Liquidators

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COMPULSORY LIQUIDATION

Cont'd...

You may claim interest on your outstanding debt up to the date of liquidation, if it bore interest, if it was payable at a previous date under a written instrument, or if you had previously demanded it in writing with notice that you would claim interest. You will not get interest on your claim accruing after liquidation, unless all creditors are paid in full.

If you believe that you own something in the company’s possession you should contact the liquidator as soon as possible with full proof of ownership and be prepared to identify what you are claiming. The liquidator will examine your claim carefully before deciding whether to release the goods in question, pay you for them, or otherwise.

How will the liquidator adjudicate my claim?

The liquidator will consider your claim and any supporting information. He will compare your claim to the company’s records and any other available information, and may discuss the claim with the directors. The liquidator may ask you for additional information or evidence if he thinks you have not sufficiently proved your claim.

For example, if you have supplied goods to the company, the liquidator may ask you to provide copies of signed delivery notes. The liquidator may agree your claim in full, or in part, or he may reject your claim if he does not think it is valid.

What can I do if I believe the liquidator has unfairly rejected my claim?

It is best to contact the liquidator in the first instance to discuss any amounts under dispute. If you cannot reach agreement you can, within 21 days of rejection, appeal to court. After 21 days, if you do not apply to court the adjudication is final.

Is the liquidator bound by contracts entered into by the company prior to his appointment?

No. The liquidator may refuse to perform or formally disclaim any onerous or unprofitable contract entered into by the company prior to liquidation. The other party will then have a claim for breach of contract, which ranks as an unsecured claim. However, a contracting party that has acquired a beneficial interest in property of the company will still be able to enforce it.

Is the liquidator liable for sums due under contracts entered into by the company subsequent to his appointment?

The liquidator can cause the company to enter into new contracts, in which event the associated liabilities of the company rank as an expense of the liquidation.

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UK Liquidation

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Compulsory liquidation a guide for unsecured creditors Association of Business Recovery Professionals

Once a winding-up order is made, the Official Receiver becomes the liquidator

COMPULSORY LIQUIDATION

Compulsory liquidation occurs when a company is wound up by an order of the court.

A licensed insolvency practitioner has given you this because you, or your business, may be owed money by a company that is in compulsory liquidation and the liquidator is not the Official Receiver.

This guide aims to help you understand your rights as a creditor and to describe how best these rights can be exercised. It is intended to relate only to England and Wales. It is not an exhaustive statement of the relevant law or a substitute for specific professional or legal advice.

We have made every effort to ensure the guide is accurate, but R3 cannot accept responsibility for the consequences of any action you take in reliance on its contents. If, having read the guide, you remain in any
doubt about your rights, you should consult a licensed insolvency practitioner or solicitor.

Depending on the circumstances of the case, creditors who play an active role in an insolvency can make a significant difference to how much the insolvency practitioner will be able to recover for them. We hope that you will read this guide carefully and consider whether taking an active role as a creditor in this case could benefit you or your business.

COMPULSORY LIQUIDATION

A compulsory liquidation occurs when a company is wound up by an order of the court

What is a compulsory liquidation?

A compulsory liquidation occurs when a company is wound up by an order of the court. The purpose of the winding-up order is to appoint a responsible person who has a duty to collect the company’s assets and distribute them to its creditors in accordance with the law.

When does a company find itself in compulsory liquidation?

The most common circumstances are when a petition is presented to the court on the grounds that the company is unable to pay its debts, or it is proved to the court that the company’s liabilities are greater than its assets.

Who can present a petition to wind up the company?

Amongst others, a creditor, the company itself, or the Department of Trade & Industry (DTI) can present a  petition to the court to wind up the company.

A petitioning creditor may feel that the company's assets might be in jeopardy in the period after presentation of the petition. If so, he may apply to the court for an order to appoint a provisional liquidator whose function is to ensure the security of the company's assets between the petition date and the hearing (usually several
weeks later).

Who deals with the company's affairs?

