23 InsolvencyOverviewINSOLVENCYAdministrationLiquidationCompulsoryVoluntaryMembersCreditors1Insolvency of a company usually results in liquidation either compulsory or voluntary. Liquidation may be avoided by administration. Liquidation may also be entered into whilst a company is still solvent.2Administration ordersPurpose of administration2.1(a)The appointment of an administrator is designed to give companies in financial difficulty (usually with insolvency looming) a “breathing space” from which to trade out of their difficulties.(b)Administrators may be appointed either by the court, the holders of floating charges created on or post 15.9.03 and the company and its directors.(c)If the company and its directors intend to appoint an administrator they must give five days notice to any floating charge holder entitled to appoint either an administrative receiver or administrator. This effectively means that a floating charge holder can either block the companys choice of administrator or block the administration procedure.(d)The administrator once appointed must perform his functions with the objective of:(i)rescuing the company as a going concern, or(ii)achieving a better result for the companys creditors than winding up; or (iii)realising property to distribute to secured or preferential creditors.Consequences of the appointment of an administrator2.2(a)Winding-up cannot be commenced or continued with.(b)No goods can be recovered from the company (e.g. H.P. repossessions) without court leave.(c)Legal proceedings can only be commenced or continued with the courts permission.Administrators proposals and powers2.3(a)The administrator should:(i)Establish the state of the companys affairs by obtaining a statement of affairs.(ii)Prepare proposals to achieve the aim of administration.(b)A creditors meeting must be called within 10 weeks of administrators appointment.(c)The meeting will(i)accept;(ii)accept with modifications which must be approved by the administrator; or(iii)reject.Powers2.4(a)The administrator has general powers of management derived from.(b)He can (i)appoint and remove directors (a unique power in company law normally only available in an AGM)(ii)call meetings of the members and creditors(iii)apply to court for directions regarding the carrying out of his functions(iv)make payments to secured or preferential creditors and with the courts permission make payments to unsecured creditors(e)He must summon a meeting of the companys creditors if told to by:(i)the court, or(ii)10% of the companys creditors. s.17(IA)End of administration2.5(a)The administration has been successful.(b)Automatically (unless extended) 12 months after the date of appointment.(c)By court order which includes the granting of a winding up petition on public interest grounds.3Liquidation3.1Liquidation may take one of two forms:(i)Winding up by the court Compulsory liquidation.(ii)Voluntary Winding Up Members or Creditors.Winding up by the court3.2(a)s.122(1)(IA) Reasons for which a company may be put into compulsory liquidation:(i)The company has passed a special resolution to that effect.(ii)The company was regarded as a public company on incorporation and not issued with a s.117 certificate within 1 year.(iii)The company does not start business within one year of incorporation or suspends business for one year.(iv)The total number of members in a public company is reduced below the legal minimum. (i.e., 2)(v)The company is unable to pay its debts.(vi)The court is of the opinion that it is just and equitable that it should be wound up.(b)s.123(IA) Unable to pay its debts (Creditors petition)There are four ways of proving that a company is unable to pay its debts:(i)A creditor has served on a written demand for 750 or more on the company, and the company has failed to pay within a period of 21 days.(ii)A creditor has sued the company and obtained judgement but remains unpaid.(iii)The company is insolvent on the balance sheet test (liabilities exceed assets)(iv)The company is insolvent on the commercial insolvency test (i.e. it is unable to pay its debts as they fall due because it lack cash).(c)s.122(1)g Just and equitable (members petition)Cases where the court has held that it is just and equitable to wind up include:-(i)where the companys main object has failed: Re German Date Coffee Company. (ii)where there is deadlock in the management: Re Yenidje Tobacco Company. (iii)where a director of a partnership company is removed under s.303: Ebrahimi v. Westbourne GalleriesMembers must stand to gain something from liquidation (the company must not be insolvent).(d)The court will appoint the Official Receiver as liquidator (he will pass on the role quickly) and encourage the formation of