Law 232 Topic 07

09-03-00

Insolvency (Winding-up)
Insolvency Act 1986 - a result of long and lengthy consultations, the result of the "Cork Report", whose committee was first established in 1977. A company only comes to life through the operation of the law, and may only be killed off by the operation of the law. Analogies between the death of a company and the death of a person - assets are distributed to the members, etc., but with one crucial difference - the company's assets have to be dealt with before the desolution of the company A company can be wound up while still solvent, without any complications. The winding-up of an insolvent company, on the other hand, can prove quite complicated. One of the main reforms of the Insolvency Act 1986 was the introduction of Insolvency Practitioners Insolvency Practitioners: s.388-393 IA 1986 contains rules regarding the minimum qualifications, competence and appointment of such practitioners. Before this legislation, neither liquidators nor receivers had to have any qualifications, and this in turn lead to "dodgy" practice, as companies lost out on money, etc.

Types of Winding-up
There are two types of winding-up - compulsory and voluntary (s.73(1) IA 1986) a) Compulsory Winding-up s.122(1) & s.125 IA 1986 - judicial discretion s.122(1) contains 7 grounds for compulsory winding up: 1) if there is a special resolution by the company that it be wound-up by the court; 2) a company which has been registered, but not issued with a certificate to conduct business; 3) an old company ("old" has a special meaning within the legislation, but is beyond the scope of this course);

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Law 232 Topic 07

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4) the company has not started to trade or conduct business within 12 months of its incorporation; 5) the number of members is reduced to 2 (unless it is a private company); 6) it is unable to pay it's debts * most important * 7) the court is asked to reach a just and equitable winding-up There are four main areas a court will consider, particularly in regard to 6) above: a) if a creditor owed a debt exceeding 750.00 for 3 weeks after making a written request for payment of that debt; b) execution process issued on a judgement is returned unsatisfied, in whole or in part (in practice, the minimum sum must exceed 750.00); c) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due; d) if the company's assets are worth less than the amount of its liabilities, taking into account contingent and prospective liabilities There are several people who can bring a petition for winding-up - creditors, the company itself, directors and the members. This is subject to a general proviso that they have held their shares for at least 6 months and they have an interest in the winding-up Just because a company has debts, dies not mean that a court will order the winding-up - the mere existence of debts is not sufficient grounds Comes back to the court's general discretion to grant a winding-up order, and that the court will take into account all contributor's and member's interests, but especially the interests of other creditors. Re ABC Coupler & Engineering Ltd [1961] 1 All ER 354 In this case, a creditor had a debt of 17,500. In order to try and get back some of the money he petitioned the court for a winding-up order. There were a number of other creditors, and all of them opposed the compulsory winding-up. This was considered of importance by the courts. Also considered important was that the company had extensive goodwill. The court also looked at the fact that although the company was money poor, it was asset rich - its assets were extensive and would more than cover the liabilities. For these reasons, the creditor was denied his petition for winding-up.

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Law 232 Topic 07

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b) Voluntary Winding-up There are two types of voluntary winding-up: 1) members voluntary winding-up - largely under control of members - where directors swear a statutory declaration of solvency 2) creditors voluntary winding-up - largely under control of creditors - where directors failed to swear a statutory declaration of solvency With respect to a creditors voluntary winding-up, a meeting of creditors will be called, and they will appoint a liquidator and they can also appoint, if they should so wish, creditors representatives to sit on the liquidation committee. In the case of a members voluntary winding-up, there will be a meeting of members, and possibly contributors, and they will have to pass a resolution for the winding-up of the company and appointment of a liquidator. Voluntary winding-up may commence in the following ways: s.84 IA 1986 - if the company resolves by extraordinary resolution to be woundup on the basis that it cannot by reason of its liabilities continue its business if the company resolves to be wound-up voluntarily by special resolution if a fixed period has been settled for the duration f the company, and the fixed period has now elapsed, then the company may be wound-up be ordinary resolution. Notice of winding-up: A requirement of the Insolvency Act 1986 is that notice of a winding-up be reported in the London Gazette

Malpractice and Conduct

Malpractice with regard to Insolvency Where someone has misapplied the monies, or misappropriated the property of the company, and is guilty of any breach of fiduciary duty and / or duty of care. In these cases, the court may order repayment of the money, it can also order restoration of the property. It can also demand any contribution related to the breach of duty, as it thinks fit.

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Law 232 Topic 07

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This is also related to the "fraudulent trading" aspects of malpractice, particularly s.213 IA 1986, which covers, in particular, situations where a person or persons knowingly carry on the business of a company with intent to defraud creditors or for any fraudulent purpose. Any such person can be ordered to contribute to the company's assets.

The main phrase concerning the court is "unreasonable behaviour"

The Conduct of the Liquidation s.233 IA 1986 This was a direct result of the recommendations of the Cork Committee, and is primarily concerned with preventing the abuse of "economic muscle" by the suppliers of utilities (stop "pay up or be cut off", etc.) s.216 IA 1986 Designed to stop the "phoenix situation" - places certain limitations on companies using the same name or very similar names. The old name of a company cannot be used for a period of 5 years from the date of liquidation. For example, in the case of Thorne & Silverleaf (1994), the defendant was a director of two companies, which had been liquidated - called Mike Spence (Reading) Ltd and Mike Spence (Motor Sport) Ltd. He personally guaranteed these two companies' overdrafts, and when they got a little large, he formed a third company called Mike Spence (Classic Cars) Ltd. IT was argued that he was personally liable for the third company's debts, and because the three companies were so similar, there was an association between these three companies. Notwithstanding the corporate veil, the court agreed that he was liable for all three companies. When a liquidator has realised the company's assets, they have to pay off the debts, and there is an order of priority. There are two main bodies - firstly, the liquidator's pay including the costs of liquidation, and then the preferential creditors. There are several recognised preferential creditors, each have an equal claim on the remaining assets.

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Law 232 Topic 07

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Fraud and deception: There are various offences of fraud and deception which can be committed during a liquidation. Five of the most important are: 1) Fraud in anticipation of a wind-up (s.206 IA 1986) 2) Past or present officers of the company making gifts, transfers or charges on a company's property (s.207 IA 1986) 3) Misconduct by past or present officers (s.208 IA 1986) 4) Falsification, destruction or mutilation of the company's books (s.209 IA 1986) 5) Material omission from statements relating to the company's affairs (s.210 IA 1986)

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