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Gathering the assets: the role of liquidation
Liquidation is the end of the road for the troubled company. It involves its winding up and the gathering in of the assets for subsequent distribution to creditors. On the commencement of liquidation the principle of collectivity takes effect1 and this is reflected in a moratorium on hostile actions and the restraining of uncompleted executions.2 Liquidation, nevertheless, raises issues of efficiency, expertise, accountability and fairness as much as processes involving prospects of rescue. This chapter explores those issues as well as the conceptual underpinnings of liquidation. Liquidations are encountered in three main forms: voluntary, compulsory and public interest, and to set the scene, it is necessary to review the varieties of liquidation and the legal framework that supports the liquidation process.
The voluntary liquidation process
A voluntary liquidation of a solvent company is termed ‘a members’ voluntary winding up’ and, where an insolvent company is involved, this is then known as ‘a creditors’ voluntary winding up’. This distinction flows from the Insolvency Act 1986 sections 89 and 90 which provide that if the directors have made a statutory declaration of solvency under section 89, a members’ voluntary liquidation3 occurs, but that the liquidation is a creditors’ voluntary liquidation in the absence of such a declaration.
Both types of voluntary liquidation are, however, triggered by the actions of the company’s members. These members can initiate a
1For discussion see ch. 2 above and ch. 14 below.
2See Insolvency Act 1986 ss. 126–8, 130(2), 183. See e.g. Re Modern Jet Support Ltd [2005] BPIR 1382; and, on the court’s unfettered discretion to lift the s. 130(2) stay, New Cap Reinsurance Corp. Ltd v. HIH Casualty and General Insurance Ltd [2002] BPIR 809 at 819 (Jonathan Parker LJ).
3See J. Tribe, ‘Members’ Voluntary Liquidations: A Declaration of Under Use’ (2005) 26 Co. Law. 132.
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winding up by passing a special resolution in favour of a voluntary liquidation.4 Resolutions must be advertised in the Gazette within fourteen days of passing (on penalty of a fine where the officers of a company are in default).5
Creditor involvement in a creditors’ voluntary winding up is provided for in the rule that a company must call a creditors’ meeting within fourteen days of the meeting at which the resolution for voluntary liquidation is to be proposed.6 Such creditors, moreover, must be given at least seven days’ warning and a notice of the meeting has to be placed in the Gazette and two local newspapers. This advertisement must give the name of the IP who is qualified to act as the company’s voluntary liquidator and it must also indicate the place where a list of creditors can be found.
A main source of information to creditors is the Statement of Affairs that the Insolvency Act 1986 section 99 requires the company directors to lay before the creditors’ meeting. The directors, moreover, must nominate one of their number to run the creditors’ meeting.7 The creditors at that meeting are able to nominate a liquidator. The members
4 Insolvency Act 1986 s. 84(1)(b). The Companies Act 2006 (Commencement No. 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007, SI 2007/2194, introduced changes to the rules relating to company meetings and resolutions, some of which affected the resolutions which need to be taken to put a company into liquidation. Thus, for example, from 1 October 2007, the Insolvency Act 1986 s. 84(1)
(c) provision was repealed (this provided that the company could be wound up voluntarily if it resolved by extraordinary resolution that it ‘cannot by reason of its liabilities continue its business and that it is advisable to wind up’).
5Insolvency Act 1986 s. 85(2).
6Ibid., s. 98; Insolvency Rules 1986 rr. 4.51(as amended), 4.53, 4.62. Under the Companies Act 2006 s. 307 the period of notice required for a meeting of a private company at which a special resolution is to be proposed was reduced from twenty-one days to fourteen days (although the company’s articles may specify a longer period: s. 307(3)). In relation to private company winding-up resolutions the articles can also prevail regarding the majority needed for a meeting to be held on short notice – set at 90 per cent of voting rights per s. 307(5) CA 2006. See also Re Centrebind Ltd [1967] 1 WLR 377 which held that failure to comply with the specified meetings procedures did not invalidate proceedings but, now, the Insolvency Act 1986 s. 166 prevents a liquidator, as a general rule, from exercising any section 156 powers (e.g. of property disposal) until the creditors’ meeting required by section 98 has been held. Section 166(5) of the Insolvency Act 1986 gives the court powers to make directions where there has been a failure to comply with sections 98 and 99: on the exercise of these see R. Tateossian, ‘The Scope of Section 166(5) Insolvency Act 1986: An Analysis’ (2001) Finance and Credit Law 4.
