Insolvency

Introduction

If a company finds itself in financial difficulty, the two main options available to it are:

 Administration – this aims to reduce the company so that it may continue trading as a going
concern.
 Liquidation – this winds up the company, thud bringing its life to an end.

Voluntary liquidation: s84 Insolvency Act (IA 1986)

A voluntary liquidation occurs when the members pass a resolution to go into liquidation. The type
of resolution needed depends on the circumstances:

 Where the period fixed for the duration of the company expires or an event occurs upon
which the articles provide that the company should be wound up, an ordinary resolution
must be passed.
 A special resolution must be passed if the company is being wound up for any other reason.

There are two types of voluntary liquidation:

 A members voluntary liquidation is used when the company is solvent

 A creditors voluntary liquidation is used when the company is insolvent

Members voluntary winding up

1. Winding up commences from the passing of the appropriate resolution: s86 IA 1986
2. The directors make a declaration of solvency under s89 IA1986 stating that they are of the
opinion that the company will be able to pay it debts within 12 months. It is a criminal
offence to make a false declaration.
3. The members appoint a named insolvency practitioner as liquidator (s91 IA1986)
4. The liquidator is responsible for realising the assets and distributing the proceeds
5. The liquidator presents their report to a final meeting of the members (s93 IA 1986)
6. The liquidator informs the Registrar of the final meeting and submits a copy of their report
(s94(3) IA1986)
7. The Registrar registers the report and the company is dissolved 3 months later.

Creditors voluntary winding up

1. Winding up commences from the passing of the appropriate resolution (s86 IA 1986)
2. The members appoint a liquidator. The directors must then deliver a notice to the creditors
seeking their decision on the liquidator. The directors must also send to the creditors a
statement of affairs within 7 working days
3. The creditors can approve the liquidator either by virtual meeting or by the ‘deemed
consent process’. Under this process, approval is deemed unless 10% of the creditors of the
company raise objections to the proposed liquidator. The members and creditors may
appoint up to five persons to serve on a liquidation committee.
4. The liquidator submits their final report to the members and creditors
5. The liquidator submits a copy of their report to the Registrar
6. The Registrar registers the report and the company is dissolved 3 months later.
Converting a members voluntary liquidation into a creditors voluntary liquidation

If the liquidator discovers that the company’s debt will not be paid in full within the time specified in
the declaration of solvency, they must convert the members voluntary liquidation into a creditors
voluntary liquidation. This is executed by following the process for a creditors voluntary liquidation.

Compulsory liquidation

Grounds for winding up: s122 IA1986

A compulsory winding up commences when I petition for winding up order is presented to the court.
The possible grounds for the petition are set out in s122 IA1986:

 The company has passed a special resolution to be wound up by the court

 A public company has not been issued with a trading certificate within a year of
incorporation
 The company has not commenced business within a year of being incorporated or has
suspended its business for over a year
 The company is unable to pay its debts. A company is deemed to be unable to pay its debts
where a creditor who is owed at least £750 has served a written demand for payment and
the companies failed to pay the sum due within three weeks.
 A dissatisfied member my petition the court for the company to be wound up on the just
and equitable ground. However, the court will not make an order under this ground if some
other more reasonable remedy is available.

Petitioners

The following persons may petition the court for a compulsory liquidation:

 The company itself

 The Official Receiver, who is a civil servant in The Insolvency Service and is an officer of the
Court
 The Department for Business, Energy and Industrial Strategy
 A contributory. This is any person who is liable to contribute to the assets of the company
when it is being wound up. (The contributory must prove that the company is solvent).
 A creditor who is owed at least £750.

Effect of winding up

The winding up petition has the following effects:

 The liquidation is deemed to have started when the petition was first presented
 All actions for the recovery of debt against the company or stopped
 Any floating charges crystallise
 An illegal proceedings against the company halted, and non may start unless leave is granted
from the court
 The company says is to come on business except where it is necessary to complete the
winding up, example to complete work in progress
 The powers of the director cease, although the directors remain in office
 The employees are automatically made redundant, but the liquidator can re employ them to
help him or her complete the winding up.
Subsequent procedure

1. On the making of the winding up order, the official receiver becomes liquidator
2. Within three months, the official receiver will summon meetings of the contributor
contributories is in order to appoint a licensed insolvency practitioner to takeover the job of
liquidator
3. Creditor approval of the liquidator is sought via the ‘deemed consent’ process. If 10% or
more object to an alternative decision making procedures such as virtual meeting should be
used
4. The liquidator is responsible for realising the assets and distributing the proceeds
5. The liquidator returned to the court and the court passes an order dissolving the company
6. The liquidator files the order on their final report with the registrar
7. The registrar registers the report and the company is dissolved as from the date of the order

Application of assets

The liquidator must repay debts in the following order:

 Fixed charge holders

 Expenses of liquidation
 Preferential creditors
o Wages or salaries due in the four months preceding the commencement of winding
up (maximum £800 per employee)
o All accrued holiday pay.

