Features common to both types of liquidation
In both a voluntary and a creditors’ winding-up the liquidator is under a duty to take control of the company’s assets and to convert those assets into money, pay the liquidation expenses, discharge the company’s debts, and then (if any surplus remains) distribute it to members in accordance with their entitlement. The rights of the shareholders in this regard will usually be set out in the company’s articles. In controlling and distributing the company’s assets the liquidator owes a duty to the company and to those who are entitled to the assets on liquidation. He is obliged to discharge his functions correctly. If he fails in this duty he may himself be sued for misfeasance.
The liquidator is given extensive powers by the Insolvency Act 1986. Some of these powers may be exercised only with the sanction of the members or of the liquidation committee. Examples of these powers are to pay any class of creditor in full, to enter into a compromise or arrangement with creditors, or to compromise claims to which the company is entitled. Other powers may be exercised without sanction in a voluntary liquidation or with the court’s sanction in a compulsory liquidation. Examples of these would be bringing or defending legal proceedings or carrying on the company’s business. Then again, there are some powers which may be exercised without sanction whatever the type of winding-up. Examples of these are selling the company’s property, executing documents or borrowing on the security of the company’s assets.
The assets of a company that is being wound up are applied in the following order:
1 Three categories of creditor may have a priority claim to be paid out of particular assets. These are:
(i) Secured creditors:
A creditor who has a fixed charge over a particular piece of property may sell this property and pay himself out of the proceeds. Any surplus will be handed over to the liquidator.
(ii) Judgment creditors:
If execution has begun of a judgment debt of more than £250 the sheriff must retain the proceeds of sale for 14 days. If during that time notice is served on him of the presentation of a petition or the calling of a meeting to commence liquidation he must retain the money and, if liquidation does commence, hand it over to the liquidator. If execution is otherwise complete, then the judgment creditor may claim the sum in question.
(iii) Landlords who have distrained for rent:
If distress has been completed before the commencement of the winding-up, then the landlord may keep the sum distrained for. However, if in a compulsory winding-up a landlord has distrained within three months before the winding-up order is made, preferential debts are a first charge on the goods seized or on the proceeds of selling them.
2 Costs of winding-up.
3 Preferential creditors:
Preferential debts are unsecured debts which must be paid in priority to other unsecured debts. Broadly they fall into two categories. These are:
(i) Taxes and other sums due to public authorities;
(ii) Wages and other money sums due to employees.
The taxes include VAT for the preceding six months, income tax deducted under Pay As You Earn rules within the preceding 12 months, social security contributions for the previous 12 months, sums owing as contributions to an occupational or state pension scheme, and wages and salaries of employees due in respect of the previous four months (up to a maximum of £800 per employee) as well as any accrued holiday remuneration to which each employee is due.
4 Creditors having floating charges:
If there is a “floating charge” (which is a mortgage over all of the company’s business and undertaking) then the proceeds of the property subject to this “floating charge” may be used to satisfy preferential debts before the beneficiary of the “floating charge” can claim against his security.
5 Ordinary unsecured creditors:
These will usually be ordinary trade creditors (customers and suppliers) who have not taken security for their debts.
6 Deferred debts:
The only important category of deferred debts is dividends that have been declared but not yet paid.
7 Surplus distribution of any remaining assets to members according to their rights under the articles.
Measures to protect creditors
The liquidator has the power to apply to court to set aside or avoid certain transactions by the company. Thus the liquidator may apply to the court to set aside a “floating charge”. Where this has been created in favour of a connected person the time-limit is two years from the creation. Where it is in favour of anybody else the time-limit is one year. In the former case no particular details need be made out; the fact that the person is connected, ie is anyone who is a director or shadow director or an associate of such (husband, wife, relative, employee or employer), is sufficient. In the latter case it must be shown that the charge was created at a time when the company could not pay its debts or became unable to pay them as a result of the transaction associated with the charge. This provision merely renders the charge void; the debt is still due.
The liquidator may also apply to the court to set aside company transactions at an “under value” or where the company gives a “preference”. A company enters into a transaction at an “under value” if the company makes a gift or enters into a transaction on terms that the company receives no consideration or the company enters into a transaction for a consideration significantly less than that provided by the company.
A company gives a “preference” if it does anything to put a creditor, surety, or guarantor in a better position in the event of the company’s insolvent liquidation than he would otherwise be. The court will make an order only if the company was influenced by a desire to prefer the creditor.
The transaction or preference will be set aside by the court only if the company is insolvent and the transaction or preference was made within the relevant period. The period for any transaction at an undervalue, or a preference to a connected person, is two years, and for preferences to other persons the period is six months.
In addition, the liquidator may ask the court to make an order that particular people contribute to the company’s assets. This may be done, for example, if somebody is liable for fraudulent trading. If in winding-up it appears that the company’s business has been carried on in an attempt to defraud creditors or for any fraudulent purpose, the court may declare that any persons who were knowingly parties to the fraudulent trading shall make a contribution to the company’s assets. This requires proof of actual fraud (ie dishonesty).
A new provision, added in 1985, imposes liability for “wrongful trading”. This is committed by a director who knew, or ought to have concluded, that there was no reasonable prospect that the company would avoid going into insolvent liquidation. The court may in such circumstances order such a director to make such contribution to the company’s assets as the court thinks proper. The breadth of this provision, however, is limited to directors, unlike the provision of fraudulent trading, which is more wide-ranging.
