Sunday 12 th August 2012 Lecturer: Rowin Gurusami.

INSOLVENCY LAW

Sunday 12thAugust 2012

Lecturer: Rowin Gurusami


ADMINISTRATION Method of ‘saving’ a company from liquidation, under the Enterprise Act 2002

However not always to save company. Administration can allow more effective realisation of assets than would be available in liquidation as trading is allowed to continue

Main purpose is to insulate company from creditors while it seeks:-To save itself as a going concern, or failing that-To achieve better result for creditors than winding up would, or failing that-To realise property so as to make distribution to creditors


ADMINISTRATION Administration orders and liquidation are mutually exclusive

Once administration order passed by court, no longer possible to petition court for winding up order against company

Once order for winding up made, administration order cannot be granted (except when appointed by floating charge holder)

Administration can be initiated with or without a court order


WITH OR WITHOUT COURT ORDER Administration normally starts once court issued an order to that effect (para 11 of Sched B1 of Insolvency Act 1986)

Enterprise Act 2002 retains the following parties rights to undertake out-of-court actions:- Floating charge holders (para 14 of Sched B1 of IA 1986)- Company or its directors (para 22 of Sched B1 of IA 1986)

By whatever way administration started, administrator is an officer of the court (para 5 of Sched B1 of IA 1986)


FLOATING CHARGEHOLDERS Have right to appoint administrator without reference to court even if there is no actual or impending insolvency

May also appoint administrator even if company is in compulsory liquidation

Floating charge must be over all, or substantially all, the company’s property and terms of charge must entitle holder to appoint administrator (most likely be a bank)


FLOATING CHARGEHOLDERS May only appoint administrator if:-They have given 2 days written notice to holder of any prior floating charge where that person has right to appoint-Their floating charge is enforceable

Will need to file the following documents at court:-Notice of appointment, identifying administrator-Statement by administrator where he consents appointment-Statement by administrator that, in his opinion, purpose of administration is likely to be achieved-Statutory declaration that he qualifies to make appointment


COMPANY & DIRECTORS Depends on articles of association. Company or its directors may appoint administrator if:

-Company has not done so in last 12 months or been subject to a moratorium as result of voluntary arrangement with creditors in the last 12 months-Company is, or is likely to be, unable to pay its debts-No petition for winding up nor any administration order has been presented to the court-Company is not in liquidation-No administrator is already in office


COURT ORDER Four sets of parties may apply to the court for an administration order:-Company (i.e. Majority of members by ordinary resolution) (individual members cannot apply)-Directors of company-One or more creditors of company-Justice and Chief Justice of Magistrates’ Court following non-payment of a fine imposed on the company

Administration order granted if:-Company is, or is likely to be, unable to pay its debts, and-Order is reasonably likely to achieve purpose of administration


EFFECTS OF APPOINTING ADMINISTRATOR Moratorium (temporary suspension) over the company’s debts commences

Court must give permission for:-Security over company property to be enforced-Goods held under hire purchase to be repossessed-Landlord to conduct forfeiture by peaceable entry-Commencement/continuation of any legal proceedings against the company


EFFECTS OF APPOINTING ADMINISTRATOR Powers of management are subjugated to authority of administrator and managers can only act with his consent

All outstanding petitions for winding-up of company are dismissed

Any administrative receiver in place must vacate office. No appointments to this position can be made

No resolution may be passed to voluntarily wind-up company


DUTIES OF ADMINISTRATOR Administrator is an agent of the company and creditors as a whole. Therefore owes fiduciary duties to them and has the following legal duties as soon as reasonably practicable after appointment:

-Send notice of appointment to company-Publish notice of appointment-Obtain list of company creditors and send notice to each-Within 7 days of appointment, send notice to Registrar-Require certain relevant people to submit statement of affairs of the company-Ensure every business document of company bears identity of administrator and statement that affairs now managed by him

DUTIES OF ADMINISTRATOR-Consider statement of affairs submitted to him and set out his proposals for achieving the aim of administration.-Send proposals to Registrar and company’s creditors and be made available to every member of company, within eight weeks-Manage affairs of the company

Statement of affairs must contain:-Details of company’s property-Company’s debts and liabilities-Names and addresses of company’s creditors-Details of any security held by any creditor


ADMINISTRATOR’S PROPOSALS Within 8 weeks, administrator must either:-Set out his proposals for achieving aim of administration, or-Set out why it is not reasonable and practicable that company be rescued. Also set out why creditors as a whole would benefit from winding-up.