All preferential creditors rank equally amongst themselves.

 Secondary preferential creditors – HMRC in respect of VAT, PAYE income tax and employees
NIC
 Floating charge holders
 Unsecured creditors – rank equally amongst themselves. The Enterprise Act 2002 introduced
the Insolvency Act 1986 a ring-fencing mechanism where part of assets which are subject to
a floating charge are available to unsecured creditors. The amount ring-fenced is 50% of the
first £10,000, plus 20% of the rest up to a maximum ring-fenced fund of £800,000.
 Post liquidation interest
 Members – declared but unpaid dividends
 Members – return of capital (in accordance with class rights)
 Any surplus to be distributed to the members.

Administration

Purpose

Administration involves the appointment of an insolvency practitioner, known as an administrator,

to manage the affairs, business and property of a company. It was first introduced by schedule 16
Insolvency Act 1986, but has subsequently been amended by the enterprise act 2002.

Administration is often used as an alternative to putting a company into liquidation, e.g. to:

 Rescue a company in financial difficulty with the aim of allowing it to continue as a going
concern
  Achieve better results for the creditors than will be likely if the company were to be wound
up
 Realise property to pay one or more secured or preferential creditor.

The administrator can only use the third option where:

 They think it is not reasonably practicable to rescue the company as a going concern,
and
 They think that they cannot achieve a better result for the creditors as a whole than
would be likely if the company were to be wound up, and
 They do not unnecessarily harm the interests of the creditors of the company as a
whole.

Who can appoint an administrator?

An administrator can be appointed by any of the following persons:

 The court in response to a petition by a creditor, the directors or the company itself
 The holder of the qualifying floating charge over the company’s assets
 The company or its directors provided that winding up has not already begun.

The court will only agree to appoint an administrator if it is satisfied that:

 The company is or is likely to become unable to pay its debts, and

 The administration order is likely to achieve its objectives.

Consequences of administration

The appointment of an administrator has the following effects:

 The rights of creditors to enforce any security over the company’s assets are suspended
 There can be no enforcement of charges, retention of title clauses or hire purchase
agreements against the company
 Any outstanding petition for winding up is dismissed
 No resolution may be passed to wind up the company
 The directors still continue in office, but their powers are suspended.

Carrying out the administration

The administrator has a number of tasks:

 They are the company’s agent, but must act in the best interests of all the companies
creditors. They can do anything necessary for the management of the company.
 They have wide powers to manage the business and property of the company, including the
power to defend in different legal proceedings, sell assets and borrow money. With regards
to selling assets this includes property which is subject to both fixed and floating charges,
which may be disposed of without the consent of the charge-holder, although they retain
first call against any money realised by the sale of an asset. In respect of assets subject to fix
chargers, this will require the court’s permission.
 They have the power to remove and replace directors and employees. If an employee’s
contract is not adapted by the administrator within 14 days, that employee is made
redundant.
  They can pay up monies to secured or preferential creditors without the need to seek
approval if the court. They can also payout monies to unsecured creditors but this must be
with the approval of the court.

The administrator also has a number of legal duties. As soon as is reasonably practicable after
appointment:

 They must send notice of appointment to the company and published notice of appointment
 They must obtain a list of company creditors and send notice of appointment to each
 Within seven days of appointment, they must send notice of appointment to the registrar.
 They will arrange for certain relevant people to provide a statement of affairs of the
company.
 They must ensure that every business document of the company bears their identity as
administrator understatement that the company affairs and property are being managed by
them.
 Based on the statement of affairs, they must draw up a statement of their proposals within
eight weeks of their appointment
 The proposals must be approved by the creditors of the company. This approval can be
given by:
o Deemed consent process
o Virtual meeting
o Some other reasonable method
 The creditors have the right to form a creditors meeting of between three to five creditors. if
from the administrator must hold a meeting of the creditors within six weeks of its
establishment
 If the creditors do not approve the proposals, at the court may dismiss the administrator or
make such provisions as it sees fit
 If the creditors approved the proposals the administrator can carry them out.

Ending the administration

The administration will end when it is completed or when the administrator is discharged by the
court:

 The administration must normally be completed within 12 months of the date on which it
commenced. However, this term can be extended with the consent of the core or the
secured creditors.
 The administrator may apply to the court for discharge at anytime. They must make an
application when the purpose of the order has been achieved. They must also notify the
registrar and all of the creditors.