OBJECTIVES:
Identify when a company has become insolvent
Identify the information required to determine whether a creditor can petition for liquidation
Advise on the effects a company’s liquidation will have for those involved with the company
Advise on relevant director duty on insolvency
Consider options available to an insolvent company client other than liquidation.
CORPORATE INSOLVENCY
Basic aims Protect creditors
Balance the interest of creditors who compete
Promote corporate rescues
Control and punish directors
Why is it Practical Considerations:
Important to o Lack of an ability to trade – buying new stock, paying wages etc.
Know When a o Some procedures like buy-back of shares can only be undertaken if solvent
Company has Insolvency is normally a prerequisite for insolvency proceedings
Become Directors:
Insolvent? o The duty of directors to act in the best interests of the company changes on insolvency.
o Directors may be liable for wrongful trading if the company is insolvent.
o Their duties change whether insolvent
Loan Finance:
o Insolvency is likely to be an event of default which will enable holders of security to enforce
their security.
The Company May be Wound Up:
o Creditors have to prove a company is unable to pay its debts for the court to wind up the
company.
When is a s122(1)(f) Insolvency Act 1986:
Company o A company may be wound up by the court if it is “unable to pay its debts”.
Insolvent? o When a company will be “unable to pay its debts” is defined by s123.
This is the main ground that a creditor must prove in order for the court to wind up the company.
(Workshop 14,
Preparatory Task, s123 – A Company is deemed unable to pay its debts: PAGE 286 OF RG
Task 1, Question 1. (1)(a): If a creditor:
2) Is owed £750 or more.
Has served a statutory demand on the company requiring the company to pay the
Business Law and sum and
Practice, p304 – The company has, for three weeks thereafter, failed to pay or come to an alternative
19.2 arrangement with the creditor.
2. (1)(b): If a creditor obtains a judgment against the company AND tries to enforce it, but the
debt remains unsatisfied.
I.e. you have tried to send in the bailiffs and failed to recover the sum due.
3. (1)(e): If the company is unable to pay its debts when they fall due (the “cash flow” test).
Look for indicative factors such as the company having to agree to restructure
payments to creditors. Communications e.g. emails from the company may provide
evidence that the company cannot pay its debts.
4. (2): If the total value of the company’s assets is less than the amount of its liabilities (the
“balance sheet” test).
Be mindful that the balance sheet is a snapshot- it is entirely possible the value of
assets (e.g. due to bad debts, change in valuation of assets such as premises,
means that this is misleading).
This test is therefore rarely used, as:
It is difficult for the creditor to obtain the necessary accounting information.
It is easy for the company to argue that the figures are out of date or
subject to re-evaluation.
s123(1)(a) and s123(1)(b) are arguably easier to prove as the creditor need
show no further evidence than the statutory demand or unsatisfied
, judgment.
If a company is "unable to pay its debts" under any of the s123 tests, a petition by a creditor (amongst
others) for the company to be placed into compulsory liquidation is likely to be successful.
Sch B1 IA 1986 – provides that if the directors appoint an administrator then the point of insolvency is
the time at which the notice of intention to appoint is filed at Companies’ House.
Options to S172(3)CA – directors:
remedy Take professional advice asap
Need to alert to the possibility that one or more creditor may serve statutory demands or sue
If they do not take all steps, they may be personally liable on liquidation or administration and
may be subject to disqualification
1. Take steps with members to put themselves into liquidation
2. Talk to creditors and see if they will wait for payment/compromise
3. Enter into formal agreement with creditors called Company Voluntary Agreement CVA. May arrange to
pay creditors less or ask them to wait longer. It may allow them to avoid liquidation
4. Appoint administrator to run the company and try return it to solvent trading or sell as a going concern.
May avoid liquidation and provide better result for creditors.
Unpaid creditor Depends if they have security:
options:
Unsecured:
1. Serve statutory demand for debt in excess of £750 - s123(1)(a) IA, wait 3 weeks and present
petition to the court to put company into liquidation
2. Sue company, obtain judgement and attempt to execute – s123(1)(b) then present petition to
court to put in liquidation
3. Suggest CVA – but this is driven by the directors
4. Apply to court to put them into administration
They will usually prefer a rescue method of 3 or 4 as its likely to receive little or nothing if the company goes
into liquidation
However, the action of demand or court action may encourage the company to find the money if they can.
Secured:
1. Can use all the options above
2. Appoint administrator out of court
3. Appoint an LPA receiver
4. if security created before 2003 – to appoint administrative receiver
All depending on the security type they have
Directors Duties S172 CA 2006
on Insolvency o Directors have a duty to promote the success of the company.
o s172(3) provides that this duty is subject to “any enactment or rule of law requiring
PAGE 286 RG directors… to consider or act in the interests of creditors of the company”.
o The effect of this is to “shift” the duty to promote success of “the company” to “the creditors”
(Wrongful when the company enters insolvency.
Trading – o The provision does not state when creditors’ interests are to be considered. This is left to the
Business Law common law.
and Practice,
p159, 7.3.10.1) Wrongful Trading – PG 294 RG
o Summary: If the company is insolvent, a director who knew, or ought to have known that the
company had no real prospect of avoiding insolvent liquidation may, if the defence in s214(3)
does not apply, be guilty of wrongful trading and be ordered by the court to personally
contribute to the company’s assets.
o s214 Insolvency Act 1986:
o s214(2): If a company is insolvent and a director knew, OR ought to have known, that there
was no reasonable prospect that the company would avoid insolvent liquidation, a director
may be liable under s214(1) to “make such contribution to the company’s assets as the court
thinks proper”.
Subjective and objective threshold.
