BLP WS12/13
Insolvency
Identify when a company is insolvent
Why is important to know when a company has become insolvent?
v Practical considerations
o Lack of ability to trade – buying new stock, paying wages etc.
o Buy back – cannot out of profits/capital – statement of solvency
v Directors
o The duty of directors to act in the best interests of the company changes on insolvency.
o Directors may be liable for wrongful trading if the company is insolvent.
v Loan finance
o Insolvency is likely to be an event of de fault that will enable holders of security to enforce their
security.
v The company may be wound up
o Creditors have to prove a company is unable to pay its debts for the court to wind up the company.
When is a company insolvent?
® s122(1)(f) Insolvency Act 1986:
ü A company may be wound up by the court if it is “unable to pay its debts”.
ü When a company will be “unable to pay its debts” is defined by s123.
Þ This is the main ground that a creditor must prove in order for the court to wind up the company.
ð s123 – A company is deemed unable to pay its debts:
ü (1)(a): If a creditor:
§ Is owed £750 or more.
§ Has been served a statutory demand (written notice) requiring the company to pay the sum and
§ The company has, for three weeks thereafter, failed to pay or come to an alternative arrangement with
the creditor.
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Insolvency
Identify when a company is insolvent
Why is important to know when a company has become insolvent?
v Practical considerations
o Lack of ability to trade – buying new stock, paying wages etc.
o Buy back – cannot out of profits/capital – statement of solvency
v Directors
o The duty of directors to act in the best interests of the company changes on insolvency.
o Directors may be liable for wrongful trading if the company is insolvent.
v Loan finance
o Insolvency is likely to be an event of de fault that will enable holders of security to enforce their
security.
v The company may be wound up
o Creditors have to prove a company is unable to pay its debts for the court to wind up the company.
When is a company insolvent?
® s122(1)(f) Insolvency Act 1986:
ü A company may be wound up by the court if it is “unable to pay its debts”.
ü When a company will be “unable to pay its debts” is defined by s123.
Þ This is the main ground that a creditor must prove in order for the court to wind up the company.
ð s123 – A company is deemed unable to pay its debts:
ü (1)(a): If a creditor:
§ Is owed £750 or more.
§ Has been served a statutory demand (written notice) requiring the company to pay the sum and
§ The company has, for three weeks thereafter, failed to pay or come to an alternative arrangement with
the creditor.
1
