Oxbridge Notes | Tests And Procedure For Insolvency

INSOLVENCY TESTS & PROCEDURES

Just because a company is profitable, does not mean it is solvent.

Cash Flow Test – s.123(1)(e) IA [Cash Flow Statement – Closing Balance]	Balance Sheet Test – s.123(2) IA [Balance Sheet – Net Assets]
The company is paying its debts Debts could be paid by selling assets or obtaining a loan Debts in the future can be paid as fall due A debtor is not solvent just because if sufficient time was given the debts would be paid	Liabilities outweigh assets Liabilities include legal liabilities Future liabilities are included Contingent and prospective assets are not included but uncalled capital is included

Insolvency Procedures – The purpose of all three of these processes is to collect and distribute the company’s assets and terminate the company’s existence.

		Process	Key Officer
Compulsory Liquidation	Insolvent (and solvent) companies	1. PRESENT PETITION (liquidation commences – s.129(2), if the petition is successful) S.124(1) – Petition by company (directors resolve on its behalf), directors, any creditor (prospective or contingent), members or a clerk of the magistrates’ court S.122(1) – On one of the 7 grounds, usually ground (f) that the company is unable to pay its debts S.123 – Unable to pay debts means one of 4 circumstances S.123(1)(a) – Failure to pay or secure compound of a statutory demand exceeding 750 within 3 weeks of service on debtor* S.123(1)(b) – By unsatisfied judgement S.123(1)(e) – Cash flow test S.123(2) – Balance sheet test 2. CHECK THAT NO OTHER PROCEDURE IN PLACE 3. COST BENEFIT ANALYSIS 4. SERVE PETITION 5. ADVERTISE PETITION: The Gazette IR (Rules) 2016 7.10(3) 6.HEARING S.125 – If court is satisfied that the ground exists and the petitioner is eligible, it may exercise its discretion to grant the petition S.125(2) – It is possible for members to petition on grounds that it is fair, just and equitable that the company be wound up, but only where there is no other remedy available If the court has a good reason it can refuse to grant the petition* 7. ORDER/EFFECT The official receiver (OR) becomes liquidator unless/until the creditors decide to appoint one of their choice (who is a qualified insolvency practitioner) Control of the company passes from the directors to the liquidator, who will manage the winding up S.109 – The OR has to advertise his appointment in the London Gazette and notify the Registrar of companies The company remains a legal personality but its business is not carried on except for the limited purpose of winding up All company papers must state that the company is in liquidation – [Company name] (In Liquidation) All employees are automatically dismissed from date of publication of winding up order and this may entitle them to claim damages for breach of contract S.130(2) – All actions stayed automatically	Liquidator (either official receiver or replacement chosen by creditors and/or shareholders).
Voluntary Liquidation (Members)	Solvent companies only	S.89 – STATUTORY DECLARATION of solvency by directors They will require an auditors’ report as proof S.84(1)(b) – Members’ SPECIAL RESOLUTION within 5 weeks of declaration of solvency 89(2)(a) (86 a voluntary winding up is deemed to commence at the time of the passing of the resolution for voluntary winding up) S.84(2A) – Written notice of special resolution to be given to holder of any qualifying floating charge, allowing the charge holder a brief chance to appoint an administrator S.84(2B) – The special resolution may only proceed (a) five business days after the notice was given or (b) if the charge holder gives written consent Members APPOINT LIQUIDATOR at same GM. Directors’ powers cease FILE SR and DECLARATION OF SOLVENCY with Registrar of Companies Special resolution and liquidator’s appointment ADVERTISED in London Gazette within 14 days of SR/liquidator’s appointment ASSETS COLLECTED IN AND DISTRIBUTED in required order Liquidator to produce annual progress report, send to members and Registrar of Companies FINAL ACCOUNT SENT to members and Registrar of Companies Company DISSOLVED 3 months later If it becomes clear that the company will not be able to pay debts within 12 months of commencement of winding up, the liquidator must report to creditors and potentially convert to a creditors’ voluntary winding up using a ‘qualifying decision procedure’ (IR 2016)	Liquidator (chosen by shareholders).
Voluntary Liquidation (Creditors)	Insolvent companies only	Company is INSOLVENT so NO STATUTORY DECLARATION OF SOLVENCY is filed But, directors prepare statement of affairs for creditors and Registrar of Companies Directors request LIQUIDATOR NOMINATIONS from creditors Creditors decide nominee in VIRTUAL MEETING or via DEEMED CONSENT PROCEDURE Members’ SPECIAL RESOLUTION to start liquidation (s.86 a voluntary winding up is deemed to commence at the time of the passing of the resolution for voluntary winding up) S.84(2A) – Written notice of special resolution to be given to holder of any qualifying floating charge, allowing the charge holder a brief chance to appoint an administrator S.84(2B) – The special resolution may only proceed (a) five business days after the notice was given or (b) if the charge holder gives written consent Directors powers cease on appointment of administrator FILE SPECIAL RESOLUTION with Registrar of Companies Special resolution and liquidator’s appointment ADVERTISED in London Gazette...

