www.parliament.uk/commons-library | intranet.parliament.uk/commons-library | papers@parliament.uk | @commonslibrary

BRIEFING PAPER

Number CBP4937, 12 November 2019

Compulsory liquidation of a company

By Lorraine Conway

Contents: 1. Introduction 2. Compulsory liquidation

procedure 3. Liquidator’s role and powers 4. Who will investigate the

failure of the company? 5. The position in Scotland 6. Corporate insolvency:

consultations on reform

2 Compulsory liquidation of a company

Contents Summary 3

1. Introduction 4 1.1 Statutory regime 4 1.2 When is a company insolvent? 4 1.3 Insolvency may trigger serious consequences 5 1.4 What procedures may be available to an insolvent company 5

2. Compulsory liquidation procedure 8 2.1 Who can petition for a compulsory liquidation order? 8 2.2 Appointment of a liquidator 8 2.3 What happens to the directors? 9 2.4 What happens to employees? 9 2.5 Realising company assets 9 2.6 Creditors’ claims: proof of debt 10 2.7 Payment of creditors 10 2.8 When will the liquidation process end? 12

3. Liquidator’s role and powers 13 3.1 Is the liquidator bound by contracts agreed prior to his appointment? 13 3.2 Is the liquidator bound by contracts agreed after his appointment? 14 3.3 Can a liquidator’s decisions be challenged? 14 3.4 Can a liquidator’s fees be challenged? 14

4. Who will investigate the failure of the company? 15 4.1 Official Receiver’s role 15 4.2 Scrutiny of the directors’ role 15

5. The position in Scotland 16

6. Corporate insolvency: consultations on reform 17

Cover page image copyright: Pound coins / image cropped. Licensed under CC0 Creative Commons – no copyright required.

3 Commons Library Briefing, 12 November 2019

Summary Compulsory liquidation (or winding up) is a legal process by which a liquidator is appointed by the court to wind-up the affairs of a limited company. A company is said to be insolvent if it has insufficient assets to cover its debts or is unable to pay its debts as and when they fall. It is the directors’ responsibility to know whether the company is trading whilst insolvent; they can be held responsible for continuing to trade in that situation (the offence of wrongful trading).

A company (or a limited liability partnership) can be put into compulsory liquidation by order of the court if it cannot pay its debts, usually on the petition of a creditor. A company is considered unable to pay its debts if a creditor presents a written demand for payment (known as “a statutory demand”) and it fails to pay the debt or secure a repayment plan with the creditor.

Compulsory liquidation involves the collection and realisation of company assets into cash and the distribution of this money to the company’s creditors (who often will not be paid in full). How long liquidation takes will depend on the complexity of the case. Once the process has been completed, with the liquidator sending his final accounts to the Registrar of Companies, the company will be dissolved – it will cease to exist.

This Commons briefing paper provides a summary of the compulsory liquidation process in England, Wales and Scotland. It includes information on the impact of liquidation on creditors, employees and company directors.

It should be noted that there are separate Library briefing papers on “Company Administration” (CBP 4915) and “Pre-pack administrations” (CBP 5035).

4 Compulsory liquidation of a company

1. Introduction

1.1 Statutory regime The following legislation provides the principal statutory regime governing insolvent companies:

(i) Insolvency Act 1986 (as amended) [the IA 1986];

(ii) Insolvency (England & Wales) Rules 2016, [the IR 2016]1 and the Insolvency (Scotland) Rules 1986;

(iii) Enterprise Act 2002 (the EA 2002), and

(iv) the Small Business, Enterprise and Employment Act 2015, [the SBEEA 2015].

The IR 2016 came into force in April 2017 and apply to insolvency proceedings in England and Wales irrespective of when those proceedings started. However, the IR 2016 do not impact on Scotland, where the Insolvency (Scotland) Rules 1986 apply.2

1.2 When is a company insolvent? A company is insolvent if it is unable to pay its debts. There are two tests for corporate insolvency:

(v) cash-flow test: is the company currently, or will it in the future, be unable to pay its debts as and when they fall due for payment?

(vi) balance sheet test: is the value of the company's assets less than the amount of its liabilities, taking into account as-yet uncertain and future liabilities?.

