Company Law: Liquidations

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1 Liquidation

• compulsory or voluntary

• voluntary may be members’ or creditors’

• essential difference is solvency

• members’ voluntary liquidation – the company is solvent, the directors make a declaration of solvency and members pass a special resolution

• creditors’ voluntary liquidation – the company is insolvent and creditors control the liquidator

• 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 its debts as they fall due

  • just and equitable

2 Compulsory Liquidation

• unable to pay its debts as they fall due

  • need to show the court that the company has owed the petitioning creditor more than £750 for more than 21 days

  • 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 administrator acts as agent of the company, manages it and must act 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

• must prepare proposals for achievement of administration objectives

• 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

• a qualifying floating-charge holder may appoint an administrator

• 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

• automatically ends:-

  • when successfully completed

  • 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 holders, from the charged asset

• liquidation expenses

• preferential creditors

• the prescribed part from floating-charge realisations for unsecured creditors

• floating-charge holders

• unsecured creditors

• shareholders last