Once a winding-up order is made, the Official Receiver becomes the liquidator. The Official Receiver is a civil servant and an officer of the court. The Official Receiver must decide within twelve weeks of the winding-up order whether to call a meeting of creditors to appoint a licensed insolvency practitioner to act as liquidator. In certain circumstances the DTI or the court may make such an appointment. This guide assumes that a licensed insolvency practitioner has been appointed liquidator.

What are the consequences of a winding-up order?

Any disposition of the company's property after the presentation of the petition is void, unless the court orders otherwise. After the liquidation has commenced, any legal action against the company is stayed, except with leave of the court. In addition, no new legal proceedings may be brought against the company without leave of the court.

The powers of the directors cease and the liquidator takes control of the company and its assets. Secured and
preferential creditors are paid before unsecured creditors The liquidator will pay a dividend to unsecured creditors if enough funds have been realised from the company’s assets after paying costs incurred Six months after writing off the debt you can claim VAT Bad Debt Relief from HM Customs and Excise.

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National Wholesale Liquidators

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National Wholesale Liquidators

The liquidator’s role

When a company is being liquidated because it is insolvent, the liquidator has a duty to all the company’s creditors. The liquidator’s role is to:

• collect, protect and realise the company’s assets

• investigate and report to creditors about the company’s affairs, including any unfair preferences which may be
recoverable, any uncommercial transactions which may be set aside, and any possible claims against the
company’s officers

• enquire into the failure of the company and possible offences by people involved with the company and report
to ASIC

• after payment of the costs of the liquidation, distribute the proceeds of realisation—first to priority creditors,
including employees, and then to unsecured creditors, and

• apply for deregistration of the company on completion of the liquidation. Except for lodging documents and reports required under the Corporations Act 2001 (Corporations Act), a liquidator is not required to do any work unless there are enough assets to pay their costs.

If the company is without sufficient assets, one or more creditors may agree to reimburse a liquidator’s costs and expenses of taking action to recover further assets for the benefit of creditors. In this case, if additional assets are recovered, the liquidator or particular creditor can apply to the court for the creditor to be compensated for the risk involved in funding the liquidator’s recovery action.

Recoveries from creditors A liquidator has the ability to recover, for the benefit of all creditors, certain payments (known as unfair preferences) made by the company to individual creditors in the 6 months before the start of
the liquidation.

Broadly, a creditor receives an unfair preference if, during the 6 months prior to liquidation, the company is insolvent, the creditor suspects the company is insolvent, and receives payment of their debt (or part of it) ahead of other creditors. To be an unfair preference, the payment must put the creditor receiving it in a more
favourable position than other unsecured creditors.

Not all payments from the company to a creditor in the 6 months before liquidation are unfair preferences. The Corporations Act provides various defences to an unfair preference claim.

If a liquidator seeks to recover a payment that has been made to you, you may wish to obtain independent legal advice on the merits of the liquidator’s claim before repaying any money.

Creditors’ meetings

A liquidator may call a creditors’ meeting from time to time to inform creditors of the progress of the liquidation, to find out their wishes on a particular matter or seek approval of the liquidator’s fees. You may also use a creditors’ meeting to ask questions about the liquidation and inform the liquidator about your knowledge of the company’s affairs.

In a court liquidation, the liquidator is not required to call a creditors’ meeting unless a matter requires creditor approval. The only exception is that if the creditors pass a resolution requiring a creditors’ meeting to be called, or at least one-tenth in value of all the creditors request the liquidator in writing to do so, the liquidator must call a creditors’ meeting. However, it is unusual for this to happen, as those who make the request or pass the resolution must pay the costs of calling and holding the meeting.

In a creditors’ voluntary liquidation, a meeting of the creditors must be held annually and a joint meeting of the
creditors and members must be held at the end of the winding up. Creditors can require the liquidator to call a creditors’ meeting at other times, the same as in a court liquidation, as long as they pay the associated costs.

The chairperson of a creditors’ meeting (usually the liquidator or one of their senior staff) must prepare minutes of the meeting and a record of those who were present at the meeting and lodge them with ASIC within one month. A copy may be obtained from any ASIC Business Centre on payment of the relevant fee.

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Furniture Liquidators

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A GUIDE FOR CREDITORS

Who is a creditor?