Must call meeting of creditors within 10 weeks of appointment to approve proposals. Creditors may either accept or reject them

Once approved, administrator cannot make any substantial amendment without first having consent of creditors


ADMINISTRATOR’S POWERS May do anything necessarily expedient for the management of the affairs, business and property of the company

The administrator takes on the powers of the directors and can also:-Remove or appoint director-Call meeting of members or creditors-Apply to court for directors regarding his functions-Make payments to secured or preferential creditors-With permission of court, make payment to unsecured ones (no permission required if payment will assist achievement of administration)


END OF ADMINISTRATION Administration can last up to 12 months and ends when:- Administration has been successful- 12 months have elapsed from date of appointment (can be extended by court order or consent of relevant creditors)- Administrator applies to court to end appointment- Creditor applies to court to end appointment- Improper motive of applicant for applying for administration is discovered

Administrator can apply to court for ending appointment when he thinks (1) purpose of administration cannot be achieved, (2) administration has been successful or (3) company should not have entered into administration


RECEIVERSHIP Administrative receiver appointed by floating chargeholder

Has control over the whole, or substantial part of company’s property and powers over its business

Can only be appointed by holders of floating charges created on or after 15 September 2003

Can also be appointed by fixed chargeholder

Receiver need not be a qualified insolvency practitioner



LIQUIDATION Liquidation is the dissolution or ‘winding up’ of a company, and all its affairs brought to an end

1. Assets are realised2. Debts paid out of proceeds3. Surplus amounts returned to members4. Company wound up

Three types of liquidation:- Compulsory Liquidation- Members’ Voluntary Liquidation- Creditors’ Voluntary Liquidation


LIQUIDATION Parties involved:-Directors-Creditors-Members

Directors cannot formally instigate winding up procedures but they can make recommendations to members

Members’ voluntary liquidation: if company is solvent Creditors’ voluntary liquidation: if company is insolvent


LIQUIDATION FEATURES Regardless of method of liquidation used, similar factors must be respected at start of any liquidation:

No share dealings or changes in members are allowed

All company documents (e.g. Invoices, letters, emails) and the website must state the company is in liquidation (e.g. Independent Working Mills (In Liquidation) Ltd)

The directors’ power to manage ceases


LIQUIDATOR Liquidator must be an authorised, qualified insolvency practitioner (by virtue of membership of a recognised professional body

Once decision to liquidate taken, company goes under control of liquidator who is responsible for realising the assets and distributing proceeds

Liquidator has statutory duty to report to Secretary of State where he feels that any director of insolvency company is unfit to be involved in management of a company

Remuneration of liquidator payable out of company’s assets in priority to all other claims


VOLUNTARY LIQUIDATION s84 of Insolvency Act 1986 provides 2 situations in which company can be wound up voluntarily:

1. s84(1)(a) states that company can be wound up period fixed for duration of company passes or if articles provided it should be on the occurrence of a particular event (requires ordinary resolution of members)

2. S84(1)(b) states that company can be wound up in any circumstances by special resolution of its members


MEMBERS’ VOLUNTARY LIQUIDATION Directors must make a declaration of solvency (criminal offence to make one without reasonable grounds)

s89 IA 1986 provides there can only be members’ voluntary liquidation if directors make and deliver a declaration of solvency to Registrar

It is a statutory declaration that directors have made full enquiry into the affairs of company and are of opinion that it will be able to pay its debts, within a specified period not exceeding 12 months (s89 IA 1986)

Liquidator then appointed (s91 IA 1986)


DECLARATION OF SOLVENCY Declaration is made by all directors or, if there are more than two directors, by a majority of them

Declaration includes a statement of company’s assets and liabilities as at latest practicable date before it is made

Declaration must be made not more than 5 weeks before resolution to wind up is passed

Declaration must be delivered to Registrar within 15 days of meeting


MEMBERS’ VOLUNTARY LIQUIDATION Creditors play no part since there is assumption that their debts will be paid in full