If the answer to either of these questions is yes on the balance of probabilities, then the company is deemed insolvent. Furthermore, a company is deemed insolvent, if:

• a creditor who is owed more than £750 has served a formal demand (known as a “statutory demand”) for an undisputed sum at the company's registered office and the debt has not been paid within the specified 21 days;3 or

• a judgement or other court order has not yet been satisfied.

1 SI 2016/1024 2 SI 1986/1915 3 A statutory demand is a formal written demand for payment of a debt within 21

days. If the debtor does not pay within the 21 days and either fails to apply to have it set aside (where the debtor is an individual), or fails to apply to restrain the creditor from presenting a winding-up petition, the creditor can use the statutory demand as grounds to present a petition to the court for a winding-up order.

5 Commons Library Briefing, 12 November 2019

1.3 Insolvency may trigger serious consequences

Much would depend on the exact circumstances, but the insolvency of a company may result in any of the following serious consequences:

• Insolvency may be considered an event of default under any banking facilities held by the company, thereby enabling the lender to take steps to enforce its security.

• Insolvency may also be a trigger event entitling suppliers and customers to take protective measures under contracts with the company. This might include termination of contracts and other enforcement measures.

• A creditor may petition for the compulsory winding-up of the company.

• Any disposal of company assets will be void once a winding-up petition has been presented to the court. A company can only sell goods or make payments for supplies, while a winding-up petition is in progress, if it has first obtained permission from the court.

• Once in compulsory liquidation, any transactions made at a preference or undervalue may be void. In effect, the liquidator can review all transactions made in the 2 years before the insolvency order and apply to the court to reverse those transactions if: (i) the company was insolvent at the time and (ii) the transaction took place for either less than the market value or gave certain creditors priority over others.

• Importantly, any potentially fraudulent transactions are reviewable by the liquidator without time limit.

1.4 What procedures may be available to an insolvent company

Compulsory liquidation is one of a limited number of corporate insolvency procedures, each of which is run under the control of an appointed insolvency practitioner (IP) who is professionally qualified and licensed.

In practice, a company can be placed into a formal insolvency procedure by its directors, shareholders, creditors or the court. How it is done will depend on the facts of each case and the procedure involved. Box 1 (below) provides an outline of the possible insolvency procedures available to a company.

6 Compulsory liquidation of a company

Box 1: Possible insolvency procedures available to a company

1. Administration - Administration is a collective corporate rescue procedure run for the benefit of all creditors, under which the company's assets are protected by a statutory 'moratorium' (or stop) on any forms of creditor action. Appointed administrators have the power to ‘trade on’ (i.e. continue) the business and may look to find a buyer for it. Administrations are commonly associated with 'pre-packaged' insolvency. Further detailed information is provided in two separate Library briefing papers, namely: “Company Administration” (CBP 4915) and “Pre-pack administrations” (CBP 5035).

2. Administrative receivership – This is a process under which the holder of a floating charge4 against the company (which pre-dates 15 September 2003) appoints a receiver-manager to collect in and sell the company's assets to pay off its secured debt. The floating charge holder will usually be a bank. Crucially, administrative receivers are not authorised to pay unsecured creditors (unless they have court approval). To pay unsecured creditors, the company must pass into liquidation. (It should be noted that due to changes in the law5, administrative receivership has been largely replaced by administration.)

3. Company Voluntary Arrangement (CVA) - A CVA is a legally binding agreement between a

company and its creditors. Under a CVA, creditors will typically agree to a reduced or rescheduled debt arrangement which will allow the company to survive. CVAs are supervised by Insolvency practitioners and are sometimes used in conjunction with the administration procedure.

4. Scheme of Arrangement – This is a court approved legal arrangement between a company and

its creditors. The process is more complicated than a CVA, and for this reason will usually only be used for large companies and those with a significant number of classes of creditor or shareholder.

It is important to note that CVAs and Schemes of Arrangement rarely interfere with the rights of secured creditors (e.g. banks and other debenture holders). In practice, unsecured creditors (e.g. suppliers, customers etc) will usually accept a CVA or Scheme of Arrangement if there is a greater prospect of them recovering payment of their debts than if the company was forced into compulsory liquidation.