You are a creditor of a company if the company owes you money. Usually, a creditor is owed money because they have provided goods or services, or made loans to the company. An employee owed money for unpaid wages and other entitlements is also a creditor.

A person who may be owed money by the company if a certain event occurs (e.g. if they succeed in a legal claim against the company) is also a creditor, and is sometimes referred to as a ‘contingent’ creditor.

There are generally two categories of creditor: secured and unsecured. A secured creditor is someone who has a
‘charge’, such as a mortgage, over some or all of the company’s assets, to secure a debt owed by the company. Lenders usually require a charge over company assets when they provide a loan.

An unsecured creditor is a creditor who does not have a charge over the company’s assets.

Employees are a special class of unsecured creditors. In a liquidation, some of their outstanding entitlements are paid in priority to the claims of other unsecured creditors. If you are an employee, see our related information sheet ‘Liquidation: a guide for employees’. All references in this information sheet to ‘creditors’ relate to unsecured creditors unless otherwise stated.

The purpose of liquidation

The purpose of liquidation of an insolvent company is to have an independent and suitably qualified person (the liquidator) take control of the company so that its affairs can be wound up in an orderly and fair way for the benefit of all creditors.

There are two types of insolvent liquidation: creditors’ voluntary and court. The most common type is a creditors’ voluntary liquidation, which usually begins in one of two ways:

1. when creditors vote for liquidation following a voluntary administration or a terminated deed of company
arrangement, or

2. when an insolvent company’s shareholders resolve to liquidate the company, nominate a liquidator, and call a meeting of creditors to confirm that liquidator’s appointment or appoint another liquidator of the creditors’ choice.

In a court liquidation, a liquidator is appointed by the court to wind up a company, following an application, usually by a creditor. Others, including a director, a shareholder and ASIC, can also make a winding-up application.

After a company goes into liquidation, unsecured creditors can no longer commence or continue legal action against the company, unless the court permits. It is possible for a company in liquidation to also be in receivership.

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National Liquidators

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Liquidation

33. The type of proceeding referred to as “liquidation” is regulated by the
insolvency law and generally provides for a public authority (typically,
although not necessarily, a judicial court acting through a person appointed for
the purpose) to take charge of the debtor’s assets, with a view to terminating
the commercial activity of the debtor, transforming non-monetary assets into
monetary form and subsequently distributing the proceeds of sale or realization
of the assets proportionately to creditors. Although generally requiring the sale
or realization of assets to occur in a piecemeal manner as quickly as possible,
some insolvency laws permit liquidation to involve sale of the business in
productive units or as a going concern; under other laws that is only permissible
in reorganization. Liquidation usually results in the dissolution or disappearance
of a debtor that is a commercial legal entity and discharge of a natural
person debtor.

34. Around the world, liquidation proceedings tend to be very similar in their
concept, acceptance and application and normally follow a pattern that
includes:

(a) An application to a court or other competent body either by the
debtor or by creditors;

(b) An order or judgement that the debtor be liquidated;

(c) Appointment of an independent person to conduct and administer the
liquidation;

(d) Closure of the business activities of the debtor, if the business of the
debtor cannot be sold as a going concern, and termination of the powers of
owners and management and the employment of employees;
Part one: II. Mechanisms for resolving a debtor’s financial difficulties 31

(e) Sale or realization of the debtor’s assets, either piecemeal or as a
going concern;

(f) Adjudication of the claims of creditors;

(g) Distribution of available funds to creditors (under some form of
priority); and

(h) Dissolution of the debtor, where it is a corporation or some other
form of legal person, or discharge, in the case of a natural person.

