ACCA F4: Chapter 11 - Insolvency

1 Voluntary liquidation: s84 Insolvency Act (IA 1986) 1) Administration. This aims to rescue the company so that it may continue trading as a going concern. 2) Liquidation. This winds up the company, thus bringing its life to an end.

1 Voluntary liquidation: s84 Insolvency Act (IA 1986) A voluntary liquidation occurs where the members pass a resolution to go into liquidation. - Where the period fixed for the duration of the company expires or an event occurs upon which the articles provide that a company should be wound up, an ordinary resolution must be passed.- A special resolution must be passed if the company is being wound up for any other reason.

1 Voluntary liquidation: s84 Insolvency Act (IA 1986) 1) A members' voluntary liquidation is used where the company is solvent 2) A creditors' voluntary liquidation is used where the company is insolvent

1 Voluntary liquidation: s84 Insolvency Act (IA 1986)

1 Voluntary liquidation: s84 Insolvency Act (IA 1986)

1 Voluntary liquidation: s84 Insolvency Act (IA 1986) If the liquidator discovers that the company’s debts will not be paid in full within the time specified in the declaration of solvency, he must convert the members’ voluntary liquidation into a creditors’ voluntary liquidation. This is done by convening a meeting of the company’s creditors. At the meeting the liquidator must:- lay before the creditors a statement of affairs- invite the creditors to appoint a different insolvency practitioner as liquidator- invite the creditors to appoint a liquidation committee

2 Compulsory liquidation A compulsory winding up commences when a petition for a winding up order is presented to the court. The possible grounds for the petition are set out in s122 IA 1986:- The company has passed a special resolution to be wound up by the court.- A public company has not been issued with a trading certificate within a year of incorporation.- The company has not commenced business within a year of being incorporated or has suspended its business for over a year.- The company is unable to pay its debts. A company is deemed to be unable to pay its debts where a creditor who is owed at least £750 has served a written demand for payment and the company has failed to pay the sum due within three weeks.- It is just and equitable to wind up the company. However, the court will not make an order under this ground if some other more reasonable remedy is available.

2 Compulsory liquidation - the company itself- the Official Receiver, who is a civil servant in The Insolvency Service and is an officer of the Court- the Department for Business, Innovation and Skills- a contributory. This is any person who is liable to contribute to the assets of the company when it is being wound up. (The contributory must prove that the company is solvent).- a creditor who is owed at least £750.

2 Compulsory liquidation - All actions for the recovery of debt against the company are stopped- Any floating charges crystallise.- Any legal proceedings against the company are halted, and none may start unless leave is granted from the court.- The company ceases to carry on business except where it is necessary to complete the winding up, e.g. to complete work-in-progress.- The powers of the directors cease, although the directors remain in office.- The employees are automatically made redundant, but the liquidator can re-employ them to help him complete the winding up.

2 Compulsory liquidation

2 Compulsory liquidation - fixed charge-holders - expenses of liquidation - preferential creditors: - wages or salaries due in the four months preceding the commencement of winding up (maximum £800 per employee) - all accrued holiday pay - All preferential creditors rank equally amongst themselves. - floating charge-holders - unsecured creditors – rank equally amongst themselves. The Enterprise Act 2002 introduced into the Insolvency Act 1986 a ring-fencing mechanism where part of assets which are subject to a floating charge are available to unsecured creditors. The amount ring-fenced is 50% of the first £10,000, plus 20% of the rest up to a maximum ring-fenced fund of £600,000. - post-liquidation interest. - members – declared but unpaid dividends. - members – return of capital (in accordance with class rights). - any surplus to be distributed to members.

3 Administration Administration involves the appointment of an insolvency practitioner, known as an administrator, to manage the affairs, business and property of a company. It was first introduced by Schedule 16 IA 1986, but has subsequently been amended by the Enterprise Act 2002.

3 Administration - rescue a company in financial difficulty with the aim of allowing it to continue as a going concern - achieve a better result for the creditors than would be likely if the company were to be wound up - realise property to pay one or more secured or preferential creditors.

3 Administration - the court in response to a petition by a creditor, the directors or the company itself - the holder of a qualifying floating charge over the company's assets - the company or its directors provided that winding up has not already begun.

3 Administration The court will only agree to appoint an administrator if it is satisfied that the company is or is likely to become unable to pay its debts, and the administration order is likely to achieve its objectives