Insolvency procedures :winding up part 2.

Last week we looked at members' voluntary winding up. There is also another type of voluntary winding up, creditors' voluntary winding up. Section 90 of the Insolvency Act 1986 (which is the statute referred to in this series of articles save where it says otherwise) states that unless a statutory declaration of solvency has been made (as referred to in last week's article) so as to make a voluntary winding up a members' voluntary winding up, then any other voluntary winding up is a creditors' voluntary winding up. There are some provisions which apply to both forms of winding up (sections 107-116) and ones which apply just to members' voluntary liquidations (sections 91-96) and others just to creditors' voluntary liquidation (sections 97-106). The company has to have passed a resolution at a shareholders' meeting to go into voluntary winding up and the date of that resolution is the date on which the voluntary winding up commences.

However before the company passes any resolution for winding up section 84 provides that notice must be given to certain specified persons who have security interests in the property of the company (5 business days from the giving of notice must pass before the resolution). The persons who must be notified are the holders of what are known as "qualifying floating charges". This is defined by paragraph 14 of Schedule B1 to the Act which gives certain powers to such a person to initiate another type of insolvency procedure known as Administration (which will be dealt with in a subsequent article). The idea is that anyone holding those rights should have advance notice of any resolution to wind up so as to have an opportunity to decide what action to take.

Although the shareholders of the company commence the liquidation, there are provisions which mean that a meeting of creditors has to be held within 2 weeks of the resolution, with notices sent a week before the meeting. The directors have to prepare a statement (in a particular form) as to the affairs of the company. That has to go before the creditors at the meeting and one of the directors has to attend and preside over the creditors meeting. That statement of affairs has to be said to be true by an affidavit made by some or all of the directors. An affidavit is a document sworn on oath, so that just as with evidence in court, deliberate falsity can lay you open to a charge of perjury (for which you can be sent to prison). That statement of affairs has to show details of assets of the company and its debts and liabilities. It also has to show the names and addresses of the creditors of the company, what security (if any) they hold, when those securities were given and other information. This information about security is important because creditors can be secured or unsecured. If you have a house and there is a mortgage on it then the person from whom you have borrowed the money which the mortgage represents has security on the house for that debt. Therefore if the house is sold then the person with the security gets paid out of the proceeds of sale first. If as sometimes happens you have more than one mortgage on a house, then the person with the first mortgage priority gets paid first and the second one gets paid next. There is a big difference between secured and unsecured creditors because secured creditors get paid first out of the security. Thus they are in a much better position and sometimes in the liquidation secured creditors will be the only people who get any money. (If you see the comment in a liquidation that "there is not expected to be any dividend for unsecured creditors" that means they get nothing).

One reason for ensuring that creditors can see what securities are held and when they were given is that they can see if security appears to have been given at a time when the company was in trouble, and can also see if it appears to have been given to someone who is connected with those who ran the company. (For example if security was given a week before the resolution in respect of money owed to a director of the company or the director's wife or family member etc).