Unsecured creditors
When the above categories have been paid in full, a dis-
tribution may be made to ordinary unsecured creditors.
Where funds are insufficient to make a full payment,
those debts in the category abate equally (see the example
above).
Members
If all the above debts have been paid in full, a distribution
may be made to members. This is called a dividend and
is expressed as a percentage in the pound of the sum owed.
Obviously, there will not be a distribution to the members
where the company is insolvent but such a distribution
could be made in a members’ voluntary liquidation.
Swelling the assets
The assets available to the liquidator or administrator
(not an administrative receiver) can be increased where
prior to the administration or liquidation there have
been transactions at undervalue (s 238) and preferences
(s 239) (as where a creditor has been preferred over the
others). An example is to be found in Re Kushler(1943),
a case decided under previous legislation. In that case
ordinary creditors were ignored but the company paid
some £700 into its bank account merely to clear the
overdraft which the directors had personally guaranteed.
Repayment by the bank was ordered.
A further and common example of a preference con-
cerns the repayment of directors’ loan accounts. In many
smaller companies the directors may have lent money to
the company and it will repay these loan accounts so as
to avoid problems relating to repayment once an insol-
vency practitioner takes over. If the relevant repayment
is made within two years of the insolvency practitioner’s
appointment, as is often the case, it is recoverable by
him from the directors concerned and may be used to
pay the company’s debts in the prescribed order. A
major authority for this is the ruling of the court in Re
Exchange Travel (Holdings) Ltd(1996).
Under s 241 the court can set these transactions aside
and allow the liquidator to recover money or property
for the company. Preferences made in the six months
prior to administration or liquidation can be recovered.
If the preference is to a person connected or associated
with the company, e.g. a director or a relative of a dir-
ector (see s 435), the period is two years (see Re Exchange
Travel (Holdings) Ltd(1996)). Transactions at under-
value made up to two years before can be set aside,
whether the recipient was connected or associated with
Part 2Business organisations
192
the company or not. The company must have been in-
solvent at the time of such transaction or have become
insolvent as a result of it.Alternatives to liquidation:
company rescue proceduresThe two main alternatives most commonly used in
business as alternatives to liquidation and with a view to
company rescue are:
■placing the company into administration; and
■making a company voluntary arrangement.Administration
The Enterprise Act 2002 made significant changes in the
administration procedure. This was achieved by insert-
ing an additional Sch (B1) into the Insolvency Act 1986.The nature of administrationAn administrator of a company is a person appointed
under Sch B1 to manage the company’s affairs, business
and property. The effect of the Schedule is as follows:■Whether appointed by the court or not (under the
Schedule appointment may be out of court), an ad-
ministrator is an officer of the court and an agent of
the company and can only be appointed if qualified to
act as an insolvency practitioner.
■An administrator cannot be appointed if the company
has already been put into administration. Thus, an
appointment out of court cannot effectively be made
if the court has already made an appointment and vice
versa, although this does not affect provisions relating
to the replacement of an administrator nor the ap-
pointment of additional administrators if required.
■A company cannot be put into administration if:- the members have passed a resolution for a volunt-
ary winding-up; or - a compulsory winding-up order has been made by
the court.
However, in both of the above situations the liquida-
tor and/or the holder of a qualifying floating charge, i.e.