If later, liquidator concludes that company unable to pay debts, a meeting of creditors is called and laid before them is a statement of assets and liabilities (s95 IA 1986)

After assets realised and proceeds distributed, the liquidator must hold final meeting of members to lay before them his final accounts (s94 IA 1986)

After final meeting, liquidator sends copy of his accounts to Registrar who dissolves the company three months later by removing its name from the register (s201 IA 1986)


CREDITORS’ VOLUNTARY LIQUIDATION Same procedure stated by s84 IA 1986 (i.e. Passing of appropriate resolution)

If no declaration of solvency made and delivered to Registrar, liquidation proceeds as creditors’ voluntary winding up

After resolution passed, members appoint a liquidator and nominate up to 5 representatives to be members of liquidation committee

Directors must convene meeting of creditors within 14 days of resolution passed (s98 IA 1986) and directors must lay statement of affairs before them (s99 IA 1986)


CREDITORS’ VOLUNTARY LIQUIDATION Statement of affairs will include (s99(2) IA 1986):-Particulars of company’s assets and liabilities-Names and addresses of company’s creditors-Securities held by the respectively-Dates when securities were respectively given-Any other information as may be prescribed

Creditors can nominate different person to be liquidator and up to 5 representatives to be members of liquidation committee

In case of dispute, creditors’ nominee prevails over nomination of members

CREDITORS’ VOLUNTARY LIQUIDATION Winding up then proceeds similarly as members’ voluntary liquidation:

-Directors’ powers cease-Liquidator responsible for realising assets and distributing the proceeds-Liquidator presents report to final meeting of members and creditors-Liquidator informs Registrar of final meeting and submits a copy of his report-Registrar dissolves the company three months later by removing its name from the register



COMPULSORY LIQUIDATIONCreditor, member or Secretary of State may apply to court for compulsory winding up

Statutory grounds for winding up (s122(1) IA 1986):

Company has, by special resolution, resolved that company be wound up by court (s122(1)(a) IA 1986)

Public company incorporated but not issued with a trading certificate within a year of incorporation (s122(1)(b) IA 1986)


COMPULSORY LIQUIDATION Company has not commenced business within a year of its incorporation or suspends business for a whole year (s122(1)(d) IA 1986)

Numbers of members reduced below 2 (except for private limited companies) (s122(1)(e) IA 1986)

Company is unable to pay its debts (s122(1)(f) IA 1986)

Court is of opinion that it is just and equitable to wind up the company (s122(1)(g) IA 1986)

INABILITY TO PAY DEBTS Creditor must show that company unable to pay its debts

s123 provides a company deemed unable to pay debts if:

if a creditor, to whom company is indebted in a sum exceeding £750 then due, served a written demand (at company’s registered office) requiring company to pay the sum due and the company has, for three weeks thereafter, neglected to do so

Creditor obtains judgement against company for debt, attempts to enforce the judgement but unable to obtain payment (in part or in whole) as no assets of company have been found and seizedLecturer: Rowin Gurusami


INABILITY TO PAY DEBTS The conditions of a charge for payment have expired without payment being made

Creditor satisfies court that, taking into account contingent and prospective liabilities of company, the company is unable to pay its debts:

-By proof that company is not able to pay its debts as they fall due (commercial insolvency test)

-By proof that company’s assets are less than its liabilities (balance sheet test)


JUST AND EQUITABLE GROUND Member dissatisfied with directors or controlling shareholders over the management of the company may petition the court for company to be wound up on the just and equitable ground

Member must show that no other remedy is available

Not enough for member to be dissatisfied to make it just and equitable since winding up a healthy company is a drastic step


JUST AND EQUITABLE – EXAMPLES The only or main object(s) of company cannot be or can no longer be achieved-Re German Date Coffee Co (1882): Objects clause specified coffee only manufactured under a German patent. Patent not granted, member petitioned for compulsory winding up and court held company existed only to ‘work under a particular patent’ and as it could no do so, it should be wound up

Company formed for an illegal or fraudulent purpose or there is complete deadlock in management of its affairs


