INSOLVENCY

Liquidation
Liquidation is the dissolution or winding up of a company. It is the process whereby the life of the company is terminated. It is the formal and strictly regulated procedure whereby the business is brought to an end and the companys assets are realized and distributed to its creditors and members. The procedure is governed by the Insolvency Act 1986 and may be divided into two distinct categories:

1)

Voluntary Liquidation
It occurs where the members pass a resolution to go into liquidation. The type of resolution needed depends on the circumstances:

a) b)

Where the period fixed for the duration of the company expires or an event occurs upon which the articles provide that a 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: i)

Members Voluntary Liquidation

It is used where the company is solvent.

Procedure
Winding up commences from the passing of the appropriate resolution. (s86 IA 1986) The Directors make a Declaration of Solvency under s89 IA 1986 stating that they are of the opinion that the company will be able to pay its debts within 12 months. The members appoint a named insolvency practitioner as liquidator. (s91 IA 1986) The liquidator is responsible for realizing the assets and distributing the proceeds. The liquidator presents his report to a final meeting of the members. (s93 IA 1986) The liquidator informs the registrar of the final meeting and submits a copy of his report. (s94 IA 1986) The registrar registers the report and the company is dissolved 3 months later. ii)

Creditors Voluntary Liquidation

 It is used where the company is insolvent.

Procedure
Winding up commences from the passing of the appropriate resolution. (s86 IA 1986)

There is no declaration of solvency as the company is insolvent. A meeting of creditors must be held within 14 days of the resolution to liquidate. (s98 IA 1986) The directors must submit a statement of the companys affairs. (s99 IA 1986)

Both the members and the creditors have the right to appoint a named insolvency practitioner as liquidator. (s100 IA 1986) The Creditors nominee prevails unless they have not made their appointment. (s100 (2) IA 1986) The members and creditors may appoint up to five persons to serve on a liquidation committee. (s101 IA 1986) The liquidator is responsible for realizing the assets and distributing the proceeds. The liquidator presents his report to final meetings of the members and creditors. (s105 IA 1986) The liquidator informs the registrar of the final meeting(s) and submits a copy of his report. (s106 IA 1986) The registrar registers the report and the company is dissolved.

2)
i) ii) iii) iv)

Compulsory Liquidation
It is a winding up ordered by the court under s122 IA 1986. Following are the reasons for court order. 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 company has failed to pay the sum within three weeks. The court is of the opinion that it is just and equitable to wind up the company. It is an old public company which has failed to re-register.

v) vi)

vii)

It may be used in private companies where there is a deadlock in the management. (Tobacco Co Ltd 1916)

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 & is an officer of the court. The Department for Business, Enterprise and Regulatory Reform A creditor who is owed at least 750. A contributory. It is any person who is liable to contribute to the assets of the company when it is being wound up.

Effects of Winding up
All actions for the recovery of debt against the company are stopped. Any floating charges crystallize. Any legal proceedings against the company are halted. The company ceases to carry on business. The powers of the directors cease. The employees are automatically made redundant.

Procedure
On the making of the winding-up order, the official receiver becomes liquidator. (136 IA 1986) The official receiver will require the present or past officers to prepare a statement of companys affairs. Statement must reveal: i) ii) iii) Particulars of companys assets and liabilities. Name & address of companys creditors. Any securities held by the creditors whether fixed or floating charges. Within 12 weeks, the official receiver will summon meetings of the creditors and contributories and lay before them the statement of companys affairs. They will appoint a named insolvency practitioner to take over the job of liquidator and to appoint a liquidation committee. (136 (5) IA 1986) The liquidator is responsible for realizing the assets and distributing the proceeds. (143 IA 1986) The liquidator presents his report to final meetings of the members and creditors. (146 IA 1986) The liquidator informs the registrar of the final meeting(s) and submits a copy of his report.

 The registrar registers the report and the company is dissolved 3 months later.

Functions of liquidator
To secure the assets of the company Realizing the assets of the company Distributing the assets of the company to companys creditors

Administration
Administration, on the other hand is a means of safeguarding the continued existence of business enterprises in nancial difficulties, rather than merely ensuring the payment of creditors. Administration was rst introduced in the Insolvency Act 1986. The aim of the administration order is to save the company, or at least the business, as a going concern by taking control of the company out of the hands of its directors and placing it in the hands of an administrator. Alternatively, the procedure is aimed at maximizing the realized value of the business assets. Once an administration order has been issued, it is no longer possible to commence winding up proceedings against the company or enforce charges, retention of title clauses or even hire-purchase agreements against the company.

Functions of the administrator

Rescue the company as a going concern. Achieve a better result for the companys creditors as a whole than would be likely if the company were to be wound up. Realize the value of the property in order to make a distribution to the secured or preferential creditors. An application to the court for an administration order may be made by a company, the directors of a company, or any of its creditors, but in addition the Enterprise Act allows the appointment of an administrator without the need to apply to the court for approval. Such out of court applications can be made by the company or its directors, but may also be made by any oating charge holder. The administrator must either propose a rescue plan, or state that the company cannot be rescued. The administrator must call a meeting of creditors within 10 weeks of their appointment to approve the proposals. During the administration process the administrator has the powers of the directors to: Do anything necessary for the management of the company Remove or appoint directors Pay out monies to secured or preferential creditors without the need to seek the approval of the court Pay out monies to unsecured creditors with the approval of the court Take custody of all property belonging to the company

Dispose of company property without the consent of the charge holder which is subject to both xed and oating charges.

The administration period is usually 12 months, although this may be extended by six months with the approval of the creditors, or longer with the approval of the court. Administration period ends when: The administration has been successful. Twelve months have elapsed from the date of appointment of administrator. The administrator applies to the court to end the appointment. A creditor applies to the court to end the appointment.

When the administrator concludes that the purpose of their appointment has been achieved, a notice to this effect is sent to the creditors, the court and the companies registry. Such a notice terminates the administrators appointment. If the administrator forms the opinion that none of the purposes of the administration can be achieved, the court should be informed and it will consider ending the appointment. Creditors can always challenge the actions of the administrator through the courts.