Company Law Liquidation

Brown brothers Brakes LTD has invested large amount in producing a range of products for supermarkets. The company is facing financial difficulties due to unsuccessful. In that situation director fear the company may now be insolvent. The accountant now wants to understand the issues surrounding insolvency.

According to Brown Bothers current situation it has been recommended to their director to follow the following issues.

Insolvency

A company which is insolvent may be put into liquidation sometimes referred to as winding-up. Insolvency means the inability to pay one’s debts as they fall due. Insolvency refers to the inability of a company to pay off its debts.

Administration

This occurs when a company which is in financial difficulty is put into the hands of an administrator. An administrator is appointed as an officer of the court and an agent of the company by qualified Floating Charge Holder and must act in the interests of all the creditors and attempt to rescue the company as a going concern or more often if they can get a better price for assets than immediate liquidation would give. In general it is a process that happens when company face financial difficulties.

He will be working for companies interest, in order to pay out companies all creditors they can take any decision such as if it is profitable to keep running the company or sell in profitable price and pay to its creditors. An administrator may be appointed by court order issued from court or qualified charge holder and directors of the company. As soon as an administrator has appointed any pending winding-up petitions will be suspended. Enterprise act 2002 came into force 15th September 2003 section 72/A explain prohibition of appointment of administrative receiver.

The law emphasise that qualified floating charge holder appoints administrator rather than receiver. Once an administrator has been appointed must send a notice of his or her appointment to the company and each of its creditors and publish notice of his or her appointment in the Gazette( The Gazette is the official newspaper of record which contains various statutory notices and advertisements, it is published twice weekly and can be obtained from the Edinburg company house) and in a newspaper in the area where the company has its principal place of business.

Administration receivership Floating charges registered before 15th September 2003 are governed by Insolvency Act 1986 section 50-70 and Insolvency Scotland rules 1986. Receivers are appointed under the terms of the floating charge. Their task is to ingather assets caught by the floating charge and repay the charge holder.

A receiver may be appointed for the various following reasons:

* Any event which charge entitles holder to appoint a receiver. * 21 days after demanding payment . * Interest in arrears for 2 months not paid. * Order/resolution to wind up company . * Appointment of a receiver under another floating charge .

Duties of the receiver Ascertains assets caught by floating charge and realises them. Receiver pays the preferential debts IA 1986, he also pays the amount due to the charge holder and any balance is returned to company. Within 7 days of the appointment, the person who appoints the receiver must deliver notice to the Registrar of Companies for Scotland and AIB (Accountant in Bankruptcy). When the receiver ceases to act, the holder of the floating charge must deliver notice to the Registrar of Companies for Scotland and AIB within 14 days. Within 3 months of his appointment, the receiver must deliver a report to AIB with copies to the creditors of the company and the holders of a floating charge as well as the any trustees for secured creditors of the company.

Liquidation Liquidation is a process when company can’t pay debts and liabilities, then A liquidator is appointed either by creditor or the members to wind up the company in order to sell companies assets and pay the creditors. There are two types of liquidation, one is the voluntary liquidation and the other is compulsory liquidation.

Voluntary liquidation Voluntary liquidation occurs when the members of the company resolve to voluntarily wind-up the affairs of the company and dissolve. If the company is solvent, and the members have made a statutory declaration of solvency, the liquidation will proceed as a members’ voluntary winding-up. This takes place at a General Meeting. Companies Registrar and Gazette must be advised of it.

Member Voluntary liquidation A member voluntary liquidation means that the company is solvent and can pay in full a creditors. Which case preferential creditors are paid first, in full if possible then ordinary creditors will be paid if sufficient funds are available.

Creditor Voluntary liquidation

Creditors voluntary liquidation is most common methods to closing down insolent company. This method is applied when share holders want to wind up a company. Any actions have planned at creditors meeting. As a normal process liquidator is appointed to wind up company and release assets in order to pay creditors balance. At the end company directors lose their power.

Compulsory Liquidation

Compulsory liquidation of a company is when the company is ordered by a court to be wound up. The Court of Session, or Sheriff Court with the appropriate jurisdiction, may order the winding-up of a company. This may be, for example, on the petition of a creditor or creditors on the grounds that the company cannot pay its debts. It has to be advertised in Gazette. A provisional liquidator may be appointed after petition is presented. After court order interim liquidator is appointed. An official liquidator has appointed after meeting of all creditors and contributors. Then in essence same as for voluntary.

Fraudulent ; Wrongful Trading Fraudulent trading is where a company carries on a business with the intention of defrauding creditors or for any fraudulent purposes. Where during the course of a winding-up it appears to the liquidator that fraudulent trading has occurred, the liquidator may apply to the court for an order any persons who were knowingly parties to the carrying on of such business are to be made liable to make such contributions to the company’s assets as the court thinks proper. If there is suspect of fraudulent trading following people should informed: * Alert the liquidator if applicable.

Reference

http://www.companieshouse.gov.uk/about/gbhtml/gpo8s.shtml#ch8