7Failure of the nominated director to attend the meeting will not necessarily invalidate proceedings: see Re Salcombe Hotel Development Co. Ltd [1991] BCLC 44, [1989] 5 BCC 807.
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of the company may also nominate a liquidator at their meeting but if members and creditors choose divergently, the nominee of the creditors will be appointed.8 Where the company is not content with a creditors’ choice, a challenge may be made in court within seven days.9 As for the powers of the company’s directors, these are limited by section 114 of the Insolvency Act 1986 which covers the period prior to the appointment of a liquidator and only allows directorial powers to be exercised with the sanction of the court or in order to secure compliance with section 98 provisions on the creditors’ meeting or section 99 on the directors’ statement of affairs.
The person chosen to act as a liquidator in a creditors’ voluntary winding up must be a qualified IP.10 IPs, moreover, often have a strong influence on choice of liquidator. As Milman and Durrant indicate:
IPs commonly offer a service to their commercial clients of attending on their behalf at creditors’ meetings of their insolvent debtors and reporting on the proceedings free of charge. Professionals in the field, usually representatives of the larger accountancy firms, are well known to each other, and commonly discussions take place before the meeting to find out which of them commands the most voting power, now measured by value of the debt under Rule 4.63(1). By arrangement, some of the professionals attend the creditors’ meeting, and frequently one of them proposes the appointment of one of the others, either as liquidator, in place of the members’ nominee, or, more commonly nowadays, as joint liquidator.11
Joint liquidators may be appointed by such a process and the court has power to appoint a further liquidator to join a sole liquidator.12 On appointment, any liquidator has fourteen days in which to advertise his appointment in the Gazette and to notify the Companies Register.13
In a creditors’ voluntary liquidation, creditors play a central control function. They are placed in a fiduciary position regarding the company
8Insolvency Act 1986 s. 100(2).
9Ibid., s. 100(3); Insolvency Rules 1986 r. 4.102.
10Insolvency Rules 1986 r. 4.100.
11D. Milman and C. Durrant, Corporate Insolvency: Law and Practice (3rd edn, Sweet & Maxwell, London, 1999) p. 80.
12Re Sunlight Incandescent Ltd [1906] 2 Ch 728.
13In furtherance of the EC Directive 2003/58/EC the Companies (Registrar, Language and Trading Disclosures) Order 2006 requires that the statement that a company is in liquidation must be included not only on all its stationery but also on its website (amending IA 1986 s. 188(1)(a)).
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and its assets and act in the main through the Liquidation Committee.14 This body has a maximum membership of five creditors and five contributories. Creditors, moreover, possess the preponderance of power since they can veto all or any of the contributories (under section 101(3) of the Insolvency Act 1986). The quorum for such a committee is two members, and any member may be removed by the creditors at large. It has a right to information as the liquidator is advised to report all relevant matters to it. Members may require meetings to be called but generally meetings are instituted at the discretion of the liquidator.
Creditors may apply to the court for directions;15 they have powers to remove liquidators16 or apply to the court for removal of a voluntary liquidator; and they may ask the court to have the company compulsorily wound up under the Insolvency Act 1986 section 116.17
As for court supervision of voluntary liquidations, this is light and it is not a day-to-day activity. The court may, nevertheless, become involved where there is a request to remove a liquidator or where a liquidator, contributory or creditor applies to it to determine a question arising in the winding up or to use the powers it might employ in a winding up by the court to enforce calls or other matters.18
When voluntary liquidation is entered into, the general powers of the directors, as noted, cannot be exercised,19 but a series of powers is given to the liquidator under section 165 and Schedule 4 of the Insolvency Act 1986. The liquidator, with the sanction of the Liquidation Committee or the court,20 may pay any class of creditors in full; make compromises or arrangements with creditors or alleged creditors; compromise calls, debts, potential debts, claims and any question relating to the assets or the winding up of the company. Security, moreover, may be taken in the course of discharging these claims.
The sanction of the Liquidation Committee is not required in relation to the exercise of a number of other powers, including: the bringing or
14See Insolvency Act 1986 s. 101. On the functions, membership and procedural rules relating to Liquidation Committees see also IR 1986 rr. 4.151 ff.
