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What are the eligibility criteria for initiating liquidation procedures? Are any entities explicitly barred from initiating such procedures?
The term ‘insolvent’ has no strict definition. Rather, the law asks whether a company is unable to pay its debts. This usually entails an assessment of whether:
- the company is unable to pay its debts as they fall due (a cash-flow test); or
- the value of the company’s assets is less than its liabilities, taking into account its contingent and prospective liabilities (a balance-sheet test).
In the case of liquidation, a liquidator can be appointed where the company is, or will become, unable to pay its debts. However, liquidation can also be used to wind up a solvent company.
In the case of administration, the applicable entry criteria depend on the person applying to place the company into administration. If the administration is initiated by a qualifying floating charge holder (a person holding a floating charge covering all or materially all of the company’s assets), the company need not be unable to pay its debts. In such a situation, it is sufficient that the floating charge holder has a contractual right to enforce the security. If the company or its directors apply for administration, the company must be, or be likely to become, unable to pay its debts (on a cash-flow or balance-sheet basis).
In either case, the administrator-in-waiting must be satisfied that one of three statutory objectives is achievable. The primary statutory objective of administration is the rescue of the company as a going concern. If this is not possible, the administrator must pursue the objective of rescue of the business, rather than the company. In such circumstances, it is more common for the administrator to sell the company’s business or assets, by way of pre-pack or otherwise. Failing that, the administrator must pursue the objective of realising property to make a distribution to at least one secured or preferential creditor.
Restrictions on entry to administration or liquidation are imposed on certain companies which are subject to special insolvency regimes.
What are the primary procedures used to liquidate an insolvent company in your jurisdiction and what are the key features and requirements of each? Are there any structural or regulatory differences between voluntary liquidation and compulsory liquidation?
Liquidation Liquidation is the primary procedure used to wind up companies. It can take a number of forms (see below), but in each case the liquidator is under a duty to collect in and realise the assets of the company for distribution to its creditors. Once this has been done, the company is usually then dissolved.
Administration Although originally designed as a company rescue mechanism, administration is also frequently used as a type of winding-up procedure. An administrator may make distributions to creditors in broadly the same way as a liquidator would. Where no assets are available for distribution, a company may move straight from administration to dissolution.
How are liquidation procedures formally approved?
In liquidation, one or more liquidators are appointed and take over the management of the company to realise its assets for distribution. A liquidator can trade the business in only limited circumstances, because rescue is not the objective.
Compulsory liquidation A compulsory liquidation is commenced by the court if it is satisfied that the company is unable to pay its debts, or that it is just and equitable to do so. A petition to court can be made by the company, the directors, any creditor or any person liable to contribute to the assets of the company in the event of a winding up.
Voluntary liquidation In contrast, a voluntary liquidation is commenced out of court by resolution of the company’s shareholders. However, the process is controlled by the shareholders only if the company is solvent and this is confirmed by the directors in a statutory declaration. If no such declaration can be made, it becomes a creditors’ voluntary liquidation, in which the creditors confirm the appointment and control the choice of liquidator.
What effects do liquidation procedures have on existing contracts?
Parties have no automatic right to terminate contracts on entry into insolvency processes. However, parties commonly include contractual termination rights triggered by entry into an insolvency process. These rights are exercisable on entry into an insolvency process, except in relation to certain essential supplies (eg, information technology, water, gas, electricity and communications). However, the commencement of winding-up proceedings may have the following effects on contracts:
- Disclaimer – a liquidator has the power to unilaterally terminate or disclaim onerous contracts to avoid future liabilities. If the counterparty suffers loss as a result of a disclaimer, it may claim for damages in the winding up (although this is likely to be an unsecured claim).
- Non-performance – an administrator does not have a power of disclaimer, but may delay or decide not to perform a contract if performance is not in the interests of the creditors and would impede the administrator from achieving the objective of the administration.
What is the typical timeframe for completion of liquidation procedures?
A liquidation can take as little as three to six months if the insolvent company’s trading history is short and simple, although it is likely to take longer if the trading history is longer and more complex.
An administration may be completed in a year, but will take longer if the trading history is complex.
Role of liquidator
How is the liquidator appointed and what is the extent of his or her powers and responsibilities?
Once appointed, the administrator has wide-ranging powers to manage the administration process, but may seek directions from the court. The objective of an administration depends on the circumstances, but may include keeping the company trading as a going concern. The administrator has the power to continue trading the business (although in practice, he or she will want certainty regarding the continued funding of the business).
In liquidation, one or more liquidators are appointed and take over the management of the company to realise its assets for distribution. The powers of a liquidator are narrower than those of an administrator (eg, a liquidator can trade the business only in very limited circumstances because rescue is not the objective).
What is the extent of the court’s involvement in liquidation procedures?
The court acts as a ‘gate keeper’ to compulsory liquidation, as an application to court is required to commence the process.
Voluntary liquidation A voluntary liquidation is commenced out of court, by resolution of the company’s shareholders. There is usually no need to involve the court.
What is the extent of creditors’ involvement in liquidation procedures and what actions are they prohibited from taking against the insolvent company in the course of the proceedings?
The rights of secured creditors are largely unaffected by any liquidation process. They are free to enforce their security, including appointing a receiver. The position is different in an administration, in which a stay is automatically imposed on the rights of all creditors, including secured creditors.
Unsecured creditors A stay is automatically imposed on the commencement or continuation of legal proceedings against a company that is in liquidation or administration. In a compulsory liquidation, this is automatic, but the liquidator in a creditors’ voluntary liquidation must apply to the court for protection. In administration, a stay is also imposed.
Director and shareholder involvement
What is the extent of directors’ and shareholders’ involvement in liquidation procedures?
In liquidation, the directors’ powers of management automatically cease and the liquidator assumes them. In an administration, the directors’ powers do not automatically cease, although the directors are unable to exercise any powers that might interfere with the administrator’s conduct of the administration. Occasionally, the administrators may consider giving powers back to the directors; there are no fixed rules regarding when it is appropriate to do so.
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