Week 5 Law

• Winding up (liquidation)

  The ending of a company
• Ways a company can end

  • Compulsory winding up (via the courts)
  • Voluntary winding up (by passing a resolution)
• A company only comes to an end when it is wound up/liquidated
• Insolvency

  When a company's liabilities exceed its assets (balance sheet test) or it cannot pay its bills (cash flow test)
• Directors must not take any further credit and must be careful when paying bills - could be seen as preferential treatment
• Assets must be safeguarded and not taken out of the business
• Members' Voluntary Winding Up (S84 IA86)

  1. Members pass a special resolution (>75%) that the company be wound up

  2. There must be a declaration of solvency by the directors

  3. Statement of assets and liabilities must be prepared by the directors

  4. Declaration and statement must be filed with registrar within 15 days

  5. The members appoint a liquidator to wind up the company and distribute the assets
• Reasons for Members' Voluntary Winding Up

  • No longer a purpose (regulatory changes, set up for specific event/time)
  • Tax advantages vs taking income (capital vs income; entrepreneur relief)
  • Shareholders wish to split assets (distribute in specie)
  • Directors retiring or moving overseas
  • Reorganisation of subsidiary or group
  • Directors make declaration of solvency stating company is able to repay debts within 12 months
• Administration

  A process by which an attempt is made to rescue an insolvent company as a going concern
• Purpose of Administration

  • To rescue the company as a going concern (principle purpose)
  • To ensure a better result for the creditors than would be possible if the company is wound up
  • To realise the assets of the company in order to settle secured and preferential creditors
• Effects of the appointment of an administrator

  • Administrator takes over the management of the company and the functions of the directors
  • Directors remain but cannot interfere with the work of the administrator without his permission
  • A period of moratorium operates upon the appointment
• Powers of an Administrator

  1. To prepare and submit within 8 weeks, a proposal for the company to the unsecured creditors & the registrar

  2. The proposal must be approved by the creditors by simple majority within 10 weeks

  3. If the proposals are not approved the court would make any order necessary and may terminate the administrator's receiver

  4. The administrator could do anything necessary and expedient for the management of affairs, business, and properties of the company

  5. The administrator could exercise his powers without having to seek approval from the creditors
• Duties of administrator

  • He owes fiduciary duty to the company and its secured creditors
  • He also owes a duty of care to the company
  • He has a duty to take reasonable steps to get the best price for the company's assets
• Corporate Voluntary Arrangement (CVA)

  Where the company recognises it has issues and the creditors are approached to join in a voluntary arrangement
• CVA Procedure


  1. Proposal put together by insolvency practitioner; approved by directors and filed with the courts

  2. Proposal distributed to creditors

  3. Vote requires 75% of unsecured creditors (by debt value) AND 50% of 'not connected' creditors
• Advantages of CVA


  • Avoids liquidation or administration; continue trading
  • Directors continue to run business
  • More consensual than liquidation/administration
  • Greater prospect of some payment for creditors and avoidance of job losses
• Disadvantages of CVA


  • Creditors who disapprove of process may be bound by it (unfair on certain groups?)
  • May be postponing inevitable - liquidation often follows and creditors worse off than if that route had been taken first
• Creditors' Voluntary Winding Up

  1. Members pass a special resolution (>75%) that the company be wound up

  2. No declaration of solvency is required because the company is not solvent

  3. The creditors provided with a full list of creditors, the amounts due to them, and a statement of assets and liabilities

  4. Members can appoint liquidator, but largest creditor usually has the final say on who is appointed

  5. Liquidation committee established to oversee the liquidators' work

  6. Assets distributed and final report to creditors
• Grounds for Compulsory Winding Up

  • Where the number of members in a plc falls below two
  • Where a company fails to start business for over one year after incorporation
  • Where a plc fails to obtain trading certificate for more than one year after incorporation
  • Where CVA fails to resolve company's problems
  • When a company is insolvent and unable to pay its debts
  • When it is 'just and equitable' to wind up the company
• Inability to pay debts (grounds for compulsory winding up)

  • If it fails to comply with statutory demand to pay a debt of more than £750
  • If execution of a judgement debt owed by the company fails partly or completely
  • If it could not pay its debts as they become due
  • If it is proved that its liabilities exceed its assets
• Grounds for "just and equitable" compulsory winding up

  • The sole purpose of the company has been defeated and could not be realised
  • The company was formed for fraudulent purposes
  • There is complete deadlock in the board of directors
• Who may apply for compulsory winding up

  • The company's creditors
  • The company shareholders or its directors
  • Supervisor of a voluntary arrangement
  • An administrator
  • The Secretary of State (government) acting in the public interest
• Impact of winding up order

  • Company goes into liquidation
  • Company stops trading to allow its affairs to be wound up
  • Directors lose power to manage companies
  • Legal actions against the company may not be commenced or continued without court approval
  • Any disposition of property or transfer of shares after the order commences is void unless approved by the courts
  • Floating charges crystalise