Insolvency Proceedings Liquidation

Question 1

Grounds for creditors to file a winding-up petition

Answer 1

Grounds:
1. Company is unable to pay its debts; and
2. It is just and equitable for the company to be wound up

Inability to pay debts is evidenced by:
1. Failure to comply with creditor’s statutory demand. This is for sums exceeding £750 (including VAT). Company has 21 days to pay it, failing which the creditor can apply to court to wind up the company
- Watch out for a sum which is stated plus VAT (£700, plus VAT = £840 including VAT, and therefore exceeds the threshold)

2. Creditor sues company, obtains judgment and fails in attempt to execute judgment
3. Proof that company is unable to pay its debts as they fall due
4. Proof that value of company’s assets is less than liabilities

Question 2

If an order for winding up is made, who bears the burden of proof?

Answer 2

The creditor needs to prove the company is unable to pay its debts

Question 3

Consequences of a winding up order

Answer 3

• Automatic stay on commencing or continuing proceedings against the company
• All employees are automatically dismissed
• Directors lose their powers and automatically dismissed from office

Question 4

Company’s assets sufficient to pay creditor’s in full?

Answer 4

Assess the Company’s assets and what the realised value is likely to be. Consider the rights of other parties over the assets

Question 5

Grounds on which a company can challenge the petition?

Answer 5

There may be no legal grounds to challenge a petition (e.g., if the company has failed to pay a sum demanded in excess of £750, or it is deemed unable to pay its debts)
- Note that the partner may ask for grounds, but there may be no legal grounds. Need to say there are no legal grounds

Instead, consider potential commercial steps and practical steps to satisfy the debt

Question 6

Procedure following the event an order is made for winding up of the company?

Answer 6

• Appointment of liquidator
• Effect of appointment on the company
• Liquidator’s powers in event of suspicious transactions

Question 7

Appointment of liquidator

Answer 7

• The Official Receiver is appointed as the company’s liquidator and remains in office unless a decision is made to privately appoint a liquidator

Question 8

What is the effect of an appointment of a liquidator on the company?

Answer 8

• Liquidator takes control of company’s assets
• Powers of directors cease
• All company papers (hard copy or websites) must state that the company is in liquidation
• Employees are automatically dismissed

Question 9

Liquidator’s powers in event of suspicious or voidable transactions (and how to advise a client on this)

Answer 9

If liquidator believes a director continued to trade even if they knew/ought to know, no prospect of avoiding liquidation and did not take ‘every step’ = bring action against the director

Wrongful trading:
The company has gone into insolvent liquidation and;
1. At some time before commencement of winding up
2. Director know or ought to have concluded
3. There was no reasonable prospect of company avoiding insolvent liquidation or administration

4. The director did not take ‘every step’ to minimise the potential loss to creditors

Order for wrongful trading:
- Court can order the director to personally contribute to assets of company
- Director could face disqualification

Question 10

Proceeds of sale of assets

Answer 10

• Statutory order of priority
• Detail how this applies to each of the creditors
• Work down what each creditor is owed and then what remains for each step

Question 11

How to advise a director

Answer 11

• Advise them on ensuring they take ‘every step’ to minimise loss to creditors (important to avoid wrongful trading)
• As the firm acts for the Company, the director may need to seek independent legal advice, to avoid conflict of interest
• Remember that the firm acts for the company: cannot advise a director personally on proposed transactions