If Pulse Finance Research Limited is insolvent, which insolvency processes would be available to it, and which would be most appropriate.

Issue

Insolvency Act 1986 (IA 1986) -

• s.8 & Schedule B1 - appointment of an Administrator by the court.
• s.122 - grounds for winding up of the company.
• s.124 - petition for winding up of company by a member.

Rule

When a company is insolvent, two kinds of insolvency procedures are available to the company: rescue insolvency and terminal insolvency. Rescue insolvency involves appointment of an administrator for the company who will come up with a plan that can be employed for the purpose of continuing the business, thereby avoiding winding up of the company. Terminal insolvency is applied where there is no merit in rescue operations and the company is to be wound up. In other words, the existence of the company would come to an end.

Wherever there is some possibility of continuing the business, rescue insolvency procedures ought to be initiated. This can be done in two ways: (a) the business can be allowed to continue to generate revenue; (b) it can be sold as a going concern. Where there is a possibility of realising higher values and greater returns for creditors by selling the company as a going concern, where sale of assets could not have realised competitive value or returns, this option is preferred.

There are two kinds of rescue schemes that are available under the Act: Company Voluntary Arrangement (CVA) 2 and Administration Order procedure.

Under the CVA, the company can appoint an insolvency practitioner, who acts as a nominee of the company and puts forth a scheme of arrangement to the unsecured creditors. 3 From the perspective of directors, CVA is attractive because directors retain certain controls over the company, including the appointment of nominee or supervisor. 4 CVAs can be proposed by the directors when the company is not actually in process of winding up.

IA 1986, s.8 read with the Schedule B1 provides for the appointment of an Administrator by the court on an application by the company or its directors. The Administrator is asked to formulate a plan for dealing with the company otherwise than by putting it into liquidation. 5 As per the provisions of Schedule B1, administrator may be appointed in one of the three ways: appointment by court, appointment by holder of a floating charge, or by the company or its directors. The administrator is an officer of the court 6 and must also be a qualified insolvency practitioner 7 . Pre pack sales are arrangements wherein the sale of the company’s assets are made by the administrator with the potential purchaser and the administrator sells the assets after his appointment. In Re Kayley Vending Ltd, 8 the court held that on application of administration order, it must be alert to see that a pre pack procedure is not being abused to the disadvantage of the creditors.

One difficulty with the rescue mechanism, particularly, administration procedure, is that is can be expensive. Terminal insolvency involves a complete and final winding up of the company, or in other words the ending of the company’s existence. The grounds for winding up of the company are provided under CA 1986, s.122 and they include inter alia: special resolution of the company for winding up (s122(1)(a)); the number of members reduced to 2 (s.122(1)(e)) and the company being unable to pay debts (s.122(1)(f)).

A contributory (member) is allowed to petition for the winding up of the company (IA 1986, s. 124). Every past and present member of the company is a contributory.

In case there is a question or locus standi issue related to a contributory to the petition, the court may first consider all the circumstances, including the likelihood of damages to the company if the petition is not dismissed.

The consequences of winding up is that firstly, winding up is deemed to commence from the date of the petition, unless the company passes a resolution for voluntary winding up. Where the winding up is compulsory, the directors are dismissed from office and the company’s management and assets come under the control of the liquidator. 12 The liquidator then has to wind up the company’s affairs, realise assets, pay off the creditors and give the balance to the shareholders. In cases where the company is solvent, the company can be voluntary wound up. This option requires obtaining a declaration of solvency. A company that is insolvent cannot exercise this option.

Application

In the present case, both the rescue as well as terminal insolvency procedures are available to Pulse Finance Research Limited. Pulse is appointing an Insolvency practitioner to advice them as to how they should conduct the affairs of Finance. Terminal insolvency would mean that Finance no longer exists and it will be wound up under the provisions of IA 1986, s.122 and 124. As the conditions of the company fall within the grounds available under s.122, specifically, the company being unable to pay its debts, this is possible.

Finance has made profits in the first two years of its existence but in the last three, Finance has posted loss. However, considering the network that Finance and Max have established, there is potential for Finance’s recovery in the future if given some time. In such a situation, rescue insolvency procedure under IA, Part I (CVA) or under s.8 and Schedule B1 (administration procedure) is more appropriate. The directors of the company may appoint an Administrator and allow him to come up with a plan of rescue for the company. Or alternatively, if the directors want more control and lesser expense, they may choose to appoint a nominee or supervisor under CVA provisions. Ultimately, rescue may involve sale of the company or carrying on the business for a time. This will help avoid the complete extinguishing of a concern that has the potential to make profits.

As the company is insolvent, voluntary winding up option is not available to them and compulsory winding up will have to be initiated. This would mean loss of control to the liquidator during winding up and ultimately the end of the company.

Conclusion

Pulse should initiate rescue insolvency procedures available under IA 1986.

References