Liquidation and dissolution

Question 1

What is liquidation?

Answer 1

Liquidation is the process by which the company’s assets are collected and distributed to persons so entitled. The
company will then be dissolved.

Question 2

When is liquidation deemed to commence?

Answer 2

The commencement of winding up will depend upon the type of winding up:

• a voluntary winding up is deemed to commence when the special resolution is passed resolving to wind the
  company up;
• a compulsory winding up usually commences when the winding up application is presented to the court.

Question 4

What are the two types of voluntary winding up, and what are the differences between them?

Answer 4

There are two types of voluntary winding up: a members’ voluntary winding up and a creditors’ voluntary winding up. The
difference between them is based on whether the directors make a declaration of solvency. If such a declaration is made,
it will be a members’ voluntary winding up. If no declaration is made, it will be a creditors voluntary winding up.

Question 5

Name five types of person who can petition the court for a winding up order.

Answer 5

Under s. 124(1) of the IA 1986, the following persons can apply to the court for a winding up order:

• the company (such applications are rare, as the company would likely prefer a voluntary winding up);
• the directors of the company;
• any creditor or creditors of the company, including any contingent or prospective creditor or creditors (most
  applications are brought by creditors of the company);
• a contributory or contributories (s. 79(1) provides that a ‘contributory’ is a person liable to contribute to the assets of the company upon it being wound up, e.g. a shareholder whose shares are not fully paid for);
• the designated officer in a magistrates’ court;
• the Secretary of State;
• the FCA;
• the Regulatory of Community Interest Companies, and;
• an official receiver.

Question 6

On what grounds can a compulsory winding up order be made?

Answer 6

Section 122(1) provides that a company may be wound up by the court if:

• the company has by special resolution resolved that the company be wound up by the court;
• being a public company which was registered as such on its original incorporation, the company has not been
  issued with a trading certificate and more than a year has expired since it was so registered;
• it is an old public company;
• the company does not commence its business within a year from its incorporation or suspends its business for a
  whole year;
• the company is unable to pay its debts, or;
• the court is of the opinion that it is just and equitable that the company should be wound up.

Question 6

What is the role of a liquidator?

Answer 6

Section 143(1) of the IA 1986 (which applies to compulsory windings up) states that the functions of the liquidator are
‘to secure that the assets of the company are got in, realised and distributed to the company’s creditors and, if there is a surplus, to the persons entitled to it’ (a similar provision can be found in s. 107 in relation to voluntary windings up).

Question 7

What does the pari passu principle state?

Answer 7

The pari passu principle states that the liquidator will distribute the assets to the creditors in proportion to the size of their claim against the company (each creditor will receive an equal proportion of the debt owed to it).

Question 8

Set out the order in which the assets of the company are distributed.

Answer 8

The order of distribution of assets upon liquidation is as follows:

• Moratorium debts etc
• liquidation expenses
• preferential debts
• debts secured by floating charge (minus the ‘prescribed part’)
• unsecured debts
• deferred debts
• any remaining assets are distributed to the members.

Question 9

What is a preferential debt?

Answer 9

Preferential debts include:

• takes paid by employees and customers of the company that are held by the company (e.g. VAT);
• contributions to occupational pension schemes; and
• certain remuneration owed to employees (but only the first £800 ranks as preferential).

Question 10

How is the prescribed part calculated?

Answer 10

The liquidator must set aside a portion of the assets subject to a floating charge:

• where the company’s net property does not exceed £10,000 in value, 50% of that property; or
• where the company’s net property does exceed £10,000 in value, 50% of the first £10,000 in value, and 20% of that part of the company’s net property that exceeds £10,000 (Insolvency Act 1986 (Prescribed Part) Order 2003, Art. 3(1)).

The sum that is set aside is known as the ‘prescribed part’ and it cannot exceed £800,000.

Question 11

What is a deferred debt?

Answer 11

Statute provides that certain deferred debts (e.g. sums due to a member by way of dividend, IA 1986, s. 74(2)(f)) rank below the claims of unsecured creditors.

Question 12

Provide six examples of the type of conduct that can result in liability under ss. 206–211.

