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Insolvency And Liquidation Notes

LPC Law Notes > Insolvency and Liquidation Notes

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W1 - INSOLVENCY AND LIQUIDATION BM = board meeting GM = General meeting SH = shareholders D/Dirs = Directors CoHo = companies house OUTCOME 1 - Identify when a company has become insolvent s.122(1) - Co may be ordered to be wound up by court when it's unable to pay debts s.123 - Unable to pay debts = MAIN TESTS (1)(e) if...the company is unable to pay it's debts AS THEY FALL DUE (= "THE CASHFLOW TEST") (ie. Not enough cash in the bank!) - current assets v current liabilities
[nb. Re Chengue Finance - do sometimes consider future liabilities) (2) if...the value of the company's assets is less than the amount of it's liabilities (i.e. net assets ="THE BALANCE SHEET TEST")Also unable to pay its debts if fails to comply with: s.123(1) (1)(a) a statutory demand for a debt over PS750 (1)(b) failure to satisfy enforcement of a judgement debt (1)(e) proof that the value of the company's assets is less than the amount of it's liabilities, taking into account contingent and prospective liabilities (EG. LITIGATION PENDING/INSURANCE CLAIMS - won't be on balance sheet!!
How can you identify if a company is insolvent?

NB. Expert advice should be sought from an insolvency practitioner in the event of a co facing insolvency. A key message to get across to D's is to seek expert advice earlier, rather than later, at a point when the business may still be rescued!!

BALANCE SHEET:FIXED ASSETS - Sometimes even if the company has enough net assets and appears solvent, the assets may be overvalued in the balance sheet (e.g. Because the market for those assets has changed since they were being valued for balance sheet purposes) ? will have a bearing on the current overall solvency;CURRENT ASSETS - Often balance sheet value given to assets such as stock, debtors, or even fixed assets like plant and machinery bears no relation to the amount such assets might actually realise on liquidation ? care needs to be taken to adjust the values for the assets on the basis of information provided by the client about stock, plant and machinery and debtors;

NET CURRENT ASSETS less CURRENT LIABILITIES = THE CASH FLOW TEST - check this figure!!IF CO WON'T GET ANYTHING FOR STOCK USE ACID TEST= Current assets (without stock and prepayments) - Current liability?

NET ASSETS - if company has total assets of more value than its total liabilities - indicates that the company is SOLVENT. If total assets are worth LESS than total liabilities, then this shows company is INSOLVENT on the BALANCE SHEEET TEST Current Ratio - 1.5:1 is good Retail businesses often show lower current ratios Acid Test - 1:1 is good This means that if the business were dissolved it would meet each debt pound for pound

LIQUIDATION PROCESS: "LIQUIDATION" - CAN BE SOLVENT (MVL) OR INSOLVENT (CVL/COMPULSORY) involves the appointment of a liquidator (powers and duties at Sch4 IA 1986) who collects in and distributes the company's assets and dissolves the company: 3 STAGE PROCESS:

Who petitionsCo must be Process

Members voluntary liquidation

Creditors Voluntary liquidation

Co when wish to cease trading

Co in response to creditor pressur



1. D's propose a BM

2. D's draw up stat dec of solvency:
? full enquiry into co affairs
? conclusion that co can pay debts in full within 12 months s.89 IA86
? D's liable to a fine if no reasonable grounds

3. D's call a GM that must take place within 5 weeks
? 21 days notice required

4. Either period fixed for duration of co has expired s.84(1)(a) or pass SR to wind up s.84(1)(b) and OR to appoint liquidator s.91

5. Lodge stat dec s.89(3) and SR at coho within 15 days of SR s.84(3) & s.30(1) CA06

6. Liquidator takes over and notification given to all creditors s.85 within 14 days of resolution give notice by advertisement in gazette Creditor No say in the liquidator apt or in process position Usually paid in full (definition of solvency)

Liquidat or duties/

1. D's propose BM

2. D's propose GM to wind up co a recommend CVL

3. At the GM - SH pass an SR to w s.84(b) because it's insolvent and nominate liquidator s.91(1)

4. Lodge SR at coho within 15 day s.84(3) & s.30(1) CA06

5. within 14 days after passing, gi by advertisement in gazette

- s.100 - creditors in control but u be paid in full
- s.98 creditors meeting is held wi days of the resolution. Appropriate (7 days) must be given in local pre London gazette
- s.100(1) apt a liquidator/liquidat committee s.101(1) not exceeding persons at meeting, they are chos simple majority of % of debt held (secured creditors cant vote)

1. Must place notice of his apt in London gazette s.109

2. L must send notice of apt to all creditors he is aware of within 28 days

3. s.115 IA86 - L expenses paid out of co assets in priority of other claims

4. L is appointed A of the co and can:
? Sell assets
? Use co bank account
? Apt A's
? Carry on co business

Do anything necessary to facilitate winding up SH position D position

After liquidati on

If surplus after creditors they will be paid No exercise of powers unless continuance sanctioned by liquidator or members at GM
- but still officially hold office s.91(2)
- L places accounts before members at GM s.94(1) then L released
- Accounts then sent to coho and 3 months later co dissolved by registrar
- (If MVL is commenced and liquidator discovers company insolvent, he calls meeting and changes to CVL)

No D's powers cease on apt of L s.103

As soon as affairs fully wound up, liquida make account of winding up and thereup GM to lay account before the meeting (s called by advertising in Gazette one mon before

Compulsory Liquidation Most common grounds Court must always consider all factors and may dismiss petition if co can show it will recover. Who can apply

Stat demand Unsatisfied Cash flow test Balance she s.123(a) judgement s.123(1)(e) s.123(2)
- served for debt s.123(1)(b)
- proved to
- proved to over PS750
- C has judgement satisfaction of satisfaction o
- payment within against co for court that co that co's asse 21 days has been debt unable to pay than amount served
- judgement debts as they fall liabilities (tak
- no payment by unsatisfied into account end of period contingent/pr If debt disputed ive liabilities) ground cannot apply Re Cooling Equipment Any creditor: s 124(1) or directors, Secretary of State, the company itself
? Note, any secured creditor must renounce their security to do so. Be option for them is just to enforce the security. So secured creditors w petition for winding up unless the security is worthless - e.g. not regi
- Should be a last resort for any creditor
- If concerned that assets of company in danger of being dissipated then m urgent app to court for provision liquidation or injunction

Application ?

Petition made to court and facts are verified by affidavitPetition advertised in the London Gazette not less than 7 days after ser the petition on the co and not less than 7 days before the hearing. Ba usually freeze the co's accounts (e.g. because floating charges crystallise
? A court hearing will be fixed (co and creditors represented at hearing to oppose/support petition) N.B often expensive so there may be JOINT PETITION - allowed under s.124 What happens next??Judge may dismiss, adjourn the hearing conditionally, make interim other order he sees fir s.125 s.126 - company, creditor or contributory may apply to court for s proceedings If the majority of creditors support the petition court likely to grant the the Official Receiver (civil servant and court official) will be appoin liquidator (s.136(2)) -> he must decide whether to call meeting of cre who may appoint an insolvency practitioner as liquidator in his

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