A company can be put into liquidation voluntarily, at the instigation of its directors, or compulsorily, by order of the Court. The effect, in either case, is that a liquidator is appointed to bring the company’s existence to an end so that it can be dissolved. Where the decision to go into liquidation is taken voluntarily, if the company is solvent and can pay all its creditors in full, the liquidation is termed a ‘members’ voluntary liquidation’. If the company is insolvent and cannot pay all its creditors in full, the liquidation is termed a ‘creditors’ voluntary liquidation’ which is the subject of this note.
Where the company is put into liquidation by order of the Court, almost certainly because it is insolvent and usually at the instigation of a creditor, the liquidation is termed ‘compulsory liquidation’ (or ‘winding-up by the Court’).
Is the company insolvent?
There are two tests set out in the Insolvency Act 1986 S123. (1) Is the realisable value of the company's assets more than its liability including contingent liability? (2) Can the company pay its debts as and when they fall due? If the answer to either is no then it is insolvent. If directors suspect this is the case they usually contact an IP.
An IP will meet with the directors, confirm insolvency and go through the options available. The catalyst for a creditors’ voluntary liquidation is a decision by the directors that the company is insolvent and can no longer continue to trade. No one outside the company can take any step to put it into voluntary liquidation. The timing of the decision is in the hands of the directors, but it may be directly influenced by failure to obtain adequate finance or by the loss of a major customer. The wrongful trading provisions of the Insolvency Act 1986, imposing potential personal liability on directors who allow a company to continue to trade beyond the point of no return, ought to persuade directors to make the required decision earlier rather than later, with the result that more funds should be available to pay the creditors.
Once the decision to liquidate has been taken, the directors will normally instruct the IP to assist to call a meeting of members and a meeting of creditors, the meetings to be held in that order. The purpose of the members’ meeting is to pass the resolution placing the company in liquidation and to nominate a liquidator. Although the company is in liquidation from the time the members’ resolution is passed, the nominated liquidator’s powers up to the time of the creditors’ meeting are limited to taking control of and protecting the assets and disposing of perishable goods. Usually, the creditors’ meeting is held on the same day as the members’ meeting, but it can be held up to 14 days later.
The creditors’ meeting (under section 98 of the Insolvency Act 1986) is held so that the creditors can be informed of the company’s state of affairs and can appoint a liquidator. They have the opportunity to confirm the members’ choice of liquidator or to make a choice of their own if there are sufficient votes in favour. The convening and organising of the creditors’ meeting is the duty of the directors, but they will usually enlist the help of an insolvency practitioner to ensure that the legal requirements are met. These requirements are:
At the meeting either the presiding director or the nominated liquidator or a solicitor will report on the state of the company’s affairs and the causes of its failure. Creditors are entitled to ask questions on any matter on which they require clarification or information. A resolution will be put to the meeting for confirmation of the appointment of the members’ choice of liquidator, but the creditors may put an alternative resolution that someone else (who must be an insolvency practitioner) be appointed.
A resolution is passed by a simple majority in value of those present and voting, in person or by proxy. This may be achieved by a show of hands or, if the result cannot be determined that way, by a poll. It must be remembered that the director chairing the meeting will hold proxies that must be used to vote in accordance with the instructions of the giver of the proxy. He is likely to hold proxies representing inter-company debts and he is also likely to be a creditor for monies owed to him and he is entitled to vote on that debt. The resolution that is passed at the meeting determines who will be the liquidator of the company. If the person nominated by the members falls to secure appointment at the creditors’ meeting, he steps down. In many liquidations two liquidators are appointed to ensure that one is always available to deal with matters arising in the liquidation.
Once the appointment of the liquidator has been resolved, the creditors may, if they wish or if the liquidator requests, appoint a liquidation committee (minimum three, maximum five creditors) to represent their interests and to supervise and assist the liquidator. Unless a proxy states otherwise, any proxy holder at the meeting may represent his company as a member of the committee without further authorisation. A first meeting of this committee will usually be held immediately after the creditors’ meeting to establish the frequency of meetings and to resolve any immediate matters. The functions of the liquidation committee include: sanctioning continuance of such directors’ powers, if any, as may be considered appropriate (these powers otherwise cease on the appointment of the liquidator); approving the payment of any class of creditors in full; approving compromises with creditors; receiving reports from the liquidator on the conduct of the liquidation; determining the basis of the liquidator’s remuneration. A committee member can be represented by someone else at committee meetings, can resign and can be reimbursed reasonable travel expenses.
Conduct of the liquidation
The liquidator is given statutory powers and duties to enable him to conduct the liquidation and he will, or can, do the following:
The order of priority is:
· if all the above claims are paid in full, interest is payable from the date of liquidation at statutory rates
· report to the liquidation committee at six-monthly intervals unless agreed otherwise
· provide an annual progress report
· prepare a draft final report which is sent to creditors 8 weeks prior to final meetings of creditors and members to explain the conduct of the liquidation
Some questions answered
When is a company insolvent?
