CORPORATE INSOLVENCY

Winding-Up of Companies
Again, we can give only an outline of the procedures to be followed to wind up a company or to implement a company voluntary arrangement ("CVA"). Specific advice should be sought with regard to particular circumstances, particularly if the appointment of an administrator or an administrative receiver (under a floating charge created prior to 15 September 2003) is under consideration.

A company may be wound up either voluntarily or by Court Order.

Voluntary Winding-Up
A voluntary winding-up may be either a members' voluntary or creditors' voluntary winding-up.

a. Members' Voluntary Winding-Up
If a company which is solvent wishes to wind itself up, its directors must swear a statutory declaration of solvency and, not more than 5 weeks later, the members of the company (shareholders) must pass a special resolution (with 21 days notice of the meeting required) or extraordinary resolution (14 days notice required) to wind up the company. On the passing of the resolution, a licensed insolvency practitioner is appointed as liquidator and his remuneration fixed. The liquidator files his notice of appointment with the Registrar of Companies and publishes the same in the London Gazette, within 14 days after his appointment. The liquidator deals with the formalities of winding up the company, realises its assets and settles its liabilities, and makes a final report to the final meeting of the company for which one month's notice in the Gazette is required.

b. Creditors' Voluntary Winding-Up
In this case, the company summons a meeting of creditors to take place not later than the 14th day after the day on which there is to be a company meeting at which a resolution for voluntary winding-up of the company is to be proposed. The directors of the company must put a statement of affairs before the creditors, such statement of affairs to be verified by Affidavit. Usually, the creditors will nominate at their meeting a liquidator: if there is any dispute as to the identity of the liquidator, an application must be made within 7 days of the purported nomination to the High Court. As in the case of individual bankruptcy, the creditors may appoint a committee to assist the liquidator. On appointment of the liquidator, the directors' powers cease (except in so far as the liquidation committee or the creditors approve that they may continue).

Winding-Up by the Court ("Compulsory Liquidation")
As in the case of the bankruptcy of an individual, the Court must be petitioned to make a Winding-Up Order. A creditor may serve a notice on a company requiring a debt in excess of £750 to be paid within 21 days and the company will be deemed unable to pay its debts if payment is not made within that time. Alternatively, a company may be unable to pay its debts "if it is proved to the satisfaction of the Court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities". The company itself, its directors, any creditor or contributory may petition the Court for the winding-up of a company. A contributory is defined by Section 79 of the Insolvency Act as being every person liable to contribute to the assets of the company in the event of its being wound up i.e. somebody who has only partly paid up his shares.

The Petition to wind up the company must be presented to the Court supported by an Affidavit and copies must be served on the company at its registered office. The Petition must be advertised in the Gazette not less than 7 business days after it is presented and not less than 7 business days before the hearing date. If the Court makes the Winding-Up Order, the Official Receiver becomes the liquidator of the company until any other person is appointed.

In the 12 weeks following the making of the Order Winding-Up, the Official Receiver must decide whether or not to call meetings of creditors and contributories. The Official Receiver may apply to the Court for the appointment of an insolvency practitioner as liquidator in his place. He has a duty to investigate the company's affairs and the causes of its failure, and to report his findings to the Court if necessary. Similar provisions in relation to transactions at an undervalue and preferences apply to corporate insolvencies as to personal ones.

The priority of claims is, broadly, as follows. First, the expenses of the liquidation must be paid, followed by preferential creditors (which no longer includes HM Revenue and Customs, but still includes DSS and employees for wages due over the last 4 months up to £800). Thereafter, the order of priority is fixed charge holders, floating charge holders, unsecured creditors and lastly shareholders and contributories. Needless to say, in most compulsory liquidations, the shareholders and contributories have historically seen no recovery and the unsecured creditors have received little or no dividend in respect of their claims. The Enterprise Act 2002 introduced a new method of ensuring that unsecured creditors saw a return in liquidations (and administrations). This is known as the Prescribed Part (sometimes referred to a 'ring-fencing'). The "prescribed part" is calculated by looking at the amount that would be available to any floating charge holder(s) (i.e. the value of the company's assets after the payment of the preferential creditors and the fixed chargeholders) and allocating 50% of the first £10,000 to the unsecured creditors, together with 20% of the balance (up to a maximum of £600,000).

Company Voluntary Arrangements
The basic scheme of a company voluntary arrangement ("CVA") is set out in Part I of the Insolvency Act and the Insolvency Rules. The directors of a debtor company may make a proposal to the company and its creditors for either a composition in satisfaction of its debts or a scheme of arrangement of its affairs. The proposal provides for a nominee to supervise the implementation of the voluntary arrangement; he must be a licensed insolvency practitioner.

The nominee must within 28 days of his appointment submit a report to the Court stating whether a meeting should be called to enable the company and its creditors to consider the proposal and if so the proposed time and place. It should be noted that the meeting to approve the proposal cannot approve any proposal which provides that preferential debts are to be paid otherwise than in priority to non -preferential debts. Meetings are then held to consider whether to approve the proposal with or without amendment.

The rules in relation to voting at the meeting to consider the proposal are reasonably complex and do not need to be discussed here. If the meetings approve the proposal, this is reported to the Court, and the approved voluntary arrangement takes effect as if made by the company at the creditors' meeting and binds all creditors who were entitled to attend and vote at the meeting.

Any creditor, member (of a company) or contributory may apply to the Court to challenge a CVA because either it unfairly prejudices the interests of that person and/or there has been some material irregularity at, or in relation to, the meetings of the company and of its creditors to consider the proposal for a voluntary arrangement. Once the proposal is approved, the nominee becomes known as the supervisor of the voluntary arrangement.

CVAs take effect as contracts so that any breach of "the contract" may give rise to a right to terminate. Often, the CVA itself will identify what events will constitute a breach and authorise the supervisor to issue a notice that the CVA has failed. Also, a supervisor has a right under the Insolvency Act to petition the Court for a Winding-Up Order.

The obvious case in which a supervisor would wish to petition for a Winding-Up Order is where the debtor is no longer cooperating with the supervisor.

Curiously, liquidation of a company has sometimes been held not to bring to an end the CVA. Each case will turn on its inevitably different facts and it is difficult to state any overriding principle that emerges from the cases in relation to the question of whether or not the liquidation of a company will automatically result in the termination of the CVA. Similarly, the effect of termination of the CVA does not always follow an obvious pattern. You might expect that in the event of a VA ending, for example on the liquidation of the company, the parties to the VA would revert to being creditors for their original debts less anything they had received in the VA and that any money in the hands of the supervisor at the time of the Winding -Up Order would have to be passed to the liquidator. In fact, this is not always what happens.

The precise wording of the CVA is of crucial importance and, at the very least, the CVA should describe what would constitute a breach of it, as well as the consequences of any such breach or breaches. It is generally held that the CVA gives rise to a trust of assets and, again, the documents should identify in what circumstances this trust would end and whether or not the trust could continue to exist notwithstanding the termination of the CVA and the liquidation of the company.

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