Did this particular director have actual knowledge OR
Identify when a company has become insolvent
Identify the information required to determine whether a creditor can petition for liquidation
Advise on the effects a company’s liquidation will have for those involved with the company
Advise on relevant director duty on insolvency
Consider options available to an insolvent company client other than liquidation.
CORPORATE INSOLVENCY
Basic aims Protect creditors
Balance the interest of creditors who compete
Promote corporate rescues
Control and punish directors
Why is it Practical Considerations:
Important to o Lack of an ability to trade – buying new stock, paying wages etc.
Know When a o Some procedures like buy-back of shares can only be undertaken if solvent
Company has Insolvency is normally a prerequisite for insolvency proceedings
Become Directors:
Insolvent? o The duty of directors to act in the best interests of the company changes on insolvency.
o Directors may be liable for wrongful trading if the company is insolvent.
o Their duties change whether insolvent
Loan Finance:
o Insolvency is likely to be an event of default which will enable holders of security to enforce
their security.
The Company May be Wound Up:
o Creditors have to prove a company is unable to pay its debts for the court to wind up the
company.
When is a s122(1)(f) Insolvency Act 1986:
Company o A company may be wound up by the court if it is “unable to pay its debts”.
Insolvent? o When a company will be “unable to pay its debts” is defined by s123.
This is the main ground that a creditor must prove in order for the court to wind up the company.
(Workshop 14,
Preparatory Task, s123 – A Company is deemed unable to pay its debts: PAGE 286 OF RG
Task 1, Question 1. (1)(a): If a creditor:
2) Is owed £750 or more.
Has served a statutory demand on the company requiring the company to pay the
Business Law and sum and
Practice, p304 – The company has, for three weeks thereafter, failed to pay or come to an alternative
19.2 arrangement with the creditor.
2. (1)(b): If a creditor obtains a judgment against the company AND tries to enforce it, but the
debt remains unsatisfied.
I.e. you have tried to send in the bailiffs and failed to recover the sum due.
3. (1)(e): If the company is unable to pay its debts when they fall due (the “cash flow” test).
Look for indicative factors such as the company having to agree to restructure
payments to creditors. Communications e.g. emails from the company may provide
evidence that the company cannot pay its debts.
4. (2): If the total value of the company’s assets is less than the amount of its liabilities (the
“balance sheet” test).
Be mindful that the balance sheet is a snapshot- it is entirely possible the value of
assets (e.g. due to bad debts, change in valuation of assets such as premises,
means that this is misleading).
This test is therefore rarely used, as:
It is difficult for the creditor to obtain the necessary accounting information.
It is easy for the company to argue that the figures are out of date or
subject to re-evaluation.
s123(1)(a) and s123(1)(b) are arguably easier to prove as the creditor need
show no further evidence than the statutory demand or unsatisfied
, judgment.
If a company is "unable to pay its debts" under any of the s123 tests, a petition by a creditor (amongst
others) for the company to be placed into compulsory liquidation is likely to be successful.
Sch B1 IA 1986 – provides that if the directors appoint an administrator then the point of insolvency is
the time at which the notice of intention to appoint is filed at Companies’ House.
Options to S172(3)CA – directors:
remedy Take professional advice asap
Need to alert to the possibility that one or more creditor may serve statutory demands or sue
If they do not take all steps, they may be personally liable on liquidation or administration and
may be subject to disqualification
1. Take steps with members to put themselves into liquidation
2. Talk to creditors and see if they will wait for payment/compromise
3. Enter into formal agreement with creditors called Company Voluntary Agreement CVA. May arrange to
pay creditors less or ask them to wait longer. It may allow them to avoid liquidation
4. Appoint administrator to run the company and try return it to solvent trading or sell as a going concern.
May avoid liquidation and provide better result for creditors.
Unpaid creditor Depends if they have security:
options:
Unsecured:
1. Serve statutory demand for debt in excess of £750 - s123(1)(a) IA, wait 3 weeks and present
petition to the court to put company into liquidation
2. Sue company, obtain judgement and attempt to execute – s123(1)(b) then present petition to
court to put in liquidation
3. Suggest CVA – but this is driven by the directors
4. Apply to court to put them into administration
They will usually prefer a rescue method of 3 or 4 as its likely to receive little or nothing if the company goes
into liquidation
However, the action of demand or court action may encourage the company to find the money if they can.
Secured:
1. Can use all the options above
2. Appoint administrator out of court
3. Appoint an LPA receiver
4. if security created before 2003 – to appoint administrative receiver
All depending on the security type they have
Directors Duties S172 CA 2006
on Insolvency o Directors have a duty to promote the success of the company.
o s172(3) provides that this duty is subject to “any enactment or rule of law requiring
PAGE 286 RG directors… to consider or act in the interests of creditors of the company”.
o The effect of this is to “shift” the duty to promote success of “the company” to “the creditors”
(Wrongful when the company enters insolvency.
Trading – o The provision does not state when creditors’ interests are to be considered. This is left to the
Business Law common law.
and Practice,
p159, 7.3.10.1) Wrongful Trading – PG 294 RG
o Summary: If the company is insolvent, a director who knew, or ought to have known that the
company had no real prospect of avoiding insolvent liquidation may, if the defence in s214(3)
does not apply, be guilty of wrongful trading and be ordered by the court to personally
contribute to the company’s assets.
o s214 Insolvency Act 1986:
o s214(2): If a company is insolvent and a director knew, OR ought to have known, that there
was no reasonable prospect that the company would avoid insolvent liquidation, a director
may be liable under s214(1) to “make such contribution to the company’s assets as the court
thinks proper”.
Subjective and objective threshold.
Did this particular director have actual knowledge OR
