Chapter 14 -15 (Chapter 14 - Company Law: Liquidations (Duties of an…
Chapter 14 -15
Chapter 14 - Company Law:
Compulsory or Voluntary; compulsory is instituted by
courts as a result of petition by 3rd party
Voluntary: Member or creditors:
Creditor Voluntary Liquidation (CVL): initiated by company
as cannot pay creditors. More costly to pay liquidator fees,
but more financial and career consequences to wait for
Members Voluntary Liquidation(MVL): only used when
company is in a solvent state (can meet financial obligations)
Essential difference is solvency
Courts will order liquidation if:
Number members fall below 2 (plcs only)
Failure to obtain trading certificate within 12months incorp.(plc)
Suspension of business for 12 months, or
failure to commence business for 12 months.
Unable to pay debt as fall due.
Just and Equitable
Compulsory Liquidation (Wind up a Company)
Unable to pay debt as fall due. Creditor needs to show that
company has owed them more than £750 more than 21 days &
debt shouldn't be in dispute.
Just & Equitable:
Failure of Substratum: company has abandoned its main objects, or entered upon activities beyond general intention of corporators.
Deadlock on the board: cant carry on business as cannot agree on course of action.
Quasi-partnership situation: small companies run as a limited company, but are effectively several partnerships.
But 'Just & Equitable' only given in absence of alternative remedy.
Administrator Appointed by Court
Applying for Administration
Application to court by: members ordinary resolution,
directors or creditors
Court may grant if company unable to pay debts, and if granted, likely to achieve desired result.
Effect of an order:
Moratorium on company's debts (temp. prohibition of activity)
no legal action on debts
Powers of management passed to administrator
Petitions for winding-up are dismissed
Any administrative receiver already in office must step aside
Court appoints a licensed insolvency practitioner and stops all legal actions
Duties of an Administrator
Agent of the company and creditors
Has fiduciary duties as well as legal (highest standard of care)
Must send notice of appointment to creditors
Must obtain a list of creditors
Must send notice of appointment to registrar within 7 days
Must require statement of affairs
Must identify appointment on all company business letters/correspondence
Must prepare proposals for achievement of administration objectives
Must manage affairs of company.
Advantages of Administration over Liquidation
Company may continue after process is complete
Company is sheltered from creditors allowing time to think of proposals.
Creditors are therefore prevented from applying for a liquidation
Administrator can challenge previous transactions
Creditors more likely to get some money back
Any creditor can apply to the court
Floating charge debenture holders can appoint without reference to court.
Creditors will have continuing customer(potentially)
Directors could avoid acquiring reputation of having been involved in an insolvent company.
End of Administration Period
12 months after appointment
Application to court by administrator
Application to court by a creditor
When original applicant is discovered
to have an inapp. motive
Administrator can apply to court
determining that administration cannot be effective
Company should have never been in administration
(if appointed by court) the administration as been successful.
come to an exit strategy, like moving company to voluntary liquidation for dissolution.
Sequence of distribution of Assets in Liquidation
1) Liquidator's fees/expenses
2) Lenders on fixed charges: outstanding capital,
interest on overdue payments, lenders expenses
3) Preferential creditors: employee pensions,
social security, employee remuneration o/s
up to4 months or £800 each.
4) Lenders secure by floating charge
5) Creditors that have specific claim over any
6) further amounts to creditors/payables and o/s amounts
from above like wages that exceeded £800.
7) Calls paid in advance by shareholders
8) Preference Shareholders
9) Equity/ordinary shareholders
Introduced in 2003 to secure/set aside amount for unsecured
creditors/payables. Ensures that these people will have at least something due to them from liquidation.
net assets in liquidation are less than £10,000, prescribed
part is 50% of that amount.
net assets are greater than £10,000 but less than £600,000
PP is 50% of first £10,000, 20% of rest
Chapter 15 - Company
Designed to give creditors extra protection
Insolvency Act 1986: civil offence, carry on
business as insolvent,knowing cant pay bills.
Directors liable when
company has commenced insolvent liquidation
they knew, or should have know it was probable
They held a position of power, and failed to carry
Directors may escape liability if they can show court that
they took every step to mitigate/minimise
creditor's potential loss
Criminal offence under Companies Act 2006
Civil offence under Insolvency Act 1986
Criminal: entity set up and continues trading with
intention of defrauding creditors. Penalty is fine/
imprisonment up to 10yrs.
Civil: when entity is being liquidated.
Liquidator can take action against anyone who was
knowingly a party. If found liable, court may direct
person liable shall contribute shortfall in entity's assets.
Proceeds of criminal activity are converted into assets
appearing to have a legitimate origin - eg drug dealing.
Three distinct phases:
placement of funds into legitimate business activity
Transfer of money from business to business to conceal
Integration, money takes on appearance of having come
from legitimate source.
Three offences by Crime Act 2002 in money laundering:
Laundering itself (max 14 years prison/fine)
Failure to report (max 5yrs prison/fine)
Tipping off (max 5 yrs in prison/fine)
Failure to report - only for individuals acting in course
of business eg accountant.
person who has business connection with company
as a result of which they may acquire relevant info.
- buying or selling shares/securities in company.,
when having insider knowledge (shares going to fall/rise)
Unpublished price - sensitive info about company not in public
less than 6 months old
on publication, likely to have material impact on market price
of company's shares
Insider encouraging another person to deal.
person dealing as result of encouragement
Had inside info, but decision was based on external factors
eg to rennovate a property
had no reason to think publication would have a material
impact on market price of shares.
bribing another person
receiving a bribe
bribing a foreign public official(FPO)
commercial organisation failing to prevent bribery.
offering financial/other advantage to perform
relevant function/activity improperly.
function of a public nature
acitivity connected with business
activity performed in course of person's employment
activity performed by/on behalf of group of persons
Bribing an FPO
offer directly/indirectly, financial or other advantage to
FPO intending to influence them to gain business/advantage
in connection with business.
FPO holds administrative, legislative/judicial position outside UK
Company/partnership liable if agent, employee or subsidiary
bribes another person intending to gain business advantage.
Defence: if company can show it had adequate procedures in place, based on SIX PRINCIPLES. Adequacy decided by courts.
The Six Principles
Proportionate procedures to risks faced and size of company
Commitment by management: managing risks
Due diligence: procedures in respect of personnel at greater risk of offering bribes
Communication: all employees aware of company's culture
Monitoring & Review: procedures regularly reviewed
person found guilty faces imprisonment up to 10 years
guilty company liable to an unlimited fine
Reputation loss, civil claims against directors for failure
to implement adequate procedures