Liquidation

Question 1

What is liquidation?

Answer 1

Process by which a company’s commercial life comes to an end
* liquidators has task of collecting company’s asset and selling them, identifying creditors of company and determing amount owed to them and paying creditors a ‘dividend’ out of funds obtained from sale of assets
* liquidation can happen to both insolvent and solvent companies

Question 2

Do liquidators have powers to run the business?

Answer 2

No, they have very limited power to carry on business so they usually close company and dismiss employees as soon as appointment
* assest are sold as piece-meal basis (individually) rather than asset & business as a package
* where company has value in its business and sale is viable, common for companies to seek administration first as it means adminstrator runs business and seek to effect a sale as a going concern (package) - if unable to find a buyer, company will go into liquidation

Question 3

What are the two types of liquidation?

Answer 3

1. Compulsory liquidation
2. Voluntary liquidation
   
   • members’ voluntary liquidation
   • creditors’ voluntary liquidation

Question 4

What is a compulsory liquidation?

Answer 4

Court-based process for placing company into liquidation
1) applicant presents winding up petition to court to make an order against company under no. of statutory grounds to wind up company
2) court grants petition for compulsory liquidation, order operates in favour of all creditors and contributories (members and some former members) of company
3) Offical Receiver (OR) will become liquidator in office until another person is appointed - OR notifies Companies House and all known creditors of liquidation
- they have power to summons separate meetings to choose person to become liquidator of company in their place
4) dissolution occurs 3 months after liquidator has filed notice with Companies Registry stating that winding up of company has been completed

Question 5

Who can apply for a winding up order?

Answer 5

• creditor
• the company (acting by shareholders)
• directors (by BR - happens when insufficent assets to fund voluntary liquidation)
• administrator/receiver

Grounds which court can order company to wind up is: company is unable to pay debts and it’s just and equitable for company to be wound up

Question 6

What is the consequences of a winding up order?

Answer 6

• disposition of company’s property (and transfer of its shares) will be void if made after winding up petition - if company wishes to dispose, it must seek making a validation order from the court
• usually a 2-3 months gap between petition and court hearing to grant or not grant winding up order
• if winding up order is made:
  
  • limited moratorium under which no legal proceedings can be commenced against company and any proceedings already commenced are stayed (different from CIGA moratorium)
  • all employees and directors (lose their powers too) are automatically dismissed

Question 7

What is a voluntary winding up?

Answer 7

Allows for a company to be wound up without court order in 3 situations:
* where company’s purpose according to Articles has expired and resolution of shareholders [Rare]
* where company resolves by special resolution to wind up solvent company
* where company resolves that it’s advisable to wind up company dues to its inability to carry on its business - company is insolvent

= dissolution occurs 3 months after liquidator has filed final accounts and return to Registrar of Companies at Companies House

Question 8

Members’ voluntary winding up (MVL)

Answer 8

• directors are required to swear a declaration of solvency stating that having made a full enquiry into company’s affairs they formed opinion they can pay creditors in full including interests within period not exceeding 12 months from commencement of winding up
• any director making declaraion who does not have reasonable grounds for opinion is liable to fine or imprisonment and if debts aren’t paid in full, it’s presumed director did not have reasonale grounds for opinion

only be used where company is solvent

declaration must contain statement of company’s asset and liabilities as at latest practicable date before making declaration

Question 9

When does winding up commence in MVL and what if company is unable to pay debts?

Answer 9

• members pass SR to place company in MVL and OR to appoint liquidator - winding up commences when SR is passed
• on MCL, if liquidator believes company will be unable to pay debts they must change the MVL to CVL

Question 10

Creditors’ voluntary winding up (CVL)?

Answer 10

Form of insolvent liquidation commenced by resolution of shareholders but under effective control of creditors who can choose liquidator
* where directors’ declaration of solvency has not been made, liquidation will be CVL
* shareholders to pass a SR to place company into CVL and an OR to appoint nominated liquidator
* within 14 days of SR being passed, directors must ask creditors to either approve nomintaed liquidator or put forward their own choice
* directros must draw up statement of company affirs setting out asset & liabilities and send to creditors

Question 11

What is the role of the liquidator?

Answer 11

• appointment of liquidator terminates management powers of company’s directors meaning those powers are transferred to liquidator together with their fiduciary duties
  
  • liquidator then must act in good faith and avoid conflict of interest and not make secret profit
• they must either be a qualfied Insolvency Practitioner or Official Receiver (appointed by court in short term) and acts as an officer in court
• liquidator in CVL and compulsory liquidation have extensive statutory powers such as:
  
  • secure and realise assets of company then distribute to company’s creditors
  • take into custody or under their control all property of company

Question 12

What are the liquidator’s power to avoid certain transactions?

Answer 12

They have duty to preserve company’s property and maximise value of company’s asset for distribution. To achieve this, law gives liquidators special powers to undo or challenge certain transactions company made before liquidation:
* disclaim onerous assets
* apply to court to set aside transaction at an undervalue
* apply to court to set aside a preference (e.g., paying a director’s loan before trade creditors)
* apply to court to set aside transaction that will defraud creditors
* invalid floating charge made shortly before insolvency