Compulsory Liquidation

Insolvent (and solvent) companies

1. PRESENT PETITION (liquidation commences – s.129(2), if the petition is successful)

S.124(1) – Petition by company (directors resolve on its behalf), directors, any creditor (prospective or contingent), members or a clerk of the magistrates’ court
S.122(1) – On one of the 7 grounds, usually ground (f) that the company is unable to pay its debts
S.123 – Unable to pay debts means one of 4 circumstances

S.123(1)(a) – Failure to pay or secure compound of a statutory demand exceeding 750 within 3 weeks of service on debtor*
S.123(1)(b) – By unsatisfied judgement
S.123(1)(e) – Cash flow test**
S.123(2) – Balance sheet test

2. CHECK THAT NO OTHER PROCEDURE IN PLACE

3. COST BENEFIT ANALYSIS

4. SERVE PETITION

5. ADVERTISE PETITION: The Gazette IR (Rules) 2016 7.10(3)

6.HEARING

S.125 – If court is satisfied that the ground exists and the petitioner is eligible, it may exercise its discretion to grant the petition
S.125(2) – It is possible for members to petition on grounds that it is fair, just and equitable that the company be wound up, but only where there is no other remedy available
If the court has a good reason it can refuse to grant the petition***

7. ORDER/EFFECT

The official receiver (OR) becomes liquidator unless/until the creditors decide to appoint one of their choice (who is a qualified insolvency practitioner)
Control of the company passes from the directors to the liquidator, who will manage the winding up
S.109 – The OR has to advertise his appointment in the London Gazette and notify the Registrar of companies
The company remains a legal personality but its business is not carried on except for the limited purpose of winding up
All company papers must state that the company is in liquidation – [Company name] (In Liquidation)
All employees are automatically dismissed from date of publication of winding up order and this may entitle them to claim damages for breach of contract
S.130(2) – All actions stayed automatically

Liquidator (either official receiver or replacement chosen by creditors and/or shareholders).

Voluntary Liquidation (Members)

Solvent companies only

S.89 – STATUTORY DECLARATION of solvency by directors

They will require an auditors’ report as proof

S.84(1)(b) – Members’ SPECIAL RESOLUTION within 5 weeks of declaration of solvency 89(2)(a) (86 a voluntary winding up is deemed to commence at the time of the passing of the resolution for voluntary winding up)

S.84(2A) – Written notice of special resolution to be given to holder of any qualifying floating charge, allowing the charge holder a brief chance to appoint an administrator
S.84(2B) – The special resolution may only proceed (a) five business days after the notice was given or (b) if the charge holder gives written consent

Members APPOINT LIQUIDATOR at same GM. Directors’ powers cease
FILE SR and DECLARATION OF SOLVENCY with Registrar of Companies
Special resolution and liquidator’s appointment ADVERTISED in London Gazette within 14 days of SR/liquidator’s appointment
ASSETS COLLECTED IN AND DISTRIBUTED in required order

Liquidator to produce annual progress report, send to members and Registrar of Companies

FINAL ACCOUNT SENT to members and Registrar of Companies
Company DISSOLVED 3 months later

If it becomes clear that the company will not be able to pay debts within 12 months of commencement of winding up, the liquidator must report to creditors and potentially convert to a creditors’ voluntary winding up using a ‘qualifying decision procedure’ (IR 2016)

Liquidator (chosen by shareholders).

Voluntary Liquidation (Creditors)

Insolvent companies only

Company is INSOLVENT so NO STATUTORY DECLARATION OF SOLVENCY is filed

But, directors prepare statement of affairs for creditors and Registrar of Companies

Directors request LIQUIDATOR NOMINATIONS from creditors
Creditors decide nominee in VIRTUAL MEETING or via DEEMED CONSENT PROCEDURE
Members’ SPECIAL RESOLUTION to start liquidation (s.86 a voluntary winding up is deemed to commence at the time of the passing of the resolution for voluntary winding up)

S.84(2A) – Written notice of special resolution to be given to holder of any qualifying floating charge, allowing the charge holder a brief chance to appoint an administrator
S.84(2B) – The special resolution may only proceed (a) five business days after the notice was given or (b) if the charge holder gives written consent

Directors powers cease on appointment of administrator
FILE SPECIAL RESOLUTION with Registrar of Companies
Special resolution and liquidator’s appointment ADVERTISED in London Gazette...

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