15Insolvency Act 1986 s. 112. 16 Ibid., s. 171(2).
17See Re Lowestoft Traffic Services Co. Ltd [1986] 2 BCC 98.
18Insolvency Act 1986 s. 112. Confirmation of the winding-up procedure through the court is possible throughout the EU under Council Regulation (EC) No. 1346/2000 (implemented by Insolvency Act 1986 (Amendment) (No. 2) Regulations 2002) and foreign companies with centres of main interests in the UK can be wound up voluntarily (in addition to compulsorily under the Insolvency Act 1986 s. 221(4)); Re TXU Europe German Finance BV [2005] BPIR 209, [2005] BCC 90.
19IA 1986 s. 103. 20 Obtainable in advance or by ratification.
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defending of actions or legal proceedings on behalf of the company;21 carrying on the business of the company as is necessary for a beneficial winding up; selling or transferring any of the company’s property; executing deeds for the company and using its seal; proving in the insolvency of any contributory; dealing in bills of exchange; borrowing against the security of a company’s assets; taking out letters of administration to the estate of a deceased contributory; appointing an agent to perform business; and doing all such other things as may be necessary for the winding up of a company’s affairs and distribution of its assets.
These powers described are general and implied. A number of statutory powers sit alongside these, however. All types of liquidator may disclaim onerous property under the Insolvency Act 1986 sections 178–82. This may be done without court leave22 and notwithstanding the liquidator taking possession of the property, attempting to sell it or exercising rights of ownership in it.23 Onerous property here includes unprofitable contracts or other property that is not saleable or readily saleable or such that may create a liability to pay money or perform an onerous act.24 The effect of disclaiming is to terminate the rights and liabilities of the company with regard to the property disclaimed, but rights and liabilities of other parties are not affected.25 In exercising this power the liquidator’s hand may be forced by interested parties who may require the liquidator to decide whether there is an intention to
21The onus appears to be on an objector to establish that an action was not beneficial to the winding up: see Hire Purchase Co. v. Richans [1887] 20 QBD 387.
22A notice of disclaimer ‘in the prescribed form’ has to be filed in court under Insolvency Rules 1986 r. 4.187 and Form 4.53.
23Insolvency Act 1986 s. 178(2).
24Ibid., s. 178(3). Per Chadwick LJ in Re SSSL Realisations (2002) Ltd, Manning v. AIG Europe Ltd [2006] Ch 610, [2006] BCC 233 – ‘a contract is not an “unprofitable contract” … merely because it is financially disadvantageous or merely because the company could have made or could make a better bargain. The critical feature is that performance of the future obligations will prejudice the liquidator’s obligation to realize the company’s property and pay a dividend to creditors within a reasonable time’ (at para. 42).
25Hindcastle Ltd v. Barbara Attenborough Associates [1996] 2 WLR 262. On disclaimers and waste management licences see Official Receiver of Celtic Extraction and Bluestone Chemicals v. Environment Agency [2000] BCC 487, [1999] 4 All ER 684 (waste management licences held by the Court of Appeal to be disclaimable); J. Armour, ‘Who Pays When Polluters Go Bust?’ (2000) 116 LQR 200. See also Environment Agency v. Hillridge Ltd [2004] 2 BCLC 358. See Re SSSL Realisations (2002) Ltd [2006] Ch 610, [2006] BCC 233 (see note 24 above) where the Court of Appeal examined and explained the terms
‘property’ and ‘onerous contract’; Re Park Air Services (Christopher Moran Holdings Ltd v. Bairstow and Ruddock) [1999] BCC 135, [2000] AC 172 where the House of Lords gave guidance on calculating compensation for a landlord where a liquidator disclaims a lease.
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disclaim, and the liquidator has twenty-eight days to give notice of disclaiming or then forfeit the right to disclaim. If, moreover, persons suffer a loss as a result of the liquidator’s disclaiming, they can prove as creditors in the winding up.
