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Hi tutor,
I am a bit confused about compulsory and voluntary liquidation and between creditors and members voluntary liquidation.
Please explain. Thanks.
Compulsory liquidation is when a claimant goes to the Court and the Court is persuaded (on one of 6 different grounds) that the company should be liquidated
Voluntary liquidation is a voluntary act by the members of the company to put their company into liquidation
A members’ voluntary liquidation (remember, it’s a voluntary action taken by the members) is applicable where there are strong grounds for believing that the company will be able to settle the entire liabilities of the company ie the company is solvent
A creditors’ voluntary liquidation (remember, it’s a voluntary action taken by the MEMBERS) to put their company into liquidation but it’s called a creditors’ voluntary liquidation because it is not likely that the creditors will be paid in full the amount of their debt ie the company is not solvent
Is that enough?
Can I ask more?
Agents are not liable but promoters are liable unless circumstances tells us otherwise, why?
Because agents act ‘for and on behalf of the company (the principal)’ whereas promoters are acting on their own account
Why?
Because the company that they are promoting / creating / forming by definition does not yet exist
And therefore promoters cannot be acting on behalf of the company that they are promoting and are therefore acting on their own account
OK?
Yes. Understood better now. Another thing. Why is it that the company will still be found liable for debts incurred by it directors who acted beyond its power and authority eg. Loaned from a bank but used it for personal use; or bought items not within the initial agreement?
Because the third party could not have known that the director, acting as an agent, was acting beyond his/ her authority
So, to simplify matters, the law holds the principal liable and leaves it up to the principal to recover the money from the director
Can you imagine the alternative? Every director of every company could unauthorisedy obtain money / goods / services from innocent third parties and that would leave the third party to try to recover the money / value
No, that would be unconscionable
So hold the principal liable and let the principal exercise its power to recover the value from the rogue director
OK?
Sir Mike can i ask again? I encountered questions in the mock exam at OT site which asks for who appoints the liquidator under creditors voluntary winding-up – the anwer is creditors but one of the choices is members. I got confused as you have mentioned voluntary liquidation is from the members.
Why is it that members cannot petition for a court on the grounds of insolvency?
They can, but then it wouldn’t be a voluntary liquidation … it would be a compulsory liquidation by the Court
In a creditors’ voluntary liquidation, the members hold a meeting to pass a resolution to put the company into liquidation and, if that resolution is passed, they also NOMINATE a liquidator
Immediately after (no later than the next day(I seem to remember)) a meeting of creditors is held
The purpose is to tell the creditors that the company is now in liquidation and that the members have nominated a person as liquidator
However, because the creditors are unlikely to be paid in full, their wishes trump the wishes of the members so the creditors are given the opportunity to either accept the members’ nominated liquidator or, alternatively, to APPOINT a person of their own choosing
OK?
So if the two choices are present (members and creditors), the Creditors is the best answer? Thanks.
No! Because if it’s a members’ voluntary winding-up, then it’s the members that will appoint the liquidator
They will both nominate and, at the same time, appoint
If it’s a creditors’ voluntary liquidation, the members will nominate the liquidator. Then the creditors, in their meeting shortly after the members’ meeting, may either accept / appoint the liquidator nominated by the members or may say “No, we don’t want that person to be liquidator. This is the person we want” So the creditors may appoint someone other than the person nominated by the members
Better?
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