Insolvency

Bankrupt individuals

Bankruptcy proceedings under the jurisdiction of a bankruptcy court allows the property of a debtor to be seized. That property may then be realised and, subject to certain priorities, distributed rateably amongst the people to whom the debtor owes money. 1

Bankruptcy is only applicable to individuals and not to companies.

A debtor may enter into a "voluntary arrangement" with creditors regarding payment of his/her debts. 2 Such an arrangement ceases in the event that a debtor is made bankrupt.

There is no bar to initiating a prosecution against individuals who are bankrupt 3 but guidance should be sought in such cases from line managers and the Procurator Fiscal.

However issues may very well arise as to the payment of fines, (no costs in Scotland) or compensation imposed on a bankrupt, for the bankrupt's property and funds will be in the hands of his/her trustee in order that the latter may distribute them to the creditors. Questions of public interest may nevertheless weigh in favour of prosecution as, for example, it may be more appropriate to invoke the court's power to disqualify a person as a director.

An undischarged bankrupt is in any event prohibited from acting as a director or taking part or being concerned directly or indirectly in the promotion, formation or management of a company except with the permission of the court by which he was adjudged bankrupt during the currency of his bankruptcy. 4 Solicitor's Office guidance should be sought in cases where it is proposed to prosecute a bankrupt.

Bankrupt partners

In the case of partnerships, proceedings may be commenced or continued against individual partners who are bankrupt, but guidance should be sought.

Insolvent companies

There are several forms of company insolvency. If the search reveals that a company is insolvent, certain procedures must be followed in order to prosecute that company. These vary according to the type of insolvency in question. It is therefore important that you correctly advise the PF as to which form of insolvency applies, as the PF may need to apply to the court for leave to commence proceedings. This is so where a company is the subject of a compulsory winding- up order.

A search at Companies House should reveal whether a company is the subject of one of the several procedures connected with company insolvency. Of these, the most important are:

  • administration;
  • voluntary winding up;
  • compulsory winding up.

A company in the course of either form of winding up is said to be "in liquidation".

At the completion of the winding up process, the company is dissolved.

Administration may be succeeded by winding up, but a company that is in liquidation may not be placed under administration.

Administration

The administrator must send a notice of his/her appointment to the company and each of its creditors, and publish notice of his/her appointment in the official newspaper of record, the Gazette: for Scottish companies this is the Edinburgh Gazette which can be obtained from the Stationery Office, 73 Lothian Road Edinburgh.

No proceedings may be commenced or continued against a company in administration except with the consent of the administrator or the leave of the court. If the court gives leave it may impose terms or conditions. 5

The rules governing administration were amended under the provisions of the Enterprise Act 2002 (EA 2002). A company goes into administration when an administrator is appointed to manage the company's affairs, business and property. A person may be appointed as administrator of a company in one of three ways: by an order of the court as the holder of a floating charge, or by the company (or its directors). 6

Alternatively, the holder of a floating charge, or the company itself or its directors can appoint an administrator by filing a notice of appointment with the court. From the time of filing the notice, an interim moratorium on insolvency and other legal proceedings being taken against the company is effective. In all cases the administrator appointed will be an officer of the court and the court will therefore have supervisory jurisdiction over administrators (which is a significant distinction from the case of administrative receivers).

The administrator must perform their function with the objective of (a) rescuing the company as a going concern; or (b) achieving a better result for the company's creditors than would be likely if the company was wound up; or (c) realising property in order to make a distribution to one or more secured/preferential credits. 7 The administrators must perform their functions with the objective of rescuing the company as a going concern unless they think that it is not reasonably practicable to do so – or objective (b) would achieve a better result for the company's creditors as a whole. 8

Where the court is satisfied that a company is or is likely to become unable to pay its debts, it may make an administration order in relation to it, if it considers that the order is reasonably likely to achieve the purpose of the administration as set out above. 9 The holder of certain types of 'floating charge' (see 'Proceeding against companies in compulsory winding-up') in respect of a company's property and the company itself (or its directors) may, in limited circumstances, 10 appoint an administrator.

No legal proceedings may be instituted or continued against a company in administration except with the consent of the administrator or the permission of the court. 11 A company in administration cannot go into liquidation (ie be wound up), except in very limited circumstances. 12 Where the company is already in liquidation (ie being wound up) the company cannot also go into administration unless:

  • in the case of a voluntary winding-up, the court makes an administration order upon the application of the liquidator
  • in the case of compulsory winding-up, the court makes such an order upon the application of the liquidator or holder of a floating charge. 13

If the court makes an order in respect of a company in compulsory liquidation, they must discharge the winding-up order. 14 A company in administrative receivership (see below) cannot go into administration except in limited circumstances. Where these circumstances apply and the company do go into administration, the administrative receiver must vacate their post. If the company has a receiver at the time that they go into administration, the receiver shall vacate their post if required to do so by the administrator.

