Distinction level notes for the LPC at University of Law. Laid out in clear table format and covering all course content in workshop order for the 2018/19 course, these are the most up to date and comprehensive LPC notes currently available, and include step-by-step model answers and specimen paper...
, WHEN COMPANY INSOLVENT
A company may be ordered to be wound up by the court when it is unable to pay off its debts
DEFINITION (see below) (s122(1)(f))
A company is deemed unable to pay its debts in the following circumstances:
1) Statutory Demand: if the company is indebted to a creditor for more than £750 and due
notice to pay has been served on the company and the company has not complied with the
demand for 21 days (s123(1)(a))
2) Creditor obtains Judgment: a creditor gets a judgment against the company and tries to
enforce it but the debt remains unsatisfied in whole or in part (s123(1)(b))
TESTS 3) Cash-flow Test: the company is unable to pay its debts as and when they fall due (s123(1)(e)
If creditors cannot be paid until the company’s debtors have paid
Good indicator is the current ratio (current assets / current liabilities), but this isn’t
definitive test because it may give a positive ratio
Consider whether the balance sheet’s stock and debtor values are true representations
4) Balance Sheet test: the total value of the company’s assets is less than the amount of its
liabilities (s123(2))
Ascertained by taking net assets / liabilities on the balance sheet
Take into account contingent and prospective liabilities
Note overvaluation of fixed assets and low-realisation value of stock, so adjust
It is intended to apply and illustrate where a company has reached a ‘point of no
return’ (Eurosail)
Remember that balance sheets are only snapshot of one day of the company
Upon finding out that company is insolvent, a director should take the following practical
steps:
i) Immediately seek professional advice
ii) Be alert to those creditors who may serve a statutory demand or obtain judgment
iii) Do not take on any more debt (risk of breach of duty/wrongful trading under s214 IA)
iv) Keep full minutes and update accounts regularly
v) Aggressively pursue any debtors
DIRECTORS’
Promote the Success of the Company
DUTIES
S172 In a way that benefits the members as a whole (s172(3))
Interests of creditors supersede members (West Mercia Safetywear )
S173 Exercise Independent Judgment
Reasonable Care, Skill and Diligence
Objective: the knowledge, skill and experience that may reasonably be
S174 expected of a person carrying out the functions of the director in question
Subjective: with the particular knowledge, skill and experience that the
director in question has
1. Liquidation (MVL/CVL/CL)
OPTIONS FOR 2. Debt Restructuring (renegotiating or debt for equity)
AN INSOLVENT 3. Refinancing (increase overdraft provisions, asset finance and granting equity stakes)
4. Informal agreement with creditors
COMPANY
5. Compulsory Voluntary Arrangement (CVA)
6. Administration
1
, TYPES OF LIQUIDATION
MEMBERS’ VOLUNTARY CREDITORS’ VOLUNTARY COMPULSORY LIQUIDATION (CL)
LIQUIDATION (MVL) LIQUIDATION (CVL)
WHO PETITIONS The company (as they wish The company (in response The creditor applies to court
to cease trading) to creditor pressure) under s122 IA
Solvent (if commenced and
COMPANY MUST company then discovers it Insolvent Insolvent
BE is insolvent, process must
be changed to CVL)
RESOLUTIONS SR to wind-up company SR to wind-up company N/A
NEEDED OR to appoint liquidator OR to appoint liquidator
1. Winding-up petition
1. Directors recommend a showing a s123 test
1. Directors swear a CVL to its members (above) given to court by
statutory declaration that creditor (s122)
the company can pay its 2. GM held to pass SR (s84)
debts (after taking and OR (s85) 2. Petition is advertised in
professional advice) 5 London Gazette within 7
3. A creditors’ meeting is days (r4 IR 1986)
weeks before GM/WR
held within 14 days of
2. Statement made of the resolutions (s98) 3. Court hearing is fixed
company’s assets and after appropriate notice
liabilities is given (7 days before 4. Court may make a winding
in the local press and up order. If it does, notice
PROCEDURE
3. GM/WR held to pass SR London Gazette) should be placed in the
(s89) and the OR (s91) London Gazette and local
4. Unsecured creditors paper
4. Statutory declaration of choose a liquidator by
directors and the SR filed simple majority. 5. If creditors do not choose
at CH within 15 days Secured creditors to appoint an independent
(s84(3) and s89(3)) cannot vote because insolvency practitioner,
they have redress then the Official Receiver
5. Liquidator takes over will be liquidator
and notification of their 5. Directors give a sworn
appointment is given to statement of company’s 6. Directors must present a
