ACCA F4 - Corp and Business Law (ENG)

326 21: Insolvency and administration  Part G Legal implications of companies in difficulty or in crisis

Re Centrebind Ltd 1966

The facts: The directors convened a general meeting, without making a statutory declaration of solvency,

but failed to call a creditors' meeting for the same or the next day. The penalty for this was merely a small

default fine. The liquidator chosen by the members had disposed of the assets before the creditors could

appoint a liquidator. The creditors' liquidator challenged the sale of the assets (at a low price) as invalid.

Decision: The first liquidator had been in office when he made the sale and so it was a valid exercise of the

normal power of sale.

In a 'centrebinding' transaction the assets are sold by an obliging liquidator to a new company formed by

the members of the insolvent company. The purpose is to defeat the claims of the creditors at minimum

cost and enable the same people to continue in business until the next insolvency supervenes.

The Government has sought to limit the abuses during the period between the members' and creditors'

meetings. The powers of the members' nominee as liquidator are now restricted to:

 Taking control of the company's property,

 Disposing of perishable or other goods which might diminish in value if not disposed of

immediately, and

 Doing all other things necessary for the protection of the company's assets.

If the members' liquidator wishes to perform any act other than those listed above, they will have to apply

to the court for leave.

3 Compulsory liquidation

There are seven statutory reasons for the compulsory liquidation of a company, which can all be found in

Section 122 of the Insolvency Act 1986.

There are seven statutory reasons for the compulsory liquidation of a company, which can all be found in

Section 122 of the Insolvency Act 1986. We shall consider the two most important here.

Statutory reasons for compulsory liquidation

Company is unable to pay its debts

It is just and equitable to wind up the company

The parties who can apply for the compulsory liquidation of a company will depend on the reason being

cited.

In cases where the company is unable to pay its debts, it is a creditor who applies for the liquidation as a

last resort when the company has not settled a debt.

In just and equitable cases, it is usually the company itself, the members or directors that decide the

company should be wound-up.

The Government may petition for the compulsory winding up of a company:

 If a public company has not obtained a, trading certificate within one year of incorporation

 Following a report by Government inspectors that it is in the public interest and just and equitable

for the company to be wound up.

An administrator of a company may also apply for the company’s compulsory liquidation, on behalf of the

company, as a means of ending an administration process.

3.1 Company unable to pay its debts

A creditor may apply to the court to wind up the company if the company is unable to pay its debts. There

are statutory tests to prove that a company is unable to pay its debts.

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