A liquidator, creditor or contributor may also apply to the court in the course of a winding-up where it appears that a promoter, manager, director, liquidator, administrator, administrative receiver or officer has misapplied company money or property or has been guilty of any misfeasance or breach of duty. He may be ordered to repay or restore the money or property or contribute such sum as the court thinks just.
Another new provision introduced in 1985 places restrictions on the use of company names. Where a company has gone into insolvent liquidation, directors and shadow directors of the company are prohibited from using the company’s name or a similar name for a period of five years. A person in breach of these provisions will be guilty of a criminal offence. This is to prevent the so-called “phoenix syndrome” whereby insolvent businesses often rose from the ashes in a new form but with a similar name.
There is a long list of other liquidation offences whereby officers of a company may be prosecuted for misconduct during a winding-up, falsification of company books, false representations to creditors and frauds on creditors.
Under the Company Directors Disqualification Act 1986, the court has the power to make an order disqualifying a person from being a director, liquidator, administrator, receiver or manager or being concerned in the promotion, formation or management of a company. In particular, the court must make a disqualification order against a person if it is satisfied that he is or has been a director of a company which has become insolvent and his conduct as director of that company when taken with his conduct as a director of any other company makes him unfit to be concerned in the management of the company. The period of the disqualification in this case is a minimum of two years and a maximum of 12 years. In other cases, although no minimum is set, there is a maximum period of 15 years for disqualification.
Administrative receivership
Where a company has granted a “floating charge” as security to one or more creditors over its assets and undertaking, the creditor(s) may enforce the security where the company is in financial difficulties. (A receiver may also be appointed to enforce a fixed charge — one which is a security given over a fixed asset or class of assets.)
The document or debenture setting out the security will generally enumerate the various grounds for enforcing the security. These will usually include failure to pay interest on a loan, failure to repay the principal sum by the due date, the company ceasing to trade etc.
The creditor will appoint a receiver to enforce the security. The receiver must be a qualified insolvency practitioner. It is his function to take control of the undertaking and to dispose of assets to pay off the secured creditors’ debts. The Insolvency Act 1986 facilitates his functions by conferring rights and powers on him.
An administration receiver must require the company’s officers to submit a statement of affairs to the company (as described above).
Within three months of his appointment the administrative receiver must send a report to the Registrar of Companies and to all secured and unsecured creditors setting out details of:
(i) events leading to his appointment;
(ii) disposals or proposed disposals of company property by him;
(iii) carrying on or proposed carrying on of the company’s business by him;
(iv) the principal and interest payable to the debenture holders who appointed him; and
(v) the amount, if any, likely to be available to pay other creditors.
In addition, the administrative receiver must call a meeting of all unsecured creditors unless the court allows him to dispense with the meeting. The meeting may establish a creditors’ committee to maintain contact with the administrative receiver and receive information from him on a regular basis.
The administrative receiver should pay out the proceeds from the realisation of assets in the following order of priority:
(a) he must first pay the expenses of his operations (including his own remuneration);
(b) if the security is a floating charge the receiver must next discharge the debts owing to its preferential creditors;
(c) he may then repay the debenture debt and interest thereon.
Administration
This is a new procedure to enable an attempt to be made to rescue a company in financial difficulties by placing its affairs in the hands of an administrator.
Previously there has been no facility for unsecured creditors to take concerted action to recover money from a company short of a winding-up petition. The purpose of the administration order procedure is to give an unsecured creditor the opportunity of appointing an administrator who has similar powers to an administrative receiver.
While the order is in force the leave of the court is needed before any winding-up proceedings can be taken or any process, charge, hire purchase or other agreement can be enforced. Before making such an order under the Insolvency Act 1986, section 8(1)(a), the court must be convinced that the order would be likely to achieve one or more of:
(a) the survival of the whole or part of the company as a going concern; or
(b) the approval by creditors of a composition or scheme of arrangement; or
(c) a more advantageous realisation of the company’s assets than would be effected on liquidation.
The presentation of the petition imposes a moratorium on the company’s debts until such time as the court decides to make the order or dismiss the petition. This means that the creditors may not:
(a) take any steps to enforce any security over the company’s property; or
(b) repossess goods under a hire-purchase agreement, leasing agreement, retention of title or conditional sale agreement; or
(c) commence legal proceedings or levy executions or distress.
However, these actions may be taken with the court’s permission.
No resolution may be passed to wind up the company. However, a petition may be presented for a compulsory winding-up or an administrative receiver may be appointed.
If the court makes an order, any petition for winding up the company is dismissed and any administrative receiver must vacate office. In addition, any receiver must also vacate office if the administrator requires him to do so.
Every invoice, order, or letter issued must contain the administrator’s name and a statement that the company is being managed by him.
A qualified insolvency practitioner is appointed to administer the affairs of the company. The administrator is given the same wide powers as an administrative receiver to manage the business and property of the company, including the power to bring and defend legal proceedings, sell assets, borrow money, insure, and appoint agents. In case of difficulty the administrator may apply to the court for directions.
Notice of all administration orders must be sent to the Registrar of Companies within 14 days and to all creditors within 28 days. The administrator’s proposals must also be sent to the Registrar and creditors within three months. A meeting should be held to consider the proposals, and if these are accepted the company must be managed in accordance with the proposals.
The administrator may apply to the court for discharge at any time. He must make such an application when it appears that the purpose of the order has been achieved or is incapable of being achieved.
Administration and administrative receivership are mutually exclusive. An administration order cannot be made if at the time of hearing an administrative receiver has been appointed. Once an administration order has been made no appointment of an administrative receiver may be made.