5. Creditors’ Voluntary liquidation (CVL) – A CVL is the winding up of an insolvent company at the instigation of its directors and is commenced by a resolution of the members (shareholders), who can appoint a liquidator. Most of the rules relating to the conduct of a CVL are the same as (or like) those applicable to a compulsory liquidation.6

6. Compulsory liquidation or winding-up – This occurs when a company is wound up by an order of the court, usually on the petition of a creditor. The purpose of the winding-up order is to appoint a liquidator whose duty it is to collect in and realise the assets of the company and

4 A floating charge is a charge taken over all the assets or a class of assets owned by a

company from time to time as security for borrowings or other indebtedness. The charged assets can be bought and sold during the course of the company’s business without reference to the charge-holder. The floating charge is said to “crystallise” if there is a default or insolvency. At that stage, the floating charge is converted into a fixed charge over the assets which it covers at that time.

5 Enterprise Act 2002 (as amended) 6 It is also possible to have a Members’ Voluntary Liquidation (MVL). Strictly speaking

this is not really an insolvency procedure as it is a condition of an MVL that the company is able to pay its debts and the costs associated with the liquidation in full within 1 year of the commencement of the liquidation. An MVL is commenced by resolution of the members (i.e. shareholders) of the company when the continued existence of the company is no longer necessary or when the period for which it was established has come to an end. A liquidator (a licenced insolvency practitioner) is appointed by the members to wind-up the company’s affairs.

7 Commons Library Briefing, 12 November 2019

distribute the proceeds to creditors in accordance with a hierarchy set-out in the IA 1986. At the end of the liquidation, the company is dissolved, and its name will be removed from the Companies Register.

The first four procedures have the “potential” to rescue the company or its business, while the last two do not.

The remainder of this paper is concerned only with compulsory liquidation.

8 Compulsory liquidation of a company

2. Compulsory liquidation procedure

2.1 Who can petition for a compulsory liquidation order?

All compulsory liquidations start with the presentation of a winding-up petition at the High Court or a County Court with the appropriate jurisdiction. Often, a company is placed into compulsory liquidation on the petition of one of its creditors. However, any of the parties set out in section 124 of the IA 1986 may present a petition, including:

• the company itself;

• the company's directors or one or more members;

• the supervisor of a voluntary arrangement;

• the administrative receiver or administrator

• the Secretary of State for Business, Innovation and Skills (on the grounds of public interest);

• the Financial Conduct Authority (formerly the Financial Services Authority); or

• the Official Receiver

The petitioner must serve a copy of the petition on the insolvent company and must, in due course, give notice of the petition in the “The Gazette”.

At the court hearing, the company has an opportunity to oppose the winding-up petition. Ultimately, it is for the judge to decide whether to make an order, dismiss or adjourn the petition.7 The court will only make an order if one of the grounds for winding up a company (as set out in section 122(1) of the IA 1986) are met. The most common ground used is that the company is unable to pay its debts as they fall due. If an order is made, the compulsory liquidation is deemed to start from the date when the petition for winding up was presented.

2.2 Appointment of a liquidator On the making of a liquidation order, the Official Receiver is initially appointed liquidator by the court.8 Subsequently, creditors and contributories9 may appoint another individual, being a registered insolvency practitioner, to act as liquidator.10

7 Section 125, Insolvency Act 1986 8 Section 136, Insolvency Act 1986 9 A “contributory” is a person liable to contribute to the assets of a company on its

winding up and every past and present member of the company, subject to certain exceptions to protect the principle of limited liability. In practice, contributories tend to be shareholders who have not paid for their shares in full (section 79, Insolvency Act 1986)

10 Section 139, Insolvency Act 1986

9 Commons Library Briefing, 12 November 2019

The appointment of a private sector insolvency practitioner as liquidator in place of the Official Receiver is only an option where there are sufficient assets to meet the expenses of the liquidation. If the assets of the company are insufficient to meet this expense, the Official Receiver will remain in office to wind-up the company. In either case, the appointed liquidator is an officer of the court.11 As such, he has a duty to act fairly and impartially.12

Even if a private sector liquidator is appointed, the Official Receiver has a statutory duty to investigate the cause of the company’s failure and the actions of directors come under scrutiny (see below). The Official Receiver must report any evidence of wrongdoing or potential misconduct by the directors, to the Secretary of State for BEIS.