As will be discussed further below, the statutory powers of liquidators allow them to set aside prior transactions at undervalue or transactions which amount to preferences. Liquidators, moreover, may obtain orders for the examination of company affairs in order to secure information26 and may apply for an order that directors or former directors make a contribution to the assets.27 If the liquidator wishes to obtain court guidance on questions relating to a winding up, an application can be made under section 112 of the Insolvency Act 1986 and the court may also be asked to appoint a special manager.28 When a liquidator is appointed he or she is not personally bound by pre-liquidation contracts enforceable against the company, except where he or she has actually adopted them.29 Such contracts, however, retain their force with regard to the company unless they are disclaimed by the liquidator. Contracts entered into by liquidators for the purposes of effecting a winding up do not bind them personally since they act in this regard as agents of the company.30
As for the duties of the liquidator, the first of these is to realise the company’s assets effectively and to apply the company’s property ‘in satisfaction of the company’s liabilities pari passu’31 so that there is a distribution ‘among the members according to their rights and interests in the company’. There is a duty to contact known creditors and meet their claims as well as an obligation to consider all known debts before distributing assets.32 Where dividends are to be paid, liquidators must give notice of their intention to declare a dividend33 and must provide for debts relating to claims undetermined at that time and the claims of creditors who may not have had time to establish their proofs because of the distance of their place of residence.34 When a dividend is declared,
26 |
Insolvency Act 1986 s. 236. |
27 |
Ibid., s. 214. See ch. 16 below. |
28 |
Insolvency Act 1986 s. 177. |
29 |
Re S. Davies & Co. Ltd [1945] Ch 402. |
30But see Plant (Engineers) Sales Ltd v. Davis (1969) 113 Sol Jo 484 regarding contracts under seal.
31Insolvency Act 1986 s. 107. For discussion of the pari passu principle see chs. 14 and 15 below.
32See Re Armstrong Whitworth Securities Ltd [1947] Ch 673; Argylls Ltd v. Coxeter [1913] 29 TLR 355.
33Insolvency Rules 1986 r. 4.180(2). 34 Ibid., r. 4.182.
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however, creditors who have not proved cannot disturb the dividends. Dividends must be paid by the liquidator when this is possible and proper accounts, minutes of meetings and records must be kept.35 The liquidator is in a fiduciary position in relation to the company and must not derive personal profit from his role: this rules out employing him to do legal work flowing from the winding up.36
Liquidators can be removed by the court37 or the creditors and may only resign by reasons of ill-health, retirement from insolvency practice, conflict of interests or changes in personal circumstances that make it impossible for them to continue to act. Where a resignation is to be effective, a creditors’ meeting must be called and asked to accept this. In the absence of such an acceptance, the liquidator may apply to the court. A creditors’ voluntary winding up terminates normally with the realisation of all available assets and their distribution to claimants in order of priority. After this is done, the liquidator must call final meetings of members and creditors38 to which accounts of realisations and distributions must be submitted. These accounts must, in turn, be sent to the Companies Registry within a week of the meeting. The Registrar will then record the liquidator’s account and return under the Insolvency Act 1986 section 201 and the company is deemed dissolved three months from registration of a return.39 After this date the company does not exist and can neither be sued nor initiate court proceedings.
35Insolvency Regulations 1994 (SI 1994/2507).
36See Milman and Durrant, Corporate Insolvency, p. 91; Re Gertzenstein Ltd [1997] 1 Ch 115; r. 4.149 of the Insolvency Rules 1986 allows the court to set aside dealings between the liquidator and his associates which involve company assets. For a detailed discussion of the liquidators’ general duties see B. McPherson, The Law of Company Liquidation (5th edn, Lawbook Co., Australia, 2007) paras. 8.30 ff.
37In AMP Enterprises Ltd v. Hoffman (The Times, 13 August 2002) Neuberger J (regarding a section 108(2) application for replacement) emphasised the dangers of encouraging applications by disgruntled creditors, the importance of maintaining standards of independence and the bearing in mind of any costs and delay involved in replacement. In Re Buildlead Ltd (in liquidation) (No. 2) [2005] BCC 138 liquidators undertaking a creditors’ voluntary winding up were removed under s. 108(2) because they had lost the confidence of key creditors due to the over-zealous approach to investigating a possible preference claim. The loss of confidence was key – there was no need to show any breaches of duty on the liquidators’ part: see further D. Milman, ‘Winding Up of Companies: Reflections on Recent Jurisprudence’ (2006) 4 Sweet & Maxwell’s Company Law Newsletter 1, 4.
38Insolvency Act 1986 s. 106. 39 Ibid., s. 106.