ACCA F4 - Corp and Business Law (ENG)

Part G Legal implications of companies in difficulty or in crisis  21: Insolvency and administration 327

A creditor who petitions on the grounds of the company's insolvency must show that the company is

unable to pay its debts. There are three permitted ways to do that.

(a) A creditor owed more than £750 serves the company at its registered office a written demand for

payment and the company fails to pay the debt or to offer security for it within 21 days.

If the company denies it owes the amount demanded on apparently reasonable grounds, the court

will dismiss the petition and leave the creditor to take legal proceedings for debt.

(b) A creditor obtains judgement against the company for debt, and attempts to enforce the

judgement. However they are unable to obtain payment because no assets of the company have

been found and seized.

(c) A creditor satisfies the court that, taking into account the contingent and prospective liabilities of

the company, it is unable to pay its debts. The creditor may show this in one of two ways:

(i) By proof that the company is not able to pay its debts as they fall due – the commercial

insolvency test

(ii) By proof that the company's assets are less than its liabilities – the balance sheet test

This is a residual category. Any evidence of actual or prospective insolvency may be produced.

A secured creditor might appoint a receiver to control the secured asset for the purpose of realising the

creditors' loan. If the receiver cannot find an asset to realise, the creditor might file a petition for

compulsory liquidation under (b).

3.2 The just and equitable ground

A dissatisfied member may get the court to wind the company up on the just and equitable ground.

A member who is dissatisfied with the directors or controlling shareholders over the management of the

company may petition the court for the company to be wound up on the just and equitable ground. For

such a petition to be successful, the member must show that no other remedy is available. It is not

enough for a member to be dissatisfied to make it just and equitable that the company should be wound

up, since winding up what may be an otherwise healthy company is a drastic step.

3.2.1 Examples: When companies have been wound up

(a) The substratum of the company has gone – the only or main object(s) of the company (its

underlying basis or substratum) cannot be or can no longer be achieved.

Re German Date Coffee Co 1882

The facts: The objects clause specified very pointedly that the sole object was to manufacture

coffee from dates under a German patent. The German government refused to grant a patent. The

company manufactured coffee under a Swedish patent for sale in Germany. A member petitioned

for compulsory winding up.

Decision: The company existed only to 'work a particular patent' and as it could not do so it should

be wound up.

Exam focus
point

FAST FORWARD