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Unit 10: Liquidation of Companies: Preparation of Accounts

notes
Example: As an example all cheques received should be handed to the proposed
Liquidator and not paid into an overdrawn bank account. Because of all the risks involved, it
is usually safest for the company to cease to trade immediately, and for effective control to be
handed to the proposed Liquidator.

10.1 process of liquidation

The process is started by the directors holding a board meeting and recognising that the company
is insolvent and ought to be placed into liquidation. A meeting of shareholders is convened to pass
an extraordinary resolution to place the company into liquidation and to appoint a Liquidator.
By law, this meeting requires 14 days notice. However, if the holders of 95% of the issued share
capital all agree to accept less than the statutory notice the notice period can be waived and the
company placed into liquidation immediately. This would normally be necessary if there were
a need for a Liquidator to take control of the assets straight away to protect them, for example,
from an unpaid creditor.
At the same time, a notice convening a meeting under Section 98 Insolvency Act 1986 is sent to
all creditors. The creditors meeting will be held generally immediately after the shareholders
meeting (unless this was held at short notice). A director must be present at the creditors meeting,
and preside as chairman. The Liquidator appointed by the shareholders must also attend the
meeting.
Whilst the director is chairman of the meeting, to all intents and purposes the meeting is run by
the proposed Liquidator. He will read through the Statement of Affairs (effectively a document
showing the assets and liabilities of the company at realisable values rather than book values) which
must be sworn by a director and a number of other ancillary documents to provide information
to the creditors. After that, the meeting will be opened to questions from the creditors. Generally,
questions about the documentation provided will be handled by the proposed Liquidator whilst
questions concerning the company’s history will be dealt with by the chairman.
Once questions have finished (there is no statutory time limit on the length of time allowed for
this) a vote is then taken on the appointment of the Liquidator. Whilst the shareholders may have
appointed the Liquidator, in an insolvent liquidation it is the creditors who stand to lose or gain
by the Liquidator’s actions, and hence they have the final say. If they wish, they can nominate an
alternative Liquidator, and whoever receives the most votes in value (i.e. By simple majority) is
duly appointed. In the overwhelming majority of cases, the creditors choose not to propose an
alternative Liquidator.
Further, creditors can appoint a Liquidation Committee (minimum 3 members, maximum 5)
who assist the Liquidator in determining matters of policy and with whom the Liquidator can
consult on matters of importance. Shareholders can also be represented on this committee but
against a backdrop of insolvency this is not normally recommended. Committees are nowadays
only found, as a rule, on larger and contentious cases.

Example: As an example all cheques received should be handed to the proposed
Liquidator and not paid into an overdrawn bank account. Because of all the risks involved, it
is usually safest for the company to cease to trade immediately, and for effective control to be
handed to the proposed Liquidator.

self assessment

State whether the following statements are true or false:
1. A director must not be present at the creditors meeting, and preside as chairman.

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