JUST AND EQUITABLE – EXAMPLES-Re Yenidje Tobacco Co Ltd (1916): The only two directors quarrelled bitterly, one sued another for fraud, refused to speak to each other and conducted meetings through notes passed through secretary. Court held it was just and equitable to order liquidation

Understandings between members or directors which were basis of association have been unfairly breached by lawful action- Ebrahimi v Westbourne Galleries Ltd (1973): Majority was within their right to remove directors but past relationship made it ‘unjust or inequitable’ to insist on that right. Thus court intervened on equitable principles to order liquidation


CONSEQUENCE OF WINDING UP PETITION Liquidation deemed to have commenced at time when petition was first presented

Any disposition of company’s property and any further transfer of its shares since commencement of liquidation is void unless court orders otherwise (s127 IA 1986)

Any legal proceedings in progress against company halted unless court gives leave. Any seizure of company’s assets after commencement of liquidation void (ss130 & 128) Employees of company automatically dismissed Any floating charge crystallisesLiquidator assumes powers of management


PROCEEDINGS When petition presented to court, a copy delivered to company in case it objects. Also advertised so that other creditors can intervene if they wish

Petition can be presented by member who must show that:- Company is solvent or alternatively refuses to supply information of its financial position

- He has been a registered shareholder for at least 6 of 18 months up to date of his petition

Court will not order compulsory liquidation if member has nothing to gain from it


PROCEEDINGS If company insolvent, there is no compulsory liquidation as member would receive nothing since creditors have priority

Once court has been petitioned, a provisional liquidator may be appointed by court, known as official receiver

Official receiver is an officer of the court

Usually takes control of company’s property

When order for winding up issued, official receiver becomes liquidator (s136 IA 1986) or is replaced by insolvency practitioner


OFFICIAL RECIEVER INVESTIGATIONS Official receiver must investigate (s132 IA 1986):-Causes of failure of company, and-Generally the promotion, formation, business dealings and affairs of the company

Official receiver may report to the court on the results

Can require public examination in open court of those believed to be implicated

May apply to court for public examination where half the creditors or ¾ of shareholders so request. Failure to attend is contempt of court (punishable by arrest and imprisonment)


MEETINGS OF CONTRIBUTORIES & CREDITORS Official receiver has 12 weeks to decide whether or not to convene separate meetings of creditors and contributories

Meeting provides them with opportunity to appoint their own nominee as permanent liquidator and liquidation committee

If official receiver believes there is little interest and creditors unlikely to appoint liquidator, he can dispense with meeting, informing court, creditors and contributories (s136)

If no meeting held or one held and no liquidator appointed, official receiver acts as liquidator


MEETINGS OF CONTRIBUTORIES & CREDITORS At any time after winding up order made, official receiver may ask Secretary of State to appoint liquidator (s137) (e.g. If members and creditors fail to appoint one)

If separate meetings held and both creditors and contributories appoint liquidator, it is the creditors’ nominee who takes precedence

When liquidator completes his task, he reports to Government, which examines his accounts

Can apply to Register for early dissolution if realisable assets will not cover his expenses and further investigation not required (s202)


VOLUNTARY - COMPULSORY CONTROL-MVL: members control liquidation process-CVL: creditors control process-Compulsory: Court controls process

TIMING-MVL & CVL: Commences on day resolution to wind up is passed-Compulsory: Once agreed by court, commences on day petition was presented


VOLUNTARY - COMPULSORY LIQUIDATOR-MVL: members select and appoint liquidator-CVL: members or creditors select & appoint liquidator-Compulsory: officer of court appointed as official receiver; then when winding up order issued, official liquidator appointed by members or creditors, or official receiver becomes official liquidator

LEGAL PROCEEDINGS-MVL & CVL: no automatic stay of legal proceedings or seizures not void unless liquidator applies to court for order-Compulsory: automatic stay of legal proceedings & seizures void unless court grants leave

VOLUNTARY - COMPULSORY MANAGEMENT & STAFF

-In any liquidation, liquidator replaces the directors in management of company (unless he decides to retain them)-Employees not automatically dismissed by commencement of voluntary liquidation-Insolvent liquidation may amount to repudiation of their employment contracts-All employees made automatically redundant in compulsory liquidation (although liquidator can hire them back)



APPLICATION OF ASSETS1. Expenses incurred in winding up (e.g.