2.3 What happens to the directors? Once a compulsory liquidation order has been made by the court, the directors no longer have any control over the company; the Official Receiver (or the appointed liquidator) takes over the reins.13 However, directors have a statutory duty to co-operate with the liquidator and must identify all assets and liabilities of the company and provide details of its affairs.14

2.4 What happens to employees? In most cases, a compulsory liquidation order will result in the automatic dismissal of the company’s employees. The Employment Rights Act 1996 and the IA 1986 provide several avenues via which an employee might seek payment of debts owed to him or her by an insolvent employer. The avenues fall into two broad categories:

• First, the Secretary of State pays certain debts owed to employees via the Redundancy Payments Service.

• Second, employees may seek payment from the company’s assets through insolvency proceedings.

Further detailed information about the options open to an employee is available from a separate Library’s briefing paper, “Employment rights and insolvency” (CBP 0651).

2.5 Realising company assets In a compulsory liquidation, once the appointed liquidator has taken control of the company, he is under a statutory duty to act in the interests of all the creditors and to ensure an orderly winding-up of the company. This may involve:

• ensuring all company contracts (including employment contracts) are completed, transferred or ended;

• ceasing the company’s business;

11 Re Oasis Merchandising Ltd (1998) Ch. 170 12 Condon, ex parte James [1874-80] All ER Rep. 388) 13 Measures Brothers Ltd v Measures [1910] 2 Ch 248 14 Section 131, Insolvency Act 1986

“Liquidator of last resort”

10 Compulsory liquidation of a company

• selling any assets;

• collecting in money owed to the company;

• settling any legal disputes; and

• distributing any funds to creditors

The main function of the liquidator is to realise and distribute the assets of the company. The liquidator has a duty to creditors to dispose of the assets for the best possible price. The aim is for creditors to receive as large a return as possible (after the costs and expenses of the liquidation have been paid).

A liquidator may apply to court for an order restoring property which a company has disposed of in a way that is unfair to their creditors. For example, if property was transferred to a person connected to the company for less than its full value immediately before the company went into liquidation. In certain limited circumstances, a liquidator may begin a court action against the directors or former directors personally (for example, for the offence of wrongful trading) for the benefit of creditors (see below).

2.6 Creditors’ claims: proof of debt Once the court has made a compulsory liquidation order, all creditors (including employees) must formally register their claim (known as a “proof of debt”). This is done by notifying the liquidator of their claim in writing, supported by evidence of the debt if required. In liquidations, generally all debts are “provable”. This means that the liquidator will “admit” the claim provided he is satisfied that the debt is owed.

The body of creditors are entitled to receive reports on the progress of the liquidation from the liquidator.15 They can also form a liquidation committee with at least two other creditors, to help the liquidator fulfil his functions.16

Importantly, there is an automatic stay (i.e. “stop”) of legal proceedings against the insolvent company or its assets.17 If a creditor wants to bring or pursue legal proceedings against the company, they must first apply to the court for permission.18

2.7 Payment of creditors The order in which creditors are paid is prescribed by law, Schedule 6 of the IA 1986, as outlined in Box 2 (see below).

It is important to note that creditors who have the benefit of security for their debt, are entitled to be paid from the proceeds of sale of the secured assets (subject to certain exceptions). Whilst preferential creditors are paid before unsecured creditors.

15 Rule 7.48, 18.3 and rule 18.14, IR 2016 16 Section 141, Insolvency Act 1986 and rule 17.3, IR 2016 17 Section 130, Insolvency Act 1986 18 This stay does not generally extend to the enforcement of security or the forfeiture of

a lease

The main duty of the liquidator is to realise company assets and pay its creditors.

11 Commons Library Briefing, 12 November 2019

Claims by unsecured creditors are paid by the liquidator on a “pari passu” basis.19 In other words, all unsecured creditors must share equally any available cash in proportion to the debts due to each creditor. Unsecured creditors may receive a dividend paid “pro rata”20 at the end of the liquidation; in some cases, an interim dividend may also be paid.

How much the creditors will recover will depend on many factors including, the value of company assets and the total number of creditors. It is often the case that the dividend to unsecured creditors is just a few pence in the pound or is nothing at all.

