chargeholders
 Directors
 Company
 APPOINTMENT WITH A COURT ORDER

There are four sets of parties that may apply to the court for an administration order:
1. The company (that is, a majority of the members by (ordinary) resolution)
2. The directors of the company
3. One or more creditors of the company
4. Another court following non-payment of a fine imposed on the company (just like any other
creditor)
 THE EFFECTS OF APPOINTING AN ADMINISTRATOR

Effects of an administrator appointment

A moratorium over the company's debts commences (that is, no creditor can enforce their debt during the
administration period without the court's permission). This is the advantageous aspect of being in
administration.
The court must give its permission for:
• Security over company property to be enforced
• Goods held under hire purchase to be repossessed
• A landlord to conduct forfeiture by peaceable entry
• Commencement/continuation of any legal process against the company
The powers of management are subjugated to the authority of the administrator and managers can only
act with their consent.
The powers of management are subjugated to the authority of the administrator and managers can only
act with their consent.
Any administrative receiver in place must vacate office. No appointments to this position can be made.
 DUTIES OF THE ADMINISTRATOR

Legal duties of the administrator

• Publish notice of appointment.
• Send notice of appointment to the company
• Obtain a list of company creditors and send a notice of appointment to each.
• Within seven days of appointment, send notice of appointment to Registrar
• Require certain relevant people to provide a statement of affairs of the company.
• Ensure that every business document of the company bears the identity of the administrator and a statement
that the affairs, business and property of the company are being managed by them.
• Consider the statements of affairs submitted to them and set out their proposals for achieving the aim of
administration. The proposals must be sent to the Registrar and the company's creditors, and be made
available to every member of the company as soon as is reasonably practicable, and within eight weeks.
• Whilst preparing their proposals, the administrator must manage the affairs of the company.
 DUTIES OF THE ADMINISTRATOR

 The statement of affairs must be provided by the people from whom it is requested within 11 days
of it being requested. It is in a prescribed form, and contains:

 Details of the company's property

 The company's debts and liabilities
 The names and addresses of the company's creditors
 Details of any security held by any creditor
 ADMINISTRATOR'S PROPOSALS

 The administrator must either propose a rescue plan, or state that the company cannot be
rescued.
Having considered all information the administrator must, within eight weeks (subject to possible
extension):
 Set out their proposals for achieving the aim of the administration
 Set out why it is not reasonable and practicable that the company be rescued. In this case they will
also set out why the creditors as a whole would benefit from winding up.
 ADMINISTRATOR'S PROPOSALS

 The proposal must be sent to all members and creditors they are aware of. It must not:

 Affect the right of a secured creditor to enforce their security

 Result in a non-preferential debt being paid in priority to a preferential debt
 Result in one preferential creditor being paid a smaller proportion of their debt than another
 ADMINISTRATOR'S POWERS

 The administrator takes on the powers of the directors.

Administrators have the same powers as those granted to directors and the following specific
powers to:
 Remove or appoint a director
 Call a meeting of members or creditors
 Apply to court for directions regarding the carrying out of their functions
 Make payments to secured or preferential creditors
 With the permission of the court, make payments to unsecured creditors
 END OF ADMINISTRATION

 Administration can last up to 12 months.


The administration period ends when:
 The administration has been successful
 Twelve months have elapsed from the date of the appointment of administrator
 The administrator or a creditor applies to the court to end the appointment
 An improper motive of the applicant for applying for the administration is discovered
 ADVANTAGES OF ADMINISTRATION

To the company The company does not necessarily cease to exist at the
end of the process, whereas liquidation will always
result in the company being wound up.
To the members They will continue to have shares in the company
which has not been wound up. If the administration is
successful, regenerating the business should enhance
share value and will restore any income from the
business.
To the creditors Creditors should obtain a return in relation to their past
debts from an administration. Unsecured creditors will
benefit from asset realisations. Any creditor may apply
to the court for an administration order, while only
certain creditors may apply for other forms of relief
from debt.