Liquidator’s remuneration)2. Fixed charge holders3. Preferential creditors (wages and salaries due

in four months preceding commencement of winding up – maximum of £800 per employees and also all accrued holiday pay)

4. Floating charge holders5. Unsecured creditors6. Post-liquidation interest7. Declared dividend to members8. Return of capital9. Surplus distributed to members

INDIVIDUAL VOLUNTARY ARRANGEMENT

Compromise of debtor with creditors with an aim to avoid bankruptcy

Debtor pays reduced amounts towards total debt over period of 5 years

Procedure under Insolvency Act 1986 whereby court approval of IVA binds ALL creditors

No creditor can petition for bankruptcy after IVA approved



PROCEDURE:- Submit proposals to court, including insolvency practitioner’s (the nominee) comments on chances of success, for interim order- Interim order made - Effects of interim order: no further actions by creditors- Nominee of applicant must call meeting of creditors within 14 days of notice

-Contents of notice: proposals & comments of nominee, list of creditors, statement of affairs, details of meetingLecturer: Rowin Gurusami


DURING MEETING:-Creditors can approve or reject proposal by majority of 75%- If approved, supervisor appointed (normally nominee) in order to supervise scheme & distribute money to creditors-Once aims of IVA achieved, debtor is discharged from all liabilities

Creditor may apply to court if terms of IVA unfairly prejudicial to him or if there are irregularities in relation to meeting of creditors


BANKRUPTCY Applicable for the individual

Petition presented to court by:-Individual-Unsecured creditor- Supervisor of a person bound by IVA

Court hearing 14 days after petition lodged

Bankruptcy order made at satisfaction of court


BANKRUPTCY When debtor himself petitions Court, no order if:

- Total unsecured bankruptcy debts less than £40,000-Estate would be at least £4,000- Debtor has not, in previous 5 years, either been made bankrupt or entered into a composition with creditors- It would be appropriate to approve an IVA

Creditor has to show debtor unable to pay his debts:

-Served statutory demand on debtor not satisfied within 21 days- Attempts to enforce a judgment order not satisfied


BANKRUPTCY Once order is granted:

-Appointment of Official Receiver to administer bankruptcy and act as trustee of bankrupt’s estate- Official Receiver investigate debtor’s financial affairs & report to creditors & court- Official Receiver will give notice of bankruptcy order to local authorities, utility suppliers, land registry & other relevant bodies- Official Receiver to maximise funds for debt satisfaction- Payment of secured creditors first; then unsecured


EFFECTS OF BANKRUPTCY Debtor becomes an undischarged bankrupt:

-Cannot act as director or insolvency practitioner- Faces criminal liability for failure to provide information or co-operate with Official Receiver (e.g. handing over property)- Usually disqualified from professional bodies

- Any payment of money or disposition of property is void unless approved by court- Court has power to stay actions against debtor from day of petition


EFFECTS OF BANKRUPTCY Bankrupt’s estate is vested in the Official Receiver (subject to rights of unsecured creditors)

Estate does NOT include:

-Tools of trade or items necessary for use personally in relation to employment- Clothing and household provisions necessary to satisfy basic domestic needs of bankrupt & his/her family- Property held by bankrupt on trust for another - Tenancies protected by legislation



DISTRIBUTION TO CREDITORS1. Expenses incurred in bankruptcy (e.g. cost of

realising estate, remuneration of trustee, etc.)2. Pre-preferential debts (e.g. funeral expenses)3. Preferential debts (wages and salaries due in

four months preceding commencement of bankruptcy – maximum of £800 per employees and also all accrued holiday pay)

4. Ordinary debts5. Interest6. Postponed debts7. Surplus


DISCHARGE Discharged one year after bankruptcy order is

made

All debts are discharged

Personal restrictions are lifted

Still credit history will be affected

Will be subject to bankruptcy restriction order (between 2 and 15 years) if bankrupt is culpable

Sunday 12 th August 2012 Lecturer: Rowin Gurusami.

Documents

Transcript of Sunday 12 th August 2012 Lecturer: Rowin Gurusami.