Question

COMPANY LAW FOR ACCOUNTANTS:

Word limit: 1,000 words total!

QUESTION 1:

Dimyou Ltd is an electronics business making dimmer switches for lights recently incorporated by Alan and Karen, who were previously in a business partnership together. Both are directors and each holds half the shares in the company.

1. Before Dimyou Ltd was registered as a company Karen signed a lease ‘for and on behalf of Dimyou Ltd’ for factory premises that the company no longer needs. Advise Alan and Karen whether the company is bound by the contract, and if not whether Alan or Karen have any liability for it.

2. Karen is the director responsible for Health and Safety in the company. If she were to be injured in an accident at the company factory, would Karen be able to claim against the company? If Alan had not bought the correct insurance policy for the company, could Karen claim against Alan?

3. Alan and Karen have offered Nick the opportunity to invest in the company to raise capital. He will get a third of the shares in the company, leaving him equal with Alan and Karen, but Nick also wants to be a director and asks that the articles of association be changed to say that he will be director for life. Advise Nick whether this will be effective in ensuring he will be a director, and what else could be done to ensure he is made a director.

4. Dimyou Ltd borrowed £20,000 from Bigbank on 1^st February secured by a floating charge over the business and all its assets. On 1^st March they borrowed £10,000 from Midbank secured by what the documents say is a fixed charge over the company book debts.

Eric is owed £500 for work done for the company.

Alan has paid himself £5,000 from company funds without explaining the reason for the payment.

Dilli is owed £1,000 for goods supplied to the company under a retention of title clause.

If Dimyou Ltd were to go into insolvency, how might the liquidator distribute the assets of the company?

Answer 1

What is the role of a liquidator in the process of insolvency?

The role of a liquidator in a bankruptcy process is primarily designed to ensure the fair distribution of a bankrupt company's assets for the benefit of its creditors.

In many cases, a bankruptcy practitioner (a person authorized to act in connection with a bankruptcy firm) will try to restore the business if they believe it will provide better returns for creditors.

If the recovery of a company is not possible and the case is relatively straightforward, the authorized recipient may act as the company's cash flow. In more complex cases, they usually hire a private sector insolvency practitioner, usually an accountant or solicitor.

Current and former company officials have an obligation to cooperate with the official receiver and private liquidator. Under the Bankruptcy Act of 1986, failure to do so could result in imprisonment.

The role of insolvent trainees is compulsory cash flow:-

A compulsory liquidation arises when a debtor files a court order for a company's compulsory termination. If the petition is successful, the company is injured by the court and appointed as the Official Receiver (OR) Liquidator. Once the insolvent company is forced into liquidation, the directors are no longer in control of the business or its assets. The role of the liquidator is to take control of the business and sell the company's assets and distribute the proceeds to its creditors.

The official receiver will often send the liquidation process to a bankruptcy practitioner (IP). However, in the event of an OR compulsory liquidation, he or she will manage the paperwork, sell the property for repayment of the debt, and report to the concerned authorities on the conduct and conduct of the director.

Members’ Voluntary Liquidation:-

In contrast, this process is used to close a business with solvent. MVL is started automatically by the directors of the company and can only be used in cases where insolvency is not an issue. As part of the process, shareholders are required to issue a statutory notice of debt, which states that the business is solvent and can repay its creditors within 12 months.

The company hires a liquidator to sell the company's assets and make sure the company's debts are settled with income. He or she will collect all the money owed to the business and resolve any legal disputes. Shareholders receive their share capital from the liquidator.

This includes stock agreements, and ensures that all contracts he or she has completed, completed or modified in accordance with law, are registered with the company for VAT purposes. Finally, the liquidator files the latest company accounts until the business stops trading.