A company is defined as going into insolvent liquidation when the assets are insufficient for the payment of its debts and other liabilities and the expenses of liquidation. The insolvency legislation does not, however, define precisely when a company is insolvent. It can be said that a company is insolvent either when it is unable to pay its debts as they fall due or when the value of its assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities. There are many instances of companies being technically ‘insolvent’ for a period of time but then returning to solvency. The real question, therefore, should not be ‘when is a company insolvent?’ but ‘has the company reached the point at which there is no reasonable prospect that it will avoid going into insolvent liquidation?’
Who can act as liquidator?
A liquidator must be an insolvency practitioner authorised to act by a recognised professional body or by the BIS. The recognised professional bodies are the Insolvency Practitioners Association, the three institutes of chartered accountants, the Chartered Association of Certified Accountants and the law societies. Before accepting any insolvency appointments every insolvency practitioner must hold a licence from his authorising body and must hold a general insurance bond against his own fraud or dishonesty. On accepting an appointment he must obtain a further insurance bond covering the value of the assets under his control in the insolvency.
I have been trying to collect my debt through the court. What can I do now?
If you have not managed to recover your debt before the company goes into liquidation you will be unable to continue. The Insolvency Act decrees that you can only retain the benefit of an execution against the company if it is completed before notice is received of a meeting at which it is proposed to pass a resolution to liquidate or before the members pass the resolution to liquidate, whichever is the earlier. Execution is completed by the seizure and sale of goods or by the receipt of an attached debt. If, therefore, on the relevant date the recovery process is still being processed in the court and even if the bailiff is in the process of levying execution of a judgement, it will be of no use as it will not have been completed.
I have retention of title on goods supplied to the company. Can I recover them?
If your retention of title claim is valid, the goods will not belong to the company in liquidation and the liquidator is obliged to allow you to recover them. You should notify the liquidator in writing as soon as possible after he has been appointed so that he is made aware of your claim. The liquidator, however, has a duty to preserve the company’s assets and cannot allow goods to be recovered unless he is certain that the retention of title claim is valid. In the interests of the general body of creditors he must attempt to resist any such claim.
The company has my goods on hire purchase/lease. Where do I stand?
So long as title to the goods has not passed to the company, they remain your property and you are entitled to repossess them. The terms of your agreement will normally state that liquidation terminates the agreement, but the liquidator may wish to strike a commercial deal with you if he requires to use the goods for a short period of time. That is a matter between you and him. You will be able to claim as a creditor in the liquidation, initially for any arrears of charges up to the date of liquidation, but your final claim will depend on the terms of your agreement. At the creditors’ meeting you may only be aware of the arrears figure and you will seek to vote for that value. The chairman has the right to treat your claim as unascertained, but he may put an estimated value on the claim purely for voting purposes.
I am a secured creditor. What happens to me?
A secured creditor is one who holds a mortgage, charge, or other security over property of the company. If you fall into this category you are entitled, subject to the terms of your documentation, to take the assets that you have secured by a fixed charge and realise them. If the proceeds more than satisfy your debt, you must pay the surplus to the liquidator. If you debt is not fully satisfied, you will be able to look to the proceeds of any assets that you have secured by a floating charge but the preferential creditors will have a claim ahead of you if they have not been paid out of the proceeds of any uncharged assets. You can claim as an unsecured creditor for any balance that is still outstanding. If your debenture is dates after 23 September 2003 then a prescribed part of the funds realised under its charge go into a fund for the unsecured creditors, see below. If interest is payable under your documentation, you will be able to recover it up to the date of repayment if there are sufficient proceeds. If, however, you have to make an unsecured claim for the balance, you will not be able to claim interest accruing after the date of liquidation. At the initial creditors’ meeting you can only vote for the value of your debt less the estimated value of your security. If you vote for the full value of your debt you may forfeit your security.
Can I claim interest on my debt in the liquidation?
If the contract out of which the debt arises allows for interest, that interest can be claimed without restriction up to the date of liquidation (subject to the liquidator’s power to seek a Court order to set aside all or part of an extortionate credit transaction). If the debt is due by virtue of a written instrument and is payable at a certain time, interest not exceeding 15% may be claimed from the due payment date up to the date of liquidation. If a written demand for the debt has been made giving notice that interest would be charged from the date of demand to the date of payment, that interest can be claimed but the rate must not exceed 15%.
Who are preferential creditors?
Up until 23 September 2003 HMRC was a preferential creditors for certain amounts owed to it in respect of PAYE/NIC and VAT. Since that date only employees have a preferential claim for arrears at pay up to £800, all unpaid holiday and pension contributions.
What is the prescribed part?
Since the abolition of the HMRC preferential claim, in order not to provide an unfair advantage a liquidator is required to put aside a certain percentage of the funds realised that would ordinarily be available for the floating charge holder. This is 50% of the first £10,000 and 20% of the remainder of up to a maximum total amount of £600,000. The fund is then used to pay a (usually small) dividend to unsecured creditors.
I have employees - what happens to them and their claims?
On liquidation or shortly before they are made redundant, either by the company if before liquidation or by the liquidator on appointment. They are entitled to claim arrears of pay, holiday pay, redundancy pay and notice pay from the Government using form RP1 which your IP will supply.
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