18 - Liquidation and dissolution Flashcards
Must a company be insolvent to be liquidated or dissolved?
No
When is a company considered insolvent?
When it cannot pay its debts
When is a company considered to be unable to pay its debts? (4)
- Creditor of more than £750 demands payment and this is not settled within 3 weeks
- Judgement executed against company, and company fails to satisfy that judgement
- Proved to court’s satisfaction that the company is unable to pay debts as they fall due
- Court is satisfied that assets are less than liabilities
What is liquidation?
The process of resolving a company’s affairs by collecting assets and paying off debts, liabilities and entitled persons, prior to dissolution
On what must a company in liquidation state that it is being wound up?
- On every invoice, order of goods, business letter
- On all websites
What are the two types of liquidation?
- Voluntary winding up
- Winding up by the court
Purpose of voluntary winding up
Allowing company and creditors to settle affairs in a way that avoids involving the courts
2 benefits of voluntary winding up
- Faster than involuntary
- Less costly than involuntary
How does voluntary winding up commence?
Passing of special resolution
Consequences of passing special resolution for voluntary winding up
- Company ceases to carry on business
- Transfers of shares or alteration of status of members is void
Two types of voluntary winding up
- Members’
- Creditors’
What does a declaration of solvency declare?
- Directors have made full inquiry into company’s affairs; and
- Directors have formed opinion that the company will be able to pay its debts in full
What decides whether a voluntary winding up is members’ or creditors’?
Members’ if declaration of solvency made within 5 weeks of passing of special resolution
5 examples of who can apply for winding up by the court
- The company
- Directors of company
- Any creditor or creditors
- Secretary of state
- FCA
6 reasons why a company may be wound up by the court
- Company has resolved to do so
- No issue of trading certificate within 1 year for PLC
- Old public company
- Business not commenced within a year of incorp (or suspended for a year)
- Company unable to pay its debts
- Court has opinion that it is just and equitable to wind the company up
What is by far the most popular reason a company may be wound up by the court
Unable to pay its debts
What is the role of a provisional liquidator in case of winding up by court?
Keep things in status quo and preventing anybody from getting priority
What is the role (functions) of the liquidator?
Secure that the assets of the company are got in, realised and distributed to the company’s creditors, and if there is a surplus, the people’s entitled to it
Job of liquidator after they have realised company’s assets
Apply those assets ‘in satisfaction of the company’s liabilities pari passu’
What does the pari passu principle state?
Liquidator will distribute the assets to the creditors in proportion to the size of their claim against company - effectively, each debt will be paid in proportion
Order of liquidator’s distribution
- Fixed charge assets unavailable so in essence paid first *
- Moratorium debts, etc.
- Liquidation expenses
- Preferential debts (ordinary, then secondary)
- Debts secured by floating charge (minus ‘prescribed part’)
- Unsecured debts
- Deferred debts
- Members
Two types of preferential debt
Ordinary (paid first), and secondary
Two examples of preferential debts
- Contributions to occupational pension schemes
- Certain remuneration owed to employees (only first £800 is preferential)
What did parliament do after deciding to strengthen position of unsecured creditors in liquidation? S.176A
Provided that for charges created on or after 15 September 2003, the liquidator must set aside a portion of assets subject to a floating charge
