Class notes
Company Law: Liquidation notes.
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Company Law Topic Liquidation:
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General NotesFloating Charge: Bank can obtain a floating charge over moveable assets in a company i.e.,
stocks, work in progress and in event of insolvency e.g., unable to pay its debts when they fall
due s.122 + s.123 IA 86 the floating charge crystalizes which consequently means the
company can no longer deal with goods of services.
Fixed Charge: On static assets of the company like premises, in event of insolvency bank
can seize assets to sell and pay back whatever they were owed [not to forget the list of
priority. [if co cannot pay back amount they owe every month + interest then they reserve
the right to sell premises and use proceeds of that sale to get money back. Impact on the
company is that there is an agreement called a ‘debenture’ which is the jargon for agreement
that evidence of the loan + terms of the loan between company and lender. The debenture
restricts wat the company can do with the ‘subject’ i.e., cannot sell/charge to another
Personal Guarantee: creditors can ask for personal guarantees which means that they will
be personally liable for the debt and not protected by the separate legal personality of the
company if not paid back. [you will be liable for debts not paid back in your personal capacity]
Separate legal personality: Shareholder+ Directors have limited liability. In the event of
insolvency and debt shareholders cannot be asked to contribute any more than they have put
in. Shareholders and directors both protected by SLP not liable. (Unless PG given or Directors
in breach.) shareholders can lose what they have put into the company. This is a significant
advantage over the previous way of running a business [partnership]
Statutory Distribution S.107 IA 86 [hierarchical list]: Order of priority: Fixed charge
holders (have to be registered properly), Liquidator, preferential creditors (employee
wages up to £800 & outstanding pension contributions), floating charge holders (max
£600k See JJB Sport) – Minus a sum ‘ring fenced for unsecured creditors’ , then unsecured
creditors, interests on debts, and shareholders.
[Note: Fixed charge holders at the top and shareholders at the bottom]
Development: when floating charge holders paid off, they are not paid off in full, a sum is kept
back ‘ring fenced’ for unsecured creditors’
Yes, as a shareholder you cannot be asked to contribute in events of insolvency more than
you put in however due to limited liable however you could stand to lose everything that you
put in.
‘ring fencing’ When floating charges are paid off, some is help back When the floating
charge holders are paid off there a ring fence so if you net property is over 10k,
50% of the first 10,000 in value then 20% of anything over 10k in value is kept back
for unsecured creditors.
shareholders rank: as deferred creditors and will only be paid their dividends if all the
debts owed to those ranking above them have been paid [s74(2)(f) IA 1986]
Employees: Employees will be classified as preferential creditors and will be paid before
floating charge holders for a 4-month period up to the commencement of the winding up (to a
maximum of £800). Employees will be paid unpaid holiday entitlement though as well as
pension contributions. However, the winding up petition was brought in October, so it
appears they have been paid to the date which is 4 months before the commencement of the
winding up. Anything further outstanding to be paid will be paid to them as unsecured
creditors (s386 and Sch 6 IA 1986 as amended by s251 Enterprise Act 2002).
Receivership: debenture will allow a receiver appointed by secured creditor taking control of
assets and uses it to satisfy the debt, use proceeds of sale to get money back.
Compulsory Winding up: s.122(1)(f) IA 86. Need to be petitioned by either director
shareholder, creditors, have to prove ground.
, Insolvency Definition/ sign: ‘Unable to pay its debts as they fall due’ s.122 + s.123 IA 86
This can be evidenced by:
- Non-compliance with a statutory demand or
- Non-satisfaction of a judgement in favour of a creditor
- Not able to pay debts as they fall due, or the value of assets is less that the amount of
liabilities.
Voluntary Winding up:
Two types
(1) Members’ voluntary winding up: Solvent co,
(2) Creditors’ voluntary winding up. Cannot declare solvency, creditors not paid. Need
special resolution.
Duties and functions of liquidator [squeeze this in PQ where relevant]: Role (1)
Gather in all company’s’ assets (2) pay of companies’ debts and liabilities (3) distribute
remaining assets to persons entitled to them According to S.107 IA 86.
Sch 4 IA86 gives liquidator wide powers including (1) Pay creditors (2) bring/ defend legal
proceedings (3) run the business (4) sell companies property.
L Has to act in good faith (2) avoid conflicts of interest (3) not make a secret profit.
Wrongful trading 216 + 217: 216+217: when there is a director of a company which has
gone into liquidation that director cannot be involved in managing a company cannot be
involved in managing a company of the same/ similar name in the next 5 years. This is known
as the ‘phoenix’ protection principle which prevents you starting up new companies and same
board managing it. They cannot call the company the same thing due to the fact it sends false
representation to customers and suppliers or the stakeholders that it is exactly the same
company, but it would have very little capital in it.
Intent is irrelevant, strict liability and will cause imprisonment, fine plus liable for companies’
debts.
Floating charge: This charge needs to be properly registered pursuant to Companies
Act 2006 (Amendment of Part 25) Regulations 2013, s.859A-Q Companies Act 2006,
then it will be a valid charge and rank in priority to unsecured creditors
Introduction:
- Fact common to all scenarios ‘common I
- Company in liquidation, struggling for 18 months.
- Introduction talked about in Voice recording)
No role of the liquidator: understand L’s role gathering money in. [ knowledge of ranking list.
Review transactions and make money. Role of liquidator where applies, show understanding
of that] Really focus on IRAC.
- Want to see section numbers there, S.245
A company gives a preference to a person if:
a. that person is one of the company’s creditors or a surety or guarantor for any of the company’s debts or
other liabilities, and
b. the company does anything or suffers anything to be done which (in either case) has the effect of putting
that person into a position which, in the event of the company going into insolvent liquidation, will be better than
the position he would have been in if that thing had not been made.
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