A company enters into compulsory liquidation when the court makes a winding up order. Upon the order being made, the Official Receiver ("OR") is automatically appointed as liquidator, however, the company's creditors may nominate an alternative licensed insolvency practitioner to act as liquidator. A liquidator's primary function is to realise the company's assets for the benefit of its creditors. A liquidator has extensive statutory powers, including bringing legal proceedings in the name of the company, carrying on the business of the company and investigating the affairs of the company.
A special manager may be appointed by the court in conjunction with the OR or liquidator, where it appears that the nature of the business or property of the company requires the appointment of another person to manage the company's business or property and support the liquidator. Like a liquidator, a special manager is an officer of the court. The special manager's powers and functions are defined by court order.
On the making of a winding up order by the court an automatic stay on legal proceedings is imposed. This means that no action or proceedings shall be commenced or proceeded with or against the company, except by leave of the court.
Some high level considerations for contractual counter-parties are as follows:
Termination of contracts
The impact of a contracting counter-parties' insolvency in respect of termination will be governed by the terms of the contract. Insolvency may give rise to a right to terminate, alternatively, the contract may provide for automatic termination. Counter-parties should consider the terms of the contract for any procedural obligations for termination.
Joint Venture Agreements
As with any contract, the terms under joint venture agreements will vary. The joint venture agreement may contain step in rights permitting the solvent party to exclude the insolvent party from further participation in the joint venture and may take over its interest, carry on and complete the performance of the contract either alone or in conjunction with another party.
It is important that the solvent party contemplates the impact of the insolvency of a joint venture entity on the contracts the joint venture may have with its counter-parties and considers the contractual terms, including termination.
Assignment/novation of contracts
Subject to the provisions of the contract, it may be possible for the liquidator to novate or assign a contract in whole or in part.
All employees of a company are automatically dismissed and their contracts of employment are terminated with immediate effect from the date of publication of the winding up order. However, as a liquidator has the power to carry on the business of the insolvent company, some staff may be retained and new employment contracts will be entered into.
In a joint venture that the solvent party continues, some employees may TUPE to the solvent party.
Any claims arising under pre-liquidation contracts will usually be an unsecured claim in the liquidation estate and will rank pari passu with other unsecured creditors. However, the solvent party should consider whether it has any negotiating power in respect of its unsecured pre-liquidation liabilities.
Any liabilities incurred by the liquidator in carrying out his statutory functions will rank as an expense in the liquidation.
The above represents a high level overview on the impact a contracting counter-parties' insolvency may have on contracts.