Company Law: Liquidations

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1 Liquidation

• Compulsory or voluntary

• Voluntary may be members’ or creditors’

• Essential difference is solvency

• Court may order liquidation if:-

  • Special resolution

  • Failure to obtain a trading certificate within 12 months of incorporation (plcs only)

  • Suspension of business for 12 months (or failure to commence business within 12 months)

  • Unable to pay under the statutory routes, including the cash-flow and balance-sheet tests

  • Just and equitable

2 Compulsory Liquidation

• Unable to pay under the statutory routes, including the cash-flow and balance-sheet tests

  • An unpaid statutory demand for more than £750 after 21 days is one route to proving inability to pay, not the whole test

  • The debt should not be in dispute

• Just and equitable

  • Failure of substratum

    • Re German Date Coffee Co.

  • Deadlock on the board

    • Re Yenidji Tobacco

  • Quasi-partnership situation

    • Ebrahimi v Westbourne Galleries

• But just and equitable only given in the absence of alternative remedy (re A Company)

3 Administrator Appointed by the Court

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• Application to the court by :-

  • Members ordinary resolution, directors or by creditors

• Court may grant if:-

  • Company is unable to pay its debts

  • The order, if granted, is likely to achieve the desired result

• Effect of an order

  • Moratorium on company’s debts

  • Powers of management passed to administrator

  • Petitions for winding-up are dismissed

  • Any administrative receiver already in office must step aside

4 Duties of an Administrator

• An officer of the court and agent of the company, acting in the interests of creditors as a whole

• So has fiduciary duties as well as legal

• Must send notice of appointment to creditors

• Must obtain a list of creditors

• Must send notice of appointment to registrar within 7 days

• Must require a statement of affairs

• Must identify appointment on all company business letters / correspondence

• Objectives, in statutory order: rescue the company as a going concern; otherwise achieve a better result for creditors than winding up; otherwise realise property for secured or preferential creditors without unnecessarily harming creditors as a whole

• Must manage the affairs of the company

5 Advantages of Administration Compared with Liquidation

• Company may continue after the process is completed

• Company is sheltered from creditors allowing time to design acceptable proposals

• Creditors are therefore prevented from applying for a liquidation

• Administrator can challenge previous transactions

• Creditors more likely to get some money back

• Members will hold shares in a viable company (possibly)

• Any creditor can apply to the court

• Floating charge debenture holders can appoint without reference to the court

• Creditors (potentially) will have a continuing customer

• Directors could avoid acquiring the reputation of having been involved in an insolvent company

6 End of Administration Period

• Administration normally ends automatically after 12 months unless extended; earlier termination follows the statutory notice or court routes

  • Success alone does not automatically end every administration

  • 12 months after appointment

  • Application to court by administrator

  • Application to court by a creditor

  • When original applicant is discovered to have had an inappropriate motive

• Administrator can apply to court

  • On determining that administration cannot be effective

  • The company should never have been in administration

  • (if appointed by the court) the administration has been successful

7 Sequence of distribution of assets in a liquidation

Fixed-charge proceeds are paid after the costs of realising the charged asset

Insolvency expenses are then paid from the relevant estate, followed by:

• outstanding capital

• interest on overdue payments

• lenders expenses incurred in connection with the recovery of the amount due

• ordinary and secondary preferential creditors, including the restored HMRC preference where applicable

  • outstanding company contributions to employees’ pension funds

  • amounts outstanding in respect of social security contributions

  • employees’ remuneration outstanding up to a value representing the lower of 4 months’ remuneration or £800 for each employee

• the prescribed part set aside for unsecured creditors, then floating-charge claims

• a valid retention-of-title claimant may own the asset, so it does not enter the company’s estate

• unsecured claims, followed by statutory interest and then members

• any calls paid in advance by shareholders

• preference shareholders

• equity / ordinary shareholders

*** from this point onwards up to and particularly including category 6, distribution is potentially affected by the introduction of the “Prescribed Part”

8 The “Prescribed Part”

• the concept of the prescribed part was introduced in 2003 in an effort to ring-fence / secure / set aside / protect an amount from the proceeds of sale of the assets of the company in liquidation for the benefit of the unsecured creditors / payables in category 6 on the previous page

• it ensures that those people that have no security for the amounts owed to them will have at least something due to them from the liquidation

• the prescribed part is calculated as follows:

  • where net assets in the liquidation are less than £10,000, the prescribed part is 50% of that amount

  • for qualifying charges created on or after 6 April 2020, the maximum prescribed part is £800,000

    • 50% of the first £10,000 net assets +

    • 20% of the balance, subject to the £800,000 maximum prescribed part; earlier qualifying charges retain the transitional cap

  • the effect is that, even though there may be an amount remaining unsatisfied to the lenders secured by floating charge debenture, the proceeds of the sale of the assets that are the subject of the floating charge shall be partially set aside as prescribed part for the benefit of those ranking lower than the secured debenture holders