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 750

(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

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:

	Members voluntary liquidation		Creditors Voluntary liquidation
Who petitions?	Co when wish to cease trading		Co in response to creditor pressure
Co must be	Solvent		Insolvent
Process	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		1. D’s propose BM 2. D’s propose GM to wind up co and recommend CVL 3. At the GM – SH pass an SR to wind up co s.84(b) because it’s insolvent and OR to nominate liquidator s.91(1) 4. Lodge SR at coho within 15 days of SR s.84(3) & s.30(1) CA06 5. within 14 days after passing, give notice by advertisement in gazette
Creditor position	No say in the liquidator apt or in process Usually paid in full (definition of solvency)		- s.100 – creditors in control but unlikely to be paid in full - s.98 creditors meeting is held within 14 days of the resolution. Appropriate notice (7 days) must be given in local press and London gazette - s.100(1) apt a liquidator/liquidation committee s.101(1) not exceeding 5 persons at meeting, they are chosen by simple majority of % of debt held (secured creditors cant vote)
Liquidator duties/ powers	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	If surplus after creditors they will be paid	No
D position	No exercise of powers unless continuance sanctioned by liquidator or members at GM - but still officially hold office s.91(2)	D’s powers cease on apt of L s.103
After liquidation	- 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)	As soon as affairs fully wound up, liquidator shall make account of winding up and thereupon call GM to lay account before the meeting (s.106) – called by advertising in Gazette one month before

Most common grounds

Court must always consider all factors and may dismiss petition if co can show it will recover.

Stat demand s.123(a)

- served for debt over 750

- payment within 21 days has been served

- no payment by end of period

If debt disputed ground cannot apply Re Cooling Equipment

Unsatisfied judgement s.123(1)(b)

- C has judgement against co for debt

- judgement unsatisfied

Cash flow test s.123(1)(e)

- proved to...

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