Corporate And Business Law

Insolvency |Corporate and Business Law |ACCA F4

Insolvency |Corporate and Business Law |ACCA F4

Welcome in the series notes of ACCA F4, In this article we will discuss about the topic “Insolvency“.

Insolvency

Insolvency is the point where a company close it’s operations.

Voluntary Liquidation: Company face difficulties to run the company or a business, following are the two options or choice,

Administration: Help to keep a business going on by the outsider.

Liquidation: Wind up the company, it is an end.

Voluntary Liquidation can occur by passing the resolution (according to situations)

An Ordinary Resolution will be passed if their is a fixed time for a company expiry or necessary to wind up (defined by article).

Special Resolution will be passed if their is a reason for winding up the company.

Types of Voluntary Liquidation

  • A member’s voluntary liquidation: company has assets to pay outsiders (Solvent just want to close not because of finance but some other reason).
  • A creditor’s voluntary liquidation: company has nothing to give outsider thus it is (Insolvent it is because of lake of finance).

Member’s voluntary winding up procedure

  1. Has to pass appropriate resolution (according to s86, Insolvency Act 1986).
  2. Declaration of solvency under (s89, Insolvency Act 1986) mean company has sufficient amount to pay outsider, False declaration is a criminal offence.
  3. Appoint a statutory person for the process of liquidation (under s91, Insolvency Act 1986)
  4. Liquidator who is responsible for giving the creditor their share and take care of asset proceeds.
  5. He (Liquidator) present the the report in the final meeting of the members (under s93, Insolvency Act 1986).
  6. Liquidator informs and submit a copy of final meeting to registrar (under s94, Insolvency Act 1986)
  7. Finally registrar register the report and company dissolved after 3 months from registering.

Creditor voluntary winding up procedure

  1. Has to pass appropriate resolution (according to s86, Insolvency Act 1986).
  2. There is no declaration of solvency as the company has not to pay its creditor, directors has to submit “the statement of the company’s affairs”(s99, Insolvency Act 1986).
  3. Both member and creditor can appoint a statutory person for the process of liquidation (under s100, Insolvency Act 1986). Maximum five person can work as liquidator.
  4. Liquidator who is responsible for giving the creditor their share and take care of asset proceeds.
  5. He (Liquidator) present the the report in the final meeting of the members and creditors (under s105, Insolvency Act 1986).
  6. Liquidator informs and submit a copy of final meeting to registrar (under s106, Insolvency Act 1986)
  7. Finally registrar register the report and company is dissolved

Note: When the amount is not enough to pay creditors then liquidator convert “members voluntary liquidation into creditors voluntary liquidation“. This can be done by a meeting where a liquidator must:

  • Compare the creditor’s statement of affairs
  • Invite creditors to appoint liquidator
  • Invite creditor to appoint liquidation committee

Compulsory Liquidation

Liquidation is compulsory when it arrives at court and there is no other option except winding up the company, (s122, Insolvency Act 1986).

  • Company has to pass a special resolution to wound up by the court
  • Public company is not provided the trading certificate within a year after incorporation
  • If a business is not operated with a year after incorporation or suspended business over a year
  • Unable to pay debts
  • If a member is dissatisfied and appeal in the court for wind up of a company, court will check the other remedy before winding up and if nothing or no remedy found then court will wind up the company.

Note: Petition is a request for doing something

Compulsory Liquidation Petitioner

These are the persons who can request for winding up the company, following are the petitioners:

  • Company itself
  • Insolvency service provider or court officer
  • Department of Business, Skill and Innovations
  • A person who is liable for paying when company will wound up (A Contributory)
  • Person who owed 750 pounds.

Winding Up Effects

  • Once the petition has done for the first time the liquidation is already started
  • Debts recovery stops
  • Finish floating charges
  • All the legal cases on the company holds for time being until court grated for something
  • If the company is going to wind up all the operations and projects has to stop but if there is project in (work in progress) has to finish as soon as possible.
  • All powers of directors will no more even they sit in the office
  • Automatically redundant but liquidator can keep employees for sometimes if their is an incomplete work or project.

Application of Assets

Liquidator must have to pay in following order,

  • Fixed charge holders (Maybe bank interest)
  • Liquidation expenses
  • Preferential Creditors such wages and salaries for four months or accrued holiday pays
  • Floating charge holders (Maybe bank interest)
  • Unsecured Creditor
  • Bank Interest, post liquidation interest
  • Unpaid dividend which was already declared
  • Capital return (Class rights)
  • Surplus to distribute among the members

Administration

These involves the appointing the insolvency provider by an administrator (the person who work as an administration). They manage company’s affairs and property, They can help to run a company when there is a situation of winding up. They can,

  • Rescue a company in financial difficulties
  • Achieve better result for creditors
  • Pay something by proceeding something but do not wind up

An administrator only wound up the company, when

  • No use to rescue the company
  • Can not achieve the better result for creditors
  • When creditors interest is more then company’s worth

Who appoints the administrator

Following are the authorities who can appoint the administrator:

  • The court (Only if company can not pay its debts or they think that administrator can achieve the objectives)
  • Holders who has floating charge on company’s asset
  • Company or Directors

Consequences of an administration

Following are the effects,

  • If a creditor has right over an asset the administrator can not get that asset
  • No agreement can take place
  • Winding up case will be dismissed if the administrator has appointed
  • No resolution is necessary after administrator appointment
  • Directors will continue in the office but their power will be no longer

Administrator Rights or Tasks

  • He is the company’s agent but should work in creditors interest
  • An administrator has power to manage a business or a company’s property
  • He has power to remove directors or employees
  • He can pay to secured creditors but for unsecured creditors he has to take permission from the court

Administrator duties or work

  • He must send or publish an appointment notice
  • Must obtain the list of creditors and can send appointment notice to each creditors
  • Must send notice to registrar after 7 days of appointing
  • Arrange for statement of affairs of a company by relevant people
  • Manage company’s property

Note: An administrator can end after 12 months of appointment or can extend if needed or he can apply for discharge if the objective is achieved.

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Naveen Rajput

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