Box 2: Statutory hierarchy in the payment of creditors’ claims

Under the IA 1986, creditors of a company in compulsory liquidation are paid according to a descending order of priority as follows:

• Secured creditors (also known as ‘fixed charge holders’) have their debt secured against a specified asset of the company (e.g. a bank or other mortgage lender who has security against a property). On the insolvency of the company, the secured creditor can sell the secured asset so to recover payment of his debt (after the costs of realisation have been deducted).

• Expenses of the liquidation (e.g. insolvency practitioners' fees).

• Preferential creditors are unsecured debts which, by statute, are to be paid in priority to all other

unsecured debts. Preferential debts primarily consist of employees’ arrears of wages, accrued holiday pay, unpaid contributions to occupational pension schemes and state scheme premiums (subject to certain strict limits).

• Prescribed part – This is an amount which must be set aside by the liquidator for the benefit of unsecured creditors. It is calculated as a proportion of the amount of assets which are subject to any floating charge created after 15 September 2003. The size of the fund will depend on the value of the assets but can be up to a maximum of £600,000.

• Any creditor holding a floating charge over an asset. A “floating charge holder” is usually a bank which takes a floating charge as security for its financial exposure to the company. Unlike a fixed charge, a floating charge does not attach to a specific item of company property. Instead it is a charge on those company assets which are constantly changing (e.g. stock, book debts and work in progress). On insolvency (or if the company defaults on the terms of a loan for any other reason) then the floating charge is said to “crystallize”. At that stage the floating charge is converted to a fixed charge over the assets which it covers at that time.

• All unsecured creditors' claims – Unsecured creditors (also known as “ordinary creditors”) are all other non-secured and non-preferential creditors and are the last external creditors to be paid. Trade debts (e.g. unpaid for supplies) and unpaid taxes (e.g. VAT) are examples of unsecured debts. When all claims have been adjudicated or provided for, the liquidator will declare a dividend. The dividend will be a percentage (pence in the pound) of each creditor’s total admitted claim, based on the cash available for distribution to the creditors and the total of all creditors’ claims. All unsecured creditors are treated equally.

• shareholders will be the last class of creditor to receive a distribution; they will only receive a dividend after everyone else has been paid in full. In a compulsory liquidation it is rare for shareholders to receive anything at all.21

19 Pari passu means “equal in right of payment” 20 Pro rata means “proportionately allocated” 21 It should be noted that shareholders of a company that has gone into liquidation can

be held liable for company debts, but the liability is limited to the value of their

12 Compulsory liquidation of a company

2.8 When will the liquidation process end? The compulsory liquidation process is complete when all the assets have been realised, all creditors’ claims have been adjudicated (where there are sufficient funds) and net realisations after expenses of the liquidation have been distributed to the creditors. The final formality is for the Registrar of Companies to receive either:

• notice from the liquidator of the final meeting of creditors; or

• notice from the Official Receiver that winding-up is complete

The Registrar then registers completion of the winding-up process.

Unless a request has been made to postpone the dissolution of the company, the company is dissolved after three months and will cease to exist.22 How long the whole liquidation process takes will depend on a number of factors, including the size of the company and the complexity of the case (for example, the number and location of company assets and the number of creditors).

shareholding. For instance, if a person’s shareholding is £100 that would be the limit of their liability. If the £100 is fully paid up, the shareholder is deemed to have paid the liability and will not be asked to contribute more by the liquidator. However, where there is uncalled capital (i.e. the £100 stake has not been paid in full) the liquidator can ask the shareholder for the full amount.

22 Unlike administration, where jobs may be saved if a buyer can be found to take over all or part of the business as a “going concern”. Employees may be transferred to the buyer with their rights protected under special rules that apply to transfers of undertakings.

13 Commons Library Briefing, 12 November 2019

3. Liquidator’s role and powers As already mentioned, the primary objective of the appointed liquidator (whether the Official Receiver acting as liquidator or a private sector insolvency practitioner) is to collect in and realise the insolvent company’s assets, and to distribute the proceeds to the company’s creditors.23

To achieve this objective, a liquidator has wide-ranging powers under Schedule 4 to the IA 1986. Such powers include bringing legal proceedings in the name of the company, carrying on the business of the company, and paying debts.