35. There are a number of legal and economic justifications for liquidation.
Broadly speaking, it can be argued that a commercial business that is unable
to compete in a market economy should be removed from the marketplace. A
principal identifying mark of an uncompetitive business is one that satisfies
one of the tests of insolvency, that is, it is unable to meet its mature debts as
they become due or its debts exceed its assets. More specifically, the need for
liquidation proceedings can be viewed as addressing inter-creditor problems
(when an insolvent debtor’s assets are insufficient to meet the claims of all
creditors it will be in a creditor’s own best interests to take action to recover
its claim before other creditors can take similar action) and as a disciplinary
force that is an essential element of a sustainable debtor-creditor relationship.
Orderly and effective liquidation proceedings address the inter-creditor
problem by setting in motion a collective proceeding that seeks to avoid those
actions which, while viewed by individual creditors as being in their own best
self interest, essentially lead to the loss of value for all creditors. A collective
proceeding is designed to provide equitable treatment to creditors, by treating
similarly situated creditors in the same way, and to maximize the value of the
debtor’s assets for the benefit of all creditors. This is normally achieved by the
imposition of a stay on the ability of creditors to enforce their individual rights
against the debtor and the appointment of an independent person whose
primary duty is to maximize the value of the debtor’s assets for distribution to
creditors.

36. An orderly and relatively predictable mechanism for the enforcement of
the collective rights of creditors can also provide creditors with an element of
predictability at the time they make their lending decisions and can more
generally promote the interest of all participants in the economy by facilitating
the provision of credit and the development of financial markets. This is not
to say that an insolvency law should function as a means of enforcing the
rights of individual creditors, although there is a clear and important relationship
between enforcement and insolvency mechanisms. The efficiency and
effectiveness of procedures for the individual enforcement of creditors’ rights
will mean that creditors are not forced to use insolvency proceedings for that
purpose, especially since insolvency proceedings generally require a level of
proof, cost and procedural complexity that makes it unsuitable for use in that
way. Nevertheless, effective insolvency proceedings will ensure that where
debt enforcement mechanisms fail, creditors will have an avenue of final recourse
that can operate as an effective incentive to a recalcitrant debtor to pay
a particular creditor.

32 UNCITRAL Legislative Guide on Insolvency Law

D. Administrative processes

37. In recent years a number of crisis-affected jurisdictions have developed
semi-official “structured” forms of insolvency processes, inspired largely by
government or central banks, to deal with systemic financial problems within
the banking sector. These processes have been developed on a similar pattern.
Firstly, each has a facilitating agency to encourage and, in part, coordinate and
administer the process to provide the incentive and motivation necessary for its
development. Secondly, each process is underpinned by an agreement between
commercial banks in which the participants agree to follow a set of “rules” in
respect of corporate debtors that are indebted to one or more of the banks and
may participate in the process. The rules provide the procedures to be followed
and the conditions to be imposed in cases where corporate reorganization is
attempted. In some of the jurisdictions, a debtor corporation that seeks to
negotiate reorganization under this process is required to agree to the application
of these rules. Thirdly, time limits are provided for various parts of the
process and, in some cases, agreements in principle can be referred to
the relevant court for reorganization proceedings to commence under the
insolvency law. In addition, one jurisdiction established a special agency that
has extremely wide powers under its governing legislation to acquire nonperforming
loans from the banking and finance sector and then to impose
extrajudicial processes upon a defaulting corporate debtor, including a forced
or imposed reorganization.

38. Both because these processes are relatively complex and involve the
development of special rules and regulations and because they address particular
situations of systemic failure, they are not discussed in the Legislative
Guide.

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Government Liquidation

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8. Recognition of existing creditor rights and establishment
of clear rules for ranking of priority claims

13. Recognition and enforcement in insolvency proceedings of the differing
rights that creditors had with respect to the debtor and its assets before the
commencement of insolvency proceedings will create certainty in the market
and facilitate the provision of credit, in particular with respect to the rights and
priorities of secured creditors. Clear rules for the ranking of priorities of both
existing and post-commencement creditor claims are important to provide predictability
to lenders, and to ensure consistent application of the rules, confidence
in the proceedings and that all participants are able to adopt appropriate
measures to manage risk. To the greatest extent possible,1 those priorities
should be based upon commercial bargains and not reflect social and political
concerns that have the potential to distort the outcome of insolvency. According
priority to claims that are not based on commercial bargains therefore
should be minimized.

9. Establishment of a framework for cross-border insolvency

14. To promote coordination between jurisdictions and facilitate the provision
of assistance in the administration of insolvency proceedings originating in a
foreign country, insolvency laws should provide rules on cross-border insolvency,
including the recognition of foreign proceedings, by adopting the
UNCITRAL Model Law on Cross-Border Insolvency (see annex III).

