11/7/2022

Business
Associations
LECTURE 5 LIQUIDATION

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Procedures for companies in financial difficulties

Administration order

Company Voluntary arrangement

Receivership

Liquidation (winding-up)

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Administration

Three statutory objectives IA 1986 Sch B1 para 3:

Rescue the company as a going concern
Achieve a better result for the creditors as a
whole than would be likely on a winding-up
Realise property in order to make a distribution to
one or more secured or preferential creditors

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Company Voluntary Arrangements

Company and
creditors reach
Insolvency Act 1986 agreement on
s1-7 payment of debts-
typically 50-75% debts
written off

Moratorium for small

companies on Agreement of 75% of A CVA may only
creditors enforcing Up to 28 days unsecured creditors by postpone a winding
debts once value up
agreement reached

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Receivership

Receivers

Appointed under charges over specific assets-fixed

charges

Derive powers from such a charge and under the Law

of Property Act 1925

Liquidation: Introduction

Insolvency – the worst-case scenario

Role of liquidator
Insolvency Act 1986 – provides for eventual dissolution of the company
Winding-up

Voluntary
Compulsory

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A solvent company may instigate a members

voluntary winding up if the members decide
they are no longer willing for the company to
Voluntary continue trading.

Winding Up IA Directors give a statutory declaration of

solvency and members pass a special
1986 s84-96 resolution.
Liquidator is appointed to realise the assets.
Rare in practice.

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The company is unable to pay its debts

Non-compliance with a statutory demand-debt over

Compulsory £750

winding-up: Non-satisfaction of a judgment in favour of a

creditor
s122(1)(f) IA
1986 Not able to pay debts as they fall due, or the value
of assets is less than the amount of liabilities

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Consequences of winding-up petition on company property

S127 IA 1986

any disposition of the company’s property, and any transfer of shares, or alteration in
the status of the company’s members, made after the commencement of the winding
up is, unless the court otherwise orders, void.

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Duties and functions of a liquidator s143 IA 1986

Realise the assets and distribute

proceeds to creditors and if a To act in good faith Avoid conflicts of interest
surplus pay those entitled

Re Silver Valley Mines (1882) per

Cotton LJ
•“he is not in the ordinary sense a trustee. He
is a person appointed by the court to do a
Not make a secret profit certain class of things; he has some of the
rights and some of the liabilities of a trustee
but is not in the position of an ordinary
trustee. Being an agent employed to do
business for a remuneration, he is bound to
bring reasonable skill to its performance.”

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Order of payment of creditors
(see ss74, 107, 115, 143, 156 and 175 IA 1986)

[Fixed Charges]
Expenses of the winding-up
Preferential debts
Floating charge holders
‘ring fencing’ amounts for unsecured creditors
Ordinary debts
Deferred and subordinated debts e.g., interest on creditors debts
Members’ repayment of capital and profits

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Preferential Debts

Contributions to occupational pension schemes

Wages for employees for 4 months subject to maximum of £800

Holiday pay

From 1 December 2020 Tax to HMRC

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Floating charge holders
‘ring fencing’ amounts for unsecured creditors
Section 176A of the 1986 Act and s 252 Enterprise Act
2002
(a) where the company’s net property (assets) does not
exceed £10,000 in value, 50% of that property (50% of
first 10k);
(b)subject to paragraph (2), where the company’s net
What is ‘ring property exceeds £10,000 in value the sum of—
(i)50% of the first £10,000 in value; and
fencing’? (ii)20% of that part of the company’s net
property which exceeds £10,000 in value
(20% of any assets over 10k and up to 800k –
increased from £600,000 in March 2020)
(2) The value of the prescribed part of the company’s
net property available for covering unsecured debts of
the company shall not exceed £800,000
The increase applies to floating charges created after 6
April 2020

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Transactions at an undervalue

Connected parties
Undervalue
(ss249 & 435 IA 1986)-
transactions e.g., sale
S238(4) IA 1986 director or associate of
of property at below
the director e.g.,
market value
Spouse

Provided that the

Relevant time: within 2 Presumption of
company was insolvent
years of the onset of insolvency(e.g., inability
at time of transaction
insolvency for to pay debts) in the
or became insolvent as
connected and case of connected
a result of the
unconnected parties persons (s252 CA 2006)
transaction

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HAS REASONABLE
COMPANY ENTERED TRANSACTION WAS FOR
GROUNDS FOR
DEFENCES S238(5) IA: INTO TRANSACTION IN PURPOSE OF CARRYING
BELIEVING IT WOULD
GOOD FAITH AND ON THE BUSINESS AND
BENEFIT THE COMPANY.

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S239 IA 1986 - a company gives a preference to a person if:
• 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
• 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

Voidable Relevant time: 2 years (connected person) or 6 months

(unconnected) prior to liquidation
preferences Insolvent at time of transaction or as a result of it. No
presumption for connected persons

Desire to place person in a better position : Re MC Bacon Ltd

(1990) and presumption where connected persons involved

Defence –if Company can show it was NOT influenced by

desire to prefer e.g., commercial pressure

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Avoidance of floating charges

S245 IA 1986
To unconnected person – 12 months prior to liquidation
Was there fresh consideration?
Insolvent at time or as a result?