Some of the liquidator’s powers can only be used with the permission of the creditors' or liquidation committee or the court, while others can be used without permission. By way of illustration, the following powers can only be used by the liquidator with the permission of the committee or the court:

• carry on the business of the company so far as may be necessary for the benefit of the creditors;

• bring or defend legal actions relating to the property of the company; and

• come to a binding compromise with creditors of the company about their debts

If no committee is appointed, then the Secretary of State acts as the committee (in practice this will be the Insolvency Practitioner Unit of the Insolvency Service, acting on behalf of the Secretary of State). The liquidator then needs the permission of the Secretary of State or the court to use these powers.

Powers the liquidator can use without any permission include: • sell the property of the company;

• act and to sign documents in the name of, and on behalf of, the company;

• employ an agent; and

• to do all other things necessary for winding-up the company.

3.1 Is the liquidator bound by contracts agreed prior to his appointment?

An important question is whether the liquidator is bound by contracts entered in to by the company prior to his appointment. The answer is 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

23 Section 143, Insolvency Act 1986

Primary objective of the liquidator

14 Compulsory liquidation of a company

party that has acquired a beneficial interest in property of the company will still be able to enforce it.

3.2 Is the liquidator bound by contracts agreed after 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.

3.3 Can a liquidator’s decisions be challenged?

The liquidator’s decision in relation to any proof of debt may be challenged by a creditor or a contributory under rules 15.33 and 14.8-14.9 of the IR 2016.

In certain circumstances, a liquidator may be removed by a court order or a meeting of the company’s creditors. However, the court (and presumably the company’s creditors) would need to be satisfied that it was in the best interests of a compulsory liquidation to do so.24

3.4 Can a liquidator’s fees be challenged? The liquidator’s fees are generally paid as an expense of the compulsory liquidation. This means that the liquidator is paid out of the company’s assets, after secured creditors holding fixed charge security have been paid; but in priority to creditors who either have no security or have a floating charge security over the company’s assets.

The rules relating to how a liquidator’s fees may be fixed are set out in rules 18.16 to 18.20 of the IR 2016. In certain circumstances, creditors may be able to challenge the level of the liquidator’s remuneration under rule 18.28 and 18.34 of the IR 2016.

A separate Library briefing paper on “Insolvency practitioners’ fees” (CBP 7402) provides further information.

24 Section 172, Insolvency Act 1986

15 Commons Library Briefing, 12 November 2019

4. Who will investigate the failure of the company?

4.1 Official Receiver’s role The Official Receiver is under a statutory duty to investigate the causes of the company’s failure and the actions of directors are subject to scrutiny. If the Official Receiver thinks that the conditions for disqualification are satisfied, he will report the matter to the Secretary of State.25

4.2 Scrutiny of the directors’ role

Box 3: Responsibility of directors on insolvency of the company

• If the company is insolvent, the directors have a duty to put the interests of creditors ahead of all other interests.

• If the directors continue to trade the company’s business beyond the point when insolvent liquidation becomes unavoidable they risk serious personal and professional consequences.

It is a long-established principle of company law that directors must act in the best interests of their company, but once the company approaches insolvency, their first duty must be to the creditors. Once it has been established that the company cannot pay its debts as and when they fall due, a responsible director should take steps to protect creditors, and if a solution to the problem cannot be found, the company may enter formal insolvency proceedings.

It is important to note that under insolvency and company legislation, there are provisions regarding criminal offences and unfit conduct by directors. An irresponsible director may be subject to disqualification proceedings, which if successful will prevent them from acting as a director of a company, whether formally appointed or not, for a period of between 2 and 15 years. The Government are responsible for disqualification of unfit directors via the Insolvency Service. A person who acts as a director while disqualified is committing a criminal offence and, further, they are personally liable for any debts of the company incurred while they were breaching the disqualification.

An investigation may also lead to evidence of criminal offences committed by directors, such as fraud. In those cases, directors may face prosecution as well as disqualification proceedings.

Whatever measures are taken, the process will usually start – this is the relevant point – with the receipt of a report on the conduct of the directors, which must usually be submitted by the liquidator within 3 months of their appointment.