C. Balancing the goals and key objectives of an insolvency law

15. Since an insolvency regime cannot fully protect the interests of all parties,
some of the key policy choices to be made when designing an insolvency
law relate to defining the broad goals of the law (rescuing businesses in financial
difficulty, protecting employment, protecting the interests of creditors,
Recommendations 1-5 (paras. 4-14)

1. In order to establish and develop an effective insolvency law, the
following key objectives should be considered:

(a) Provide certainty in the market to promote economic stability and
growth;

(b) Maximize value of assets;

(c) Strike a balance between liquidation and reorganization;

(d) Ensure equitable treatment of similarly situated creditors;

(e) Provide for timely, efficient and impartial resolution of insolvency;

(f) Preserve the insolvency estate to allow equitable distribution to
creditors;

(g) Ensure a transparent and predictable insolvency law that contains
incentives for gathering and dispensing information; and

(h) Recognize existing creditors rights and establish clear rules for ranking
of priority claims.

2. The insolvency law should include provisions addressing both
reorganization and liquidation of a debtor.

3. The insolvency law should recognize rights and claims arising under
law other than the insolvency law, whether domestic or foreign, except to the
extent of any express limitation set forth in the insolvency law.

4. The insolvency law should specify that where a security interest is
effective and enforceable under law other than the insolvency law, it will be
recognized in insolvency proceedings as effective and enforceable.

5. The insolvency law should include a modern, harmonized and fair
framework to address effectively instances of cross-border insolvency.
Enactment of the UNCITRAL Model Law on Cross-Border Insolvency is
recommended.

Part one: I. Key objectives of an effective and efficient insolvency law 15
encouraging the development of an entrepreneurial class) and achieving the
desired balance between the specific objectives identified above. Insolvency
laws achieve that balance by reapportioning the risks of insolvency in a way
that suits a State’s economic, social and political goals. As such, an insolvency
law can have widespread effects in the broader economy.

16. The achievement of that balance in the insolvency law and the integration
of the law with the wider legal regime are vital to maintaining social order and
stability. All parties need to be able to anticipate how their legal rights will be
affected in the event of a debtor’s inability to pay, or to pay in full, what is
owed to them. This allows both creditors and equity investors to calculate the
economic implications of default by the debtor and so estimate their risks.
These issues are discussed in detail throughout the Legislative Guide.

17. There is no universal solution to the design of an insolvency law because
States vary significantly in their needs, as do their laws on other issues of key
importance to insolvency, such as security interests,2 property and contract
rights, remedies and enforcement procedures. Although there may be no universal
solution, most insolvency laws address the range of issues raised by the
key objectives discussed above, albeit with different emphasis and focus. Some
laws favour stronger recognition and enforcement of creditor rights and commercial
bargains in insolvency and give creditors more control over the conduct
of insolvency proceedings than the debtor (sometimes referred to as
“creditor-friendly” regimes). Other laws lean towards giving the debtor more
control over the proceedings (referred to as “debtor-friendly” regimes), while
yet others seek to strike a balance in the middle. Some laws give more prominence
to liquidation of the debtor in order to weed out inefficient and incompetent
market players, while others favour reorganization. The focus on
reorganization may serve a number of different aims, such as enhancing the
value of creditors’ claims as part of an ongoing business concern, providing a
second chance to the shareholders and management of the debtor; providing
strong incentives for the adoption by entrepreneurs and managers of appropriate
attitudes to risk; or protecting vulnerable groups, such as the debtor’s
employees, from the effects of business failure.3 Some laws give particular
emphasis to the protection of employees and the maintenance of employment
in insolvency, while others provide that business can be downsized with
minimum protections afforded to employees.

18. Nevertheless, adopting a reorganization-friendly approach should not
result in establishing a safe haven for moribund enterprises: enterprises that are
2Steps have been taken in recent years towards harmonizing the law on security interests, such
as the United Nations Convention on the Assignment of Receivables in International Trade, the
Unidroit Convention on International Interests in Mobile Equipment (Cape Town, 2001) and work by
UNCITRAL to develop a legislative guide on secured transactions.

