Compulsory & Voluntary Liquidation - Week 12

What is liquidation?

• The conversation (usually into cash) of a company’s assets in order that may distributed in the first place to the creditors and in the second place to the members in accordance with the terms of the articles - similar to sequestration.

Why do we have liquidation?

• to have a fair method of dividing up the company’s asses that everyone agrees on

• Need a fair method that allows honest directors to start again, whilst penalising wicked directors

Difference between receiver, administrator & a liquidator?

• Receiver is only interested in the assets subject to the old-style floating charge and in getting the money back for the floating charge holder

• An administrator tries to rescue the company

• The liquidator turns the company’s assets into cash. Pays secured then unsecured creditors

What are the 3 types of winding up?

1. Winding up by the court

   • compulsory in the circumstances where is it allowed

2. Members voluntary winding up

   • There should be funds repayable to the members after payment in full to the creditors, and so the winding up is for the members benefit

3. Creditors voluntarily winding up

   • There will be no funds repayable to the members, but there should be some for the creditors. Winding up for the creditors benefit

Winding up by the court cases?

• The company’s inability to pay its debts as they fall due - IA 1986 S.123)

  • Means a company cannot pay its bills even though technically it is solvent - it just has a severe cash flow problem

• Blue Star Security Services (Scotland) Ltd

  • Company admitted they did not have the ready cash to pay its bills

Dispute of statutory demand? Case? - Winding up by the court

• Must be disputed in good faith and on substantial grounds, and if so, the petition should be dismissed; and conversely, if it isn't , it shouldn’t be dismissed. A winding up order will not be made against a company if the debt is genuinely disputed

  • LHF Wools Ltd

Casa Estates case? - Winding up by the court

• A company may appear to be able to pay its debts as they fall due, but its assets are still less than it liability - one needs to look at how it is managing to pay its debts

• Casa Estates

  • Inviting people to buy shares; the money was being used to pay dividends & debts, but not to do any trading

BNY Corporate Trustee Services Ltd - Winding up by the court

• Creditor may also petition for liquidation on the grounds that the company’s assets are less than its liabilities taking into account all of its “contingent and prospective” liabilities (the balance sheet test)

• BNY Corporate Trustee Services Ltd

  • Supreme Court held that the ability of a company to meet its liabilities, both prospective and contingent, was to be determined on the “balance of probabilities”

  • The burden being on the party asserting the “balance sheet insolvency”

Who may petition up the company (IA 1986 s.124)?

• Basically the company itself, directors, creditors, contributories (members who may owe the company money)

• Creditor is the most common

Can directors to get rid of assets after the grant of petition? Buchan Developments Co

• No

• Buchan Developments Co

  • Assets had to be recovered from those who had received them

    • To be turned into cash for the benefit of the creditors

Why do members voluntarily wind up?

• thet want to wind up whilst they will get something out of as it is still solvent

Process of winding up - Members voluntarily winding up?

• Members Vote, generally by special resolution (IA 1986 s.84(1)(b)), saving expense of going to court

• Publicity then given & the member's’ choice of liquidator is appointed.

• No more than 5 weeks prior to the resolution the directors must have made a statutory declaration to the effect that having a full inquiry into company’s affairs they are of the view that the company can pay all of its debts within a year

How does creditors voluntary winding up happen?

• Members vote by special resolution to wind up the company, but they know there will be nothing left over for them and the company is likely to be insolvent

• No statutory declaration is required, the directors must lat a statement of affairs before the creditors

• creditors choose the liquidator

How do liquidators gather the company’s assets?

• Assesses what assets the company still has. He then tries to get in all the debs the company is due. He can

  • liquidator attaching and arresting

  • Set aside certain antecedent (taking place before the date of liquidation) transactions. If they are gratuitous allegations or unfair preferences

Liquidator attatching and arresting, Commercial Aluminium v Cumberland Development Corp - Getting in or ‘ingathering’ the company’s assets

• Creditors who carried out diligence in the 60 days prior to the appointment of the liquidator are all treated as taking place at the same time & have to hand back whatever they obtained - under the “equalisation of diligence rules”.

• Commercial Aluminium

  • Creditors who have handed back whatever they obtained can then claim as ordinary creditors.

Set acide certain antecedent transactions - Getting in or ‘ingathering’ the company’s assets

• Liquidator can set aside certain antecedent (tacking place before the date of liquidation) transactions, if they are gratuitous alienations or unfair preferences

  • A gratuitous alienation is a gift or transfer at less than full value of an asset of the company’s within a period of five years if the recipient is an associate or within a period of two years of any one; any such recipient will have to restore the asset or other redress as may be appropriate unless he can prove… (in the statute (IA 1986 s.242-243)

Set acide certain antecedent transactions case - Getting in or ‘ingathering’ the company’s assets

• Lafferty Construction

  • an alienation made for adequate consideration does not need to be returned to liquidator

  • Meaning it was held to mean not necessarily the best price that could be obtained, but now which on an objective viewpoint was reasonable, assuming the parties involved were acting in good faith and at arms’ length

Typical gratuitous alienations? Case?- Getting in or ‘ingathering’ the company’s assets

• Joint administrators of Questway v Simpson

  • alleged repayments of undocumented loans by a company

what is an unfair preference? - Getting in or ‘ingathering’ the company’s assets

• The early repayment of a loan, or some other act (such as granting of security) which has the effect of prejudicing other creditors. Any such repayments or act within six months of the liquidation can be reduced, or the court may order the restoration of the property to the company’s assets

What is not an unfair preference? case?- Getting in or ‘ingathering’ the company’s assets

• IA 1986 s.243

  • Transactions in the ordinary course of buisness

  • Transactions in cash when the debt was due and payable with no collusive purpose (no fraud etc)

    • Craiglaw developments

  • Reciprocal transactions unless collusive

when may a floating charge be invalid? When still valid? Sharp Investments case? - Getting in or ‘ingathering’ the company’s assets

• Where charge is granted within 12 months of liquidation to someone not connected with the company, the charge may be invalid if… IA s.245(4)(a)&(b))

• Still valid where… s.245(2)

  • Sharp Investments

    • Involved a floating charge given some months after monies were paid - Paid far to far before the floating charge was granted for the floating charge to be valid