Further detailed information is provided in a separate Library briefing, “Company insolvency: potential liabilities of directors”, (CBP 7936).

25 Sections 7 and 7A, Company Directors Disqualification Act 1986

Disqualification of directors

16 Compulsory liquidation of a company

5. The position in Scotland The procedures governing corporate insolvency in Scotland and England and Wales are broadly similar, with the IA 1986 being the governing statute in both jurisdictions. However, there are some key differences, including:

• In England and Wales, the Official Receiver (an officer of the court) will take insolvency appointments. Consequently, private sector insolvency practitioners require consent to act in any corporate insolvency. In Scotland, there is no Official Receiver, this means there is no “liquidator of last resort”.

• There is no Law of Property Act (LPA) Receiver in Scotland the only type of receivership available in Scotland is Administrative Receivership (under Chapter 2 of Part 3 of the IA 1986).

• There are different procedures for approving fees. In Scottish insolvencies, there is no ability to agree fees in advance with the creditors, rather there is a retrospective approval of accounts. Fees can be approved by creditors or by the court.

• There is no statutory power to disclaim onerous property or contracts in a Scottish insolvency, equivalent to sections 178 or 179 of the IA 1986. However, there are common law rules in relation to how insolvency practitioners should deal with onerous property and contracts.

17 Commons Library Briefing, 12 November 2019

6. Corporate insolvency: consultations on reform

Recently, the Department for Business, Energy & Industrial Strategy (BEIS) has consulted on insolvency law and corporate governance. It published three separate consultations, namely:

• “A Review of the Corporate Insolvency Framework: A consultation on options for reform", which was published by the Insolvency Service in May 2016. The Government consulted on four proposals: creating a new moratorium; helping businesses to continue trading through the restructuring process; developing a flexible restructuring plan; and exploring options for rescue financing. The consultation closed on 6 July 2016 and the Government published a summary of responses on 28 September 2016.

On 9 February 2018, Stephen McPartland MP, Chair of the Regulatory Reform Committee, called on the Government to bring forward proposals to reform the insolvency framework. Various commentators had raised concerns about the ability of the Insolvency Service to deal with large corporate failures such as Carillion plc.

• “Insolvency and Corporate Governance”, which was published by BEIS in March 2018. Views were sought on new proposals to improve the governance of companies when they are in, or approaching, insolvency. Proposals include: directors responsible for the sale of an insolvent subsidiary of a corporate group to take proper account of the interests of the subsidiary’s stakeholders; reversal of value extraction schemes; investigation into the actions of directors of dissolved companies; and strengthening corporate governance in pre-insolvency situations. The consultation ended on 11 June 2018.

• Tax Abuse and Insolvency” was published by HMRC on 11 April 2018. This discussion paper followed the Autumn Budget 2017 and Spring Budget 2018 in which the Government announced that it would explore ways to tackle those who deliberately abuse the insolvency regime in trying to avoid or evade their tax liabilities, including through the use of phoenixism.

A separate Library briefing paper, “Corporate insolvency: consultations on reform” (CBP 8291) looks considers all three consultations in detail.

BRIEFING PAPER Number CBP4937 12 November 2019

About the Library The House of Commons Library research service provides MPs and their staff with the impartial briefing and evidence base they need to do their work in scrutinising Government, proposing legislation, and supporting constituents.

As well as providing MPs with a confidential service we publish open briefing papers, which are available on the Parliament website.

Every effort is made to ensure that the information contained in these publicly available research briefings is correct at the time of publication. Readers should be aware however that briefings are not necessarily updated or otherwise amended to reflect subsequent changes.

If you have any comments on our briefings please email papers@parliament.uk. Authors are available to discuss the content of this briefing only with Members and their staff.

If you have any general questions about the work of the House of Commons you can email hcenquiries@parliament.uk.

Disclaimer This information is provided to Members of Parliament in support of their parliamentary duties. It is a general briefing only and should not be relied on as a substitute for specific advice. The House of Commons or the author(s) shall not be liable for any errors or omissions, or for any loss or damage of any kind arising from its use, and may remove, vary or amend any information at any time without prior notice.

The House of Commons accepts no responsibility for any references or links to, or the content of, information maintained by third parties. This information is provided subject to the conditions of the Open Parliament Licence.