all creditors affairs at the creditor’s statement of affairs within
meeting 14 days of the order
6. Liquidation proceeds 7. Liquidator proceeds
They control winding up They or the court may
They have no say in the They choose the appoint liquidator
CREDITORS’ appointment of liquidator liquidator Expensive and slow
POSITION Should be paid back in full Very unlikely to recover Unlikely to recover all their
all their money money
No exercise of powers No exercise of powers
unless a continuance is unless a continuance is
DIRECTORS’ sanctioned by liquidator or sanctioned by liquidator Both their powers and office
POSITION members at the GM Still officially hold the are terminated
Still officially hold the office of director (s91(2))
office of director (s91(2))
2
, DISTRIBUTION OF ASSETS ON LIQUIDATION
GENERAL Assets are distributed in accordance to the order in s175, s176A and s176ZA IA 1986
Fixed Charge Holder
The asset will be sold and the debt satisfied with the proceeds
1 Any shortfall in price for the debt will rank as an unsecured creditor (below)
2 Liquidator’s Expenses
Preferential Creditors
Such as employees
3 Wages done in the last 4 months will be paid at a maximum of £800 per person
(Schedule 6 Paragraph 9) as well as Occupational Pension Schemes
ORDER OF
DISTRIBUTION Ring-fencing for Ordinary Unsecured Creditors
No secured creditor has the benefit of ring-fencing (Re Airbase (UK))
50% of the 1st £10,000 net assets after the preferential creditors have been satisfied
4 20% of the balance remaining on it
Maximum of £600,000 may be ring-fenced
5 Post 15/09/03 Floating Charge Holder
Ordinary Unsecured Creditors
6 In proportion to what they are owed (“pari passu”)
Shareholder
7 In the very unlikely event that there is anything left to distribute
Referred to in Schedule 4 IA 1986
a) To collect assets and distribute them in accordance with the statutory order
b) To sell assets at a reasonable price
RIGHTS & c) To use the company bank account
d) To appoint agents
DUTIES OF
e) To litigate on the company’s behalf
LIQUIDATOR f) To carry on the company’s business
g) To do everything necessary to wind-up
h) To investigate past transactions
3
, PERSONAL INSOLVENCY
A director will incur no personal liability on insolvency unless they acted improperly (Salomon)
WHEN There are two tests:
INDIVIDUAL IS a) Cash flow (cannot pay debts as and when they fall due)
BANKRUPT b) Absolute (where debts exceed assets)
s265 IA states that the following can be made bankrupt:
WHO CAN BE a) Any person domiciled in England and Wales when petition is presented; or
MADE b) Any person who has in the last 3 years (ending on day petition is presented):
BANKRUPT i) Had a place of residence in England & Wales; or
ii) Carried on a business in England & Wakes
Under s264(1) IA, the following can petition for the above’s bankruptcy
1) The individual debtor
2) One or more creditors (with an aggregate debt of £750 or over)
3) The IVA supervisor or anyone connected to an IVA
PETITION BY DEBTOR (s272) PETITION BY CREDITOR (s267)
Must present petition on grounds they They must be owed money totalling £750
WHO CAN
cannot pay currently due debts (s272(1)) or above (s267(2)(a)); or
PETITION FOR Must support petition with a full statement Debtor must be unable to pay their debts
THEIR of affairs of creditors as currently due; or
BANKRUPTCY Cannot withdraw petition once made Have no reasonable prospect of being able
without leave of the court (s266) to pay (s267(2)(c))
Court will not make an order if: Court must be satisfied that either:
Aggregate unsecured debts is less than Debt is currently payable and has not
small bankruptcies level of £40,000 been paid, secured or compounded
If an order is made, value of (accept less)
petitioner’s estate would be equal to Not currently payable but one which
or more than £4,000 the debtor has no reasonable
Within last 5 years petitioner has prospect of paying
neither been adjudged bankrupt nor Court may dismiss the petition if:
been in a scheme of arrangement Debtor can pay their debts
It’s appropriate to have a report Creditor unreasonably refused to
prepared under s273 secure or compound the debt
Official Receiver is appointed and creditors’ meeting held
Bankrupt’s estate automatically vests in their trustee in bankruptcy (s306)
PROCEDURE Trustee collects and distributes assets to creditors (see below for home)
Bankrupt is discharged, usually automatically after one year
a) If held at JT, trustee will need a court order to sell against the other’s will
BANKRUPT’S b) Sole name of bankrupt: there may be an occupier FLA right (if so, need a court order)
HOME c) Children: bankrupt has a right of occupation so trustee will need a court order
d) Bankrupt lives alone: no one has equitable interest, then no court order is needed
4
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