3There is not necessarily a direct correlation between the debtor or creditor friendliness of an
insolvency regime, the emphasis on liquidation or reorganization and the subsequent success or failure
of reorganization. While it is beyond the scope of the Guide to discuss these issues in any detail, they
are important for the design of an insolvency regime and deserve consideration. While the rate of
successful reorganizations varies considerably between those regimes classified as creditor-friendly,
research appears to suggest that the assumption that creditor-friendly regimes lead to fewer or less
successful reorganizations than debtor-friendly regimes is not necessarily true.

16 UNCITRAL Legislative Guide on Insolvency Law

beyond rescue should be liquidated as quickly and efficiently as possible. To
the extent that some interests may be regarded as being of lower priority than
others, the establishment of mechanisms outside of the insolvency law may
provide a better solution than trying to address those interests under the insolvency
regime. For example, where as a matter of policy it is decided that
employee claims should rank lower than secured and priority creditors in
insolvency, insurance arrangements can be used to protect

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Liquidation World

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LIQUIDATION and INSOLVENCY

4. Ensuring equitable treatment of similarly situated creditors

7. The objective of equitable treatment is based on the notion that, in collective
proceedings, creditors with similar legal rights should be treated fairly,
receiving a distribution on their claim in accordance with their relative ranking
and interests. This key objective recognizes that all creditors do not need to be
treated identically, but in a manner that reflects the different bargains they
have struck with the debtor. This is less relevant as a defining factor where
there is no specific debt contract with the debtor, such as in the case of damage
claimants (e.g. for environmental damage) and tax authorities. Even though the
principle of equitable treatment may be modified by social policy on priorities
and give way to the prerogatives pertaining to holders of claims or interests
that arise, for example, by operation of law, it retains its significance by

12 UNCITRAL Legislative Guide on Insolvency Law
ensuring that the priority accorded to the claims of a similar class affects all
members of the class in the same manner. The policy of equitable treatment
permeates many aspects of an insolvency law, including the application of the
stay or suspension, provisions to set aside acts and transactions and recapture
value for the insolvency estate, classification of claims, voting procedures in
reorganization and distribution mechanisms. An insolvency law should address
problems of fraud and favouritism that may arise in cases of financial distress
by providing, for example, that acts and transactions detrimental to equitable
treatment of creditors can be avoided.

5. Provision for timely, efficient and
impartial resolution of insolvency

8. Insolvency should be addressed and resolved in an orderly, quick and
efficient manner, with a view to avoiding undue disruption to the business
activities of the debtor and to minimizing the cost of the proceedings. Achieving
timely and efficient administration will support the objective of maximizing
asset value, while impartiality supports the goal of equitable treatment.
The entire process needs to be carefully considered to ensure maximum efficiency
without sacrificing flexibility. At the same time, it should be focused on
the goal of liquidating non-viable and inefficient businesses and the survival
of efficient, potentially viable businesses.

9. Quick and orderly resolution of a debtor’s financial difficulties can be
facilitated by an insolvency law that provides easy access to insolvency proceedings
by reference to clear and objective criteria, provides a convenient
means of identifying, collecting, preserving and recovering assets and rights
that should be applied towards payment of the debts and liabilities of the
debtor, facilitates participation of the debtor and its creditors with the least
possible delay and expense, provides an appropriate structure for supervision
and administration of proceedings (including both professionals and the institutions
involved) and provides, as an end result, effective resolution of the
debtor’s financial obligations and liabilities.

6. Preservation of the insolvency estate to allow
equitable distribution to creditors

10. An insolvency law should preserve the estate and prevent premature dismemberment
of the debtor’s assets by individual creditor actions to collect
individual debts. Such activity often reduces the total value of the pool of
assets available to settle all claims against the debtor and may preclude
reorganization or the sale of the business as a going concern. A stay of creditor
action provides a breathing space for debtors, enabling a proper examination
of its financial situation and facilitating both maximization of the value of the
estate and equitable treatment of creditors. Some mechanism may be required
to ensure that the stay does not affect the rights of secured creditors.