Winding-up/Liquidation

A company may be wound up in either of two ways:

  • voluntary winding-up by resolution of the company or its creditors;
  • compulsory winding-up most commonly on the application of a creditor to the court.

In voluntary winding up the registrar of companies must be notified by the liquidator as soon as s/he forms the opinion that the company will be unable to pay its debts. 15

A compulsory winding up must also be notified to the registrar. 16

The particulars from Companies House 17 should specify the form of winding-up where a company is in liquidation. To double check whether a compulsory winding-up order has been made, you should telephone the general enquiry line of the Insolvency Service (020 7291 6895) quoting the company number.

Proceeding against a company in voluntary winding-up

It is possible to proceed against a company in voluntary liquidation. There is no prohibition on doing so where there has been no winding-up petition made to a court or winding-up order made. Whether this is an appropriate course of action will depend on the circumstances of each case and should be agreed with the Procurator Fiscal. It may be desirable for example where the directors of the company intend to set up a new company after the present company is wound up, or where the winding up is part of a takeover.

Where there is evidence that one or more directors have a history of setting up new companies, after winding up their previous company, it may be appropriate to bring proceedings under section 37 HSWA, against the directors as well as the company.

Proceeding against companies in compulsory winding-up

Once the 'winding up' petition has been presented, but before the winding up is ordered, the court may, on an application by a creditor, the company or contributory restrain proceedings commenced prior to the petition. 18 This section is widely drafted and would include criminal procedure, which in Scotland could be "sisted" or stayed under this provision. No proceedings can continue against a company, once the order has been made, without the leave of the court. 19 In such cases you should consider proceeding against directors, but advice should be sought from the PF.

Receivership

The creditors of a company in Scotland will hold either a standard security or a floating charge over a company's assets. A standard security is a 'fixed charge' secured on particular property a 'floating charge' is secured on the assets of a company generally.

Remedies are available to secured creditors who are concerned about the recovery of their debt. A floating charge holder may appoint a receiver. The receiver has the powers set out in the instrument of appointment and also additional statutory powers. 20

A company in receivership is not necessarily insolvent, and the appointment of a receiver does not necessitate of itself the company's winding up. This means that the company may be proceeded against.

Proceeding against the Receiver

It will not usually be appropriate to proceed against the receiver personally, though the terms of appointment may be so wide as to make the receiver a 'person in control' of premises for the purposes of s.4 HSWA. No proceedings against a receiver should be commenced without consulting the Solicitor's Office.

Dissolved companies

Once a company is dissolved it ceases to exist and therefore cannot be prosecuted. Under Section 651 Companies Act 1985 the liquidator or any person appearing to the court to be interested can apply for an order declaring that the dissolution of the company is void. If such an order is made proceedings may be taken as if the company has never been dissolved.

Where there is a voluntary winding-up, a liquidator is appointed to distribute the assets of the company to creditors and then to distribute any surplus to those entitled to it. As soon as the company's affairs are fully wound up, the liquidator must make an account of what they have done and call a general meeting of the company.

After such a meeting, the liquidator sends the account and confirmation of the meeting to the registrar of companies, who registers this on the company register. 21 The company is then deemed to be dissolved on the expiry of 3 months from the date of the registration. Any interested person may apply to the court for an order deferring the date at which the company is dissolved. 22

Where the company has been wound up by the court, the company will be dissolved at the expiry of 3 months following the liquidator registering the court order with the registrar of companies.

Striking off of non-trading private companies

Where a private company has not been trading for three months, a majority of the directors may make an application for its name to be struck off the Companies Register, subject to a number of conditions. 23 The registrar will first publish a notice in the Gazette warning of the intention to do so and inviting objections. 24 Three months later, a further notice will advise that the company has been struck off and at this point the company is dissolved. 25

A similar power is given to the registrar of companies to dissolve a company on notice. 26 Such dissolution does not affect the continuing liability of directors, managing officers or members of the company under companies' legislation. 27

When an application is made to strike off a non-trading company, notice of this fact must be given to certain persons, including employees and creditors. 28 You may therefore receive notice from an injured employee that an application has been made, or you may receive notification directly, although the directors are not obliged to notify you.

HSE may consider making representations to the registrar to show cause why the company should not be struck off the register 29, on the ground that proceedings against it are either contemplated, or in progress. The registrar then has discretion to refuse the application. You should consult the PF before making any such objection to discuss the merits of so doing.

