Introduction - companies that have built up so much debt they simply cannot carry on as a going concern are likely of up to go into process of formal insolvency proceedings such as liquidation and winding up. Assets will be sold and a liquidator appointed who is normally a qualified insolvency practitioner. The business ceases to be going concern and cannot trade. If any company assets exist that can be resold, they will be sold off in order to pay the creditors. It does necessarily follow that all companies entering into company liquidation are insolvent. Due to the nature of insolvency law, there are different classes of creditors, which which creditor gets paid first from the realisation of the assets of the company that is being liquidated wound up...
Which Creditor Gets Paid First? - Under insolvency law, there is a fixed order of priority in terms of which class of creditor gets paid first when a companies assets are being liquidated. Unfortunately, this usually means that founding shareholders (typically owners) would not normally expect to receive any monies or value for their shares in the company. The order of repayment under current insolvency law is as follows:-
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Secured Creditors - these are creditors who hold a specific named 'fixed charge' over the assets of the business. Typically this would be a bank having secured its loan to the business on buildings, plant and machinery.
- Preferential Creditors - these are usually Government or Tax authorities.
- Floating Charge Holders - these are creditors that hold a charge on the general assets of the business. Once an Administrative Receiver becomes appointed, the charge becomes crystallised and becomes 'fixed'.
- General Creditors - these are supplier to the business. They typically provide raw materials and stock.
- Shareholders - with potential high reward when business is successful, so comes the risk that they could lose all of their original investment in the company.
Unavailable Assets - some assets are not available to creditors during the process of company liquidation. For instance:-
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Property with Retention of Title - property held in possession under contract by the company where the title of the goods is that of a 3rd party supplier;
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Property Held as Agent or Trustee - where the ownership of property held by the company is for the benefit of others;
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Disclaimed Property - the liquidator may view that some property, such as old or perishable stock in unsalable and should not be included in the realisation process.
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Members Voluntary Winding Up - the process is initiated by either a special resolution or an extraordinary resolution (s.84). Both must state that the company cannot continue its normal course of business and recommends that it be wound up. The directors of the company then need to make a statutory declaration that the company will pay its debts from commencement of winding up. Failure to make such declarations within the statutory time frames could result in director finds. These notifications give a creditors' adequate notice that the company has failed. In practice, this would normally be fairly obvious to creditors with debts owed from the company. The company then appoints a liquidator (s.91). Voluntary winding up proceedings must not exceed one year, without a report from the liquidator outlining the current state of company liquidation (s93). This gives creditors some knowledge of time frames and likelihood for possible debt repayment. To company is finally wound up when there is a final meeting and final report from the liquidator s94(1). This is then filed with the registrar of companies and within three months, the company is then automatically dissolved. In situations where the company is insolvent the liquidator must advertise the creditors' meeting in local newspapers, which must give creditors at least seven days notice of before the meeting is due to commence. The creditors will appoint a liquidation committee whose role it is to work with the liquidator and oversee their performance. The liquidation of the company will carry on alongside the winding up process.
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Compulsory Winding Up by the Court - companies with called up share capital of under £120,000 can be wound up by a county court. The formal process is kick started by a petition to the court by either the creditors, directors, DTI, receiver or the Secretary of State. These parties are able to petition the court on the following grounds:-
The company is unable to repay its business debts. In particular, a creditor has issued a statutory demand for a debt in excess of £750 which has not been repaid within three weeks. This relatively minor amount gives knowledgeable creditors is a useful legal instrument to force companies to either repay of its debt of off face further legal action and potentially unnecessary expense. A more likely measure of what indebtedness is that the assets of the company are worth less than its liabilities;
The company is an old public company;
A special resolution has already been passed by the company that itself, that it should be wound up;
The company has suspended its business operations for one year or has not even commenced business from is point of incorporation;
It is under investigation by the Secretary of state;
If the petition is granted, an official receiver is appointed to oversee its implementation. Creditors with debts in excess of 25% of the overall debt are entitled to call a meeting with the official receiver.