Part one: I. Key objectives of an effective and efficient insolvency law 13

7. Ensuring a transparent and predictable insolvency law
that contains incentives for gathering and dispensing information

11. An insolvency law should be transparent and predictable. This will enable
potential lenders and creditors to understand how insolvency proceedings
operate and to assess the risk associated with their position as a creditor in the
event of insolvency. This will promote stability in commercial relations and
foster lending and investment at lower risk premiums. Transparency and predictability
will also enable creditors to clarify priorities, prevent disputes by
providing a backdrop against which relative rights and risks can be assessed
and help define the limits of any discretion. Unpredictable application of the
insolvency law has the potential to undermine not only the confidence of all
participants in insolvency proceedings, but also their willingness to make
credit and other investment decisions prior to insolvency. As far as possible,
an insolvency law should clearly indicate all provisions of other laws that may
affect the conduct of the insolvency proceedings (e.g. labour law; commercial
and contract law; tax law; laws affecting foreign exchange, netting and set-off
and debt for equity swaps; and even family and matrimonial law).
12. An insolvency law should ensure that adequate information is available in
respect of the debtor’s situation, providing incentives to encourage the debtor
to reveal its positions and, where appropriate, sanctions for failure to do so.
The availability of this information will enable those responsible for administering
and supervising insolvency proceedings (courts or administrative
agencies, the insolvency representative) and creditors to assess the financial
situation of the debtor and determine the most appropriate solution.

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Liquidation Com

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LIQUIDATION and INSOLVENCY

Continued...

3. Although country approaches vary, there is broad agreement that effective
and efficient insolvency regimes should aim to achieve the key objectives
identified below in a balanced manner. Whatever design is chosen for an
insolvency law that will meet these key objectives, the insolvency law must be
complementary to, and compatible with, the legal and social values of the
society in which it is based and which it must ultimately sustain. Although
insolvency law generally forms a distinctive regime, it ought not to produce
results that are fundamentally in conflict with the premises upon which laws
other than the insolvency law are based. Where the insolvency law does seek
to achieve a result that differs or fundamentally departs from that other law
(e.g. with respect to treatment of contracts, avoidance of antecedent acts and
transactions or treatment of the rights of secured creditors), it is highly
desirable that that result be the product of careful consideration and conscious
policy in that direction.

1. Provision of certainty in the market to promote
economic stability and growth

4. Insolvency laws and institutions are critical to enabling States to achieve
the benefits and avoid the pitfalls of integration of national financial systems
with the international financial system. Those laws and institutions should
promote restructuring of viable business and efficient closure and transfer of
assets of failed businesses, facilitate the provision of finance for start-up and
reorganization of businesses and enable assessment of credit risk, both domestically
and internationally. The following key objectives of an insolvency law
should be implemented with a view to enhancing certainty in the market and
promoting economic stability and growth.

2. Maximization of value of assets

5. Participants in insolvency proceedings should have strong incentives to
achieve maximum value for assets, as this will facilitate higher distributions to
creditors as a whole and reduce the burden of insolvency. The achievement of
this goal is often furthered by achieving a balance of the risks allocated between
the parties involved in insolvency proceedings. The manner in which
avoidance provisions treat prior transactions, for example, can ensure that
creditors are treated equitably and enhance the value of the debtor’s assets by
Part one: I. Key objectives of an effective and efficient insolvency law 11
recovering value for the benefit of all creditors. At the same time, the treatment
afforded those transactions can undermine the predictability of contractual
relations that is critical to investment decisions, creating a tension between the
different objectives of an insolvency regime. Similarly, a balance has to be
struck between rapid liquidation and longer-term efforts to reorganize the
business that may generate more value for creditors, between the need for new
investment to preserve or improve the value of assets and the implications and
cost of that new investment on existing stakeholders, and between the different
roles allocated to the different stakeholders, in particular the discretion that can
be exercised by the insolvency representative and the extent to which creditors
can monitor the exercise of that discretion to safeguard the proceedings and
ensure the maximization of value.

3. Striking a balance between liquidation and reorganization

6. The first key objective of maximization of value is closely linked to the
balance to be achieved in the insolvency law between liquidation and reorganization.
An insolvency law needs to balance the advantages of near-term debt
collection through liquidation (often the preference of secured creditors)
against preserving the value of the debtor’s business through reorganization
(often the preference of unsecured creditors and the debtor). Achieving that
balance may have implications for other social policy considerations, such as
encouraging the development of an entrepreneurial class and protecting
employment. Insolvency law should include the possibility of reorganization of
the debtor as an alternative to liquidation, where creditors would not involuntarily
receive less than in liquidation and the value of the debtor to society and
to creditors may be maximized by allowing it to continue. This is predicated
on the basic economic theory that greater value may be obtained from keeping
the essential components of a business together, rather than breaking them up
and disposing of them in fragments. To ensure that insolvency proceedings are
not abused by either creditors or the debtor and that the procedure most appropriate
to resolution of the debtor’s financial difficulty is available, an insolvency
law should also provide for conversion between the different types of
proceedings in appropriate circumstances.

Article Courtesy: http://www.uncitral.org/pdf/english/texts/insolven/05-80722_Ebook.pdf

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Insolvency

Image Courtesy: http://www.currieandco.co.uk/insolvency_debt_recovery.htm

Designing the key objectives
and structure of an effective and
efficient insolvency law
I. Key objectives of an effective
and efficient insolvency law
A. Introduction
1. When a debtor is unable to pay its debts and other liabilities as they
become due, most legal systems provide a legal mechanism to address the
collective satisfaction of the outstanding claims from assets (whether tangible
or intangible) of the debtor. A range of interests needs to be accommodated by
that legal mechanism: those of the parties affected by the proceedings including
the debtor, the owners and management of the debtor, the creditors who
may be secured to varying degrees (including tax agencies and other government
creditors), employees, guarantors of debt and suppliers of goods and
services, as well as the legal, commercial and social institutions and practices
that are relevant to the design of the insolvency law and required for its
operation. Generally, the mechanism must strike a balance not only between
the different interests of these stakeholders, but also between these interests
and the relevant social, political and other policy considerations that have an
impact on the economic and legal goals of insolvency proceedings. To the
extent that it is excluded from the scope of such legal mechanisms, a debtor
and its creditors will not be subject to the discipline of the mechanism, nor will
they enjoy the protections provided by the mechanism.
2. Most legal systems contain rules on various types of proceeding (which
are referred to in this Legislative Guide by the generic term “insolvency proceedings”)
that can be initiated to resolve a debtor’s financial difficulties.
While addressing that resolution as a common goal, these proceedings take a
number of different forms for which uniform terminology is not always used
and may include both what might be described as “formal” and “informal”
elements. Formal insolvency proceedings are those commenced under the
insolvency law and governed by that law. They generally include both
liquidation and reorganization proceedings. Informal insolvency processes are
not regulated by the insolvency law and will generally involve voluntary
10 UNCITRAL Legislative Guide on Insolvency Law
negotiations between the debtor and some or all of its creditors. Often these
types of negotiations have been developed through the banking and commercial
sectors and typically provide for some form of restructuring of the insolvent
debtor. While not regulated by an insolvency law, these voluntary negotiations
nevertheless depend for their effectiveness upon the existence of an
insolvency law, which can provide indirect incentives or persuasive force to
achieve reorganization.

Article Courtesy: http://www.uncitral.org/pdf/english/texts/insolven/05-80722_Ebook.pdf

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Liquidation-England

WHAT IS INSOLVENCY / LIQUIDATION?

There are two tests for insolvency:

1. A company does not have enough money to pay its debts, as and when they become due, or
2. A company owes more than the value of its assets, such as inventory or property. This is called the balance sheet test of insolvency.

Personal pride will become a major issue in these circumstances, but remember that a business disaster need not be a personal disaster.

There is help and advice always at hand.

It is a fact that only about 50% of small businesses are still trading after their first three years from initial set up. There are many reasons why this happens but there is only one conclusion: business failure.

Be aware at all times that when your business is under pressure so are you. This pressure can cloud your judgement, you may feel that you can sweep the problems under the carpet or bury your head in the sand. You cannot be judged as a weak individual because you think like this, but the pressure and the possible loss of pride makes you respond this way.

Want to read further?

Please visit:

www.liquidation-and-bankruptcy.co.uk

Thank you

Phil