Answer 12

Sections 206–211 create a range of offences that impose criminal liability on certain persons (usually past and present officers of the company) who have engaged in specified conduct:

• fraud in anticipation of the company being wound up (s. 206) (e.g. falsifying book entries, disposing of property
  obtained on credit which has not been fully paid for);

transactions in fraud of creditors (s. 207) (e.g. gifting company property, concealing company property);

• misconduct in the course of winding up (s. 208) (e.g. concealing information from the liquidator);
• falsification of company books (s. 209);
• material omissions from statements relating to the company’s affairs
  (s. 210); and
• false representations to creditors (s. 211).

Question 13

How does fraudulent trading under the IA 1986 differ from fraudulent trading under the CA 2006?

Answer 13

The two key differences between fraudulent trading under the IA 1986 and fraudulent trading under the CA 2006 are:

• the IA 1986 provisions only apply where the company is in liquidation or administration, whereas s. 993 of the CA
  2006 can apply at any time; and
• the IA 1986 provisions impose civil liability, whereas s. 993 of the CA 2006 imposes criminal liability.

Question 13

When will a person have engaged in wrongful trading?

Answer 13

Sections 214 (which applies to companies in liquidation) and 246ZB (which applies to companies in administration)
provide that a person will have engaged in wrongful trading if three conditions are satisfied, namely:

• the company has gone into insolvent liquidation or insolvent administration;
• at some time before the commencement of the winding up of the company or before the company entered
  administration, that person knew or ought to have concluded that there was no reasonable prospect that the
  company would avoid going into insolvent liquidation or entering insolvent administration; and
• that person was a director or shadow director of the company at that time (ss. 214(2) and 246ZB(2)).

Question 14

How can a director avoid liability for wrongful trading?

Answer 14

A director will not be liable for wrongful trading if the court is satisfied that the director ‘took every step with a view to
minimising the potential loss to the company’s creditors as … he ought to have taken’ (ss. 214(3) and 246ZB(3)).

Question 15

What is a prohibited name?

Answer 15

A ‘prohibited name’ is:

• a name by which the liquidating company was known at any time in the 12-month period prior to its liquidation; or
• a name which is so similar to a name falling within (a) as to suggest an association with that company (s. 216(2)).

Question 16

What are the consequences of breaching s. 216?

Answer 16

A person who breaches s. 216 commits a criminal offence (s. 216(4)) and can be made personally liable for the debt and liabilities of the new company incurred while they were involved in its management in contravention of s. 216 (s. 217).

This personal liability is joint and several with that of the company (s. 217(2)).

Question 17

When will a transaction be at an undervalue?

Answer 17

A company enters into a transaction at an undervalue if:

• the company makes a gift to a person or otherwise enters into a transaction with a person on terms that provide for the company to receive no consideration; or
• the company enters into a transaction with a person for a consideration the value of which, in money or money’s
  worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company (s. 238(4)).

Question 18

When will a person be connected with the company?

Answer 18

Section 249 provides that a person is connected with a company if:

• they are a director or shadow director of the company;
• they are an associate of a director or shadow director of the company; or
• they are an associate of the company.

Question 18

What is a preference?

Answer 18

A company gives a preference to a person if:

• that person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or other
  liabilities; and
• the company does anything or suffers anything to be done which (in either case) has the effect of putting that
  person into a position which, in the event of the company going into insolvent liquidation, will be better than the position they would have been in if that thing had not been done (s. 239(4)).

Question 18

When will a credit transaction be extortionate?

Answer 18

A credit transaction is extortionate if:

• the terms of the transaction are or were such as to require grossly exorbitant payments to be made (whether
  unconditionally or in certain contingencies) in respect of the provision of the credit; or
• the transaction otherwise grossly contravened ordinary principles of fair dealing (s. 244(3)).

Question 19

When can a liquidator or administrator invalidate a floating charge?

Answer 19

A floating charge can be invalidated by a liquidator or administrator if it was made at the relevant time:

• in the case of a charge which is created in favour of a person connected with the company, within a period of two years ending on the date of the onset of insolvency; or
• in the case of a charge which is created in favour of any other person, within a period of 12 months ending on the
  date of the onset of insolvency (s. 245(3)).