To connected person – 2 years prior to liquidation

Was there fresh consideration?
Insolvency at time or as a result is irrelevant.

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The effect is that charge is invalid.

Defence-only if Company can demonstrate

fresh consideration was given.

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Prohibiting management (ss 216 and
217 IA 1986) – restriction on re-use of
Company name. Director liable for
any debts in using Company name
Personal or similar name after liquidation.
liability of
directors Misfeasance (s212 IA 1986) e.g.,
director has misapplied company
funds or a breach of duty. Director
has to repay to Company all money
misappropriated.

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Fraudulent trading: s213 IA 1986

Applies to any person not just

directors
• The meaning of fraud-business carried on
with intent to defraud creditors
• Re Patrick and Lyon Ltd (1933)
• NB Jetivia SA v Bilta UK Ltd (2015):
s.213 has extra-territorial effect as the
effect of a winding-up order is world - wide
• Difficult for liquidator to prove intent–
might look to s214 IA 1986

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Personal liability of directors (cont)

The liquidator must prove that a

director has allowed the company to
continue to trade, at some time
before the commencement of its
Applies to Directors only including
Wrongful Trading: s214(4) IA 1986: winding-up, when he knew or ought
shadow Directors
to have concluded that there was no
reasonable prospect that the
company would avoid going into
insolvent liquidation.

1. knowledge, actual or constructive

2. failure to take every step to
Liquidator needs to prove two things; that insolvency was unavoidable;
minimize loss to creditors
and

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Wrongful Trading: s214(4) IA 1986:

Personal
“the facts which a director of a company ought to
liability of know or ascertain, the conclusions which he ought to
directors reach and the steps which he ought to take are those
which would be known or ascertained, or reached or
(cont) taken, by a reasonable diligent person having both –

(a) [OBJECTIVE] the general knowledge, skill and

experience that may reasonably be expected of a person
carrying out the same functions as are carried out by that
director in relation to the company; and
(b) [SUBJECTIVE] the general knowledge, skill and
experience that that director has.

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Personal liability of directors (cont)

Wrongful Trading: s214(4)

IA 1986:
•Brooks v Armstrong [2015] EWHC What does “every step” Accounting records kept Budget and cash flow
2289 (Ch) (“the Robin Hood
case”) mean? up to date forecast
•Did the Directors take every step
to minimise losses? No.

Business plan to consider

Keep creditors informed Regular board meetings Advice from Accountants
future trading

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But consider the risk and costs involved in the process

Re Ralls Builders Ltd (In Liquidation); Grant v Ralls

(2016)
Re Ralls Builders Ltd (No 2) (2016)
in these cases, the court refused to find in favour of the
liquidator even though the directors were found not to
have taken every step to minimise loss to creditors; the
court did not find that the net deficiency of the company
had increased during the relevant period, nor were the
defendants ordered to contribute to the costs of
investigating and pursuing the claim – all in all, this
litigation was fraught with evidential difficulty and risk in
proceeding, that nothing was gained pursing this cause
of action.

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If the Court find in favour of the liquidator

then the director(s) will be required to
contribute to the Company’s assets.

The Court will assess the sum payable by

reference to the amount by which the
Company’s assets were reduced by the
director’s conduct.

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2020 Winding Up and Statutory Demand Covid Restrictions under the Corporate Insolvency
and Governance Act 2020.

Companies have been given breathing space to prevent aggressive creditor action
between April and December 2020. Extended to Sept 2021. Creditors cannot rely on
statutory demands to bring winding up petitions.
New restrictions came into force in Sept 2021. Relief only for smaller debts of £10,000.

Directors were allowed to operate without fear of personal liability.

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Disqualification of Directors under CDDA 1986

Participation in fraudulent or wrongful trading, transactions at

an undervalue, or preference.
Fraudulent trading is also a criminal offence.

Maximum period of disqualification for wrongful trading is 15

years.

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BUSINESS
ASSOCIATIONS
LIQUIDATION
REVISION

Manchester Metropolitan University

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Liquidation 29

Ensure familiarity with The relationship between the

relevant provisions of the parties (ss 249 and 435 IA 86)
Insolvency Act 1986 – try to
commit these to memory to
save time Implications of “connected
Learn all the rules in relation persons”, if any
to ‘vulnerable transactions’
(ss238, 239 245 IA 86)
the relevant time period (s240 IA
Outline the process of 86)
liquidation
Discuss the role, functions
and duties of the liquidator the effect of concurrent solvency
Consider all transactions on the transaction
which are reported in the
facts to determine if they are
vulnerable to challenge and Consider potential personal
consider: liability of directors (ss 213, 214
IA 86)

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