1 Insolvency and administration

In this chapter we will discusses that how company affairs may be ceased in different conditions through understanding following topics in detail.

1. Winding up
2. Liquidation
3. Dissolution
4. Solvency and insolvency

And at the end we will discuss that companies may be saved from dissolution in crises through a process of administration.

1.1 Winding-up

Winding up is the process in which all the affairs, business dealings and core activities of the company ceased or brought to an end.

Liquidation is also closely matched with winding up in which all the assets of the company put into sale (disposed off or realized) and then the money received from liquidation may be used to pay off all the creditors, after paying them the remaining money distributed between the shareholders.

The process of liquidation is also called dissolution but some time it may be slightly different. Dissolution is the last step in liquidation in which the company name also removed from the register at the registered office of companies’ house.

If company is able to pay its creditors from the proceeds of liquidation (disposing off assets) then the company is said to be in the solvent condition but on the other hand if company is unable to pay its debts from the proceeds of the company assets by disposal then the company is insolvent.

The process of winding up is different for both solvent companies and insolvent companies.

2 Liquidation and winding up

Usually the company goes into liquidation in crises or financially difficult situations and directors well know about the position of company so they can decide the right time for liquidation. Secondly the creditors also aware about the difficult situations of the company if their invoices did not paid on time. So liquidation process following persons may be involved to wind up the company operations and functions.

1. Directors
2. Creditors
3. Members

Liquidation may be of two types

• Compulsory liquidation
• Voluntary liquidation

Compulsory liquidation is usually occurred at the order of court to wind up the company. In this case mostly creditors may apply to the court to give petition of winding up because company is unable to pay its debts. In other words we can say that in compulsory liquidation, all the affairs forced to close by the creditors usually.

Voluntary liquidation is the process of closing company’s affairs which results at the mutual willingness or agreement of inside members of the company. It may be of two types

• Creditors’ voluntary winding up
• Members’ voluntary winding up

Creditors voluntary winding up occurs if company is an insolvent position while in case of solvent position(meet creditors obligations) of company then members voluntary winding up may occurs.

Differences between creditors and members voluntary winding up

There may be following major differences between two

Appointment of liquidator

Liquidator is appointed by the members in members voluntary winding up while in creditors voluntary winding up, the creditors have right to appoint liquidator but he must be reasonable to members also.

Liquidator’s actions

A general meeting is organized in case of members voluntary winding up in which all the members and decided the power authority and obligations of liquidator during liquidation process while in case of creditors voluntary winding up a liquidation committee is held to decide all above.

Representatives

In creditors voluntary winding up there may be five representatives at the behalf of liquidation committee while in case of members voluntary winding up there are no representatives.

Position of company

The major difference is the state of company. In members voluntary winding up/liquidation (MVL) the company is in solvent sate (able to pay all its debts) while in case of CVL the company is in the insolvent state (unable to pay its debts) that’s why company forced into liquidation.

There are following steps in this process

Calling a general meeting

Calling a general meeting in which directors decided to windup the company and discuss the matters rose during its procedure

Resolution

An ordinary or sometime special resolution passed in which winding up begins and all the members and directors agreed at this. After passing a resolution, chairman sign on it and copy of resolution send to the registrar at the companies’ house within 15 days of the general meeting.

Declaration of solvency

Declaration of solvency through a solvency statement in which it is declared clearly that company have sufficient assets to pay full debts After realization.

Solvency statement is declared by the directors of the company because they better know about the financial position of the company. The statement must contain full detail of all assets and liabilities.

The solvency statement must not more than five weeks ago the resolution passed to wind up the company.

The copy of solvency statement also sends to the registrar within 15 days of the meeting along with the resolution.

Appointment of liquidator

Appointment of liquidator by calling a meeting who started liquidation process to realize all the assets and then pay off the creditors

Liquidation report

A liquidation report is prepared by the liquidator on which detail of all assets with their carrying value and disposal value is given and then total of all assets which must be greater than the liabilities. This report should be send to all the members.

The remaining funds after paying creditors must be distributed between the shareholders/members.

Last meeting

After the completion of liquidation process a meeting is called by the liquidator to show the account of liquidation transactions and then

Dissolution of company name

After three months from liquidation process the name of company is also dissolved from the register of company names at companies’ house.