BLP.11 — Corporate Insolvency

Insolvency tests (IA 1986 s.123): Cash-flow — unable to pay debts as they fall due. Balance-sheet — liabilities (incl. contingent/prospective) exceed assets. Either suffices. A statutory demand for £750+ unpaid for 21 days proves inability to pay.

The procedures

• Liquidation (winding-up): company dissolved, assets realised, distributed by statutory order. Compulsory — court order, usually creditor petition on s.122(1)(f) (unable to pay debts). Voluntary — members' (MVL, solvent, requires directors' declaration of solvency) or creditors' (CVL, insolvent). Liquidator investigates, can pursue antecedent transactions.
• Administration: moratorium protects company while administrator pursues the statutory purpose hierarchy (Sch B1 para 3): (a) rescue company as going concern; (b) better result for creditors than winding-up; (c) realise property for secured/preferential creditors. Entered by court order or out-of-court by company, directors, or qualifying floating charge holder (QFCH).
• CVA (Pt I): binding compromise with creditors. Approved by 75% by value of creditors voting (and not defeated by 50%+ of unconnected creditors). Supervised by IP. No automatic moratorium for most companies. Cannot bind secured/preferential creditors without consent.
• Receivership: largely historic. Administrative receivers abolished for most post-15 Sept 2003 floating charges (Enterprise Act 2002) — QFCH appoints an administrator instead. CIGA 2020 added a free-standing moratorium and restructuring plan (Pt 26A, cross-class cram-down).

Director liability (claims by liquidator/administrator)

• Wrongful trading (s.214): director knew/ought to have concluded no reasonable prospect of avoiding insolvent liquidation, yet didn't take every step to minimise creditor loss. Objective + subjective standard (Re Produce Marketing (1989)). Liability = contribution to assets.
• Fraudulent trading (s.213): carrying on business with intent to defraud creditors — needs actual dishonesty; harder to prove; civil + criminal.

Common traps

• Wrongful trading needs no dishonesty; fraudulent does — don't conflate.
• Order of priority: fixed-charge holders → liquidation expenses → preferential debts → prescribed part (ring-fenced from floating-charge realisations for unsecured creditors) → floating-charge holders → unsecured → shareholders.
• Floating charges rank after fixed charges and preferential creditors, and crystallise on insolvency.
• Antecedent transactions: preferences (s.239), transactions at undervalue (s.238) — note longer 2-year lookback for connected persons.
• CVA can't cram down secured creditors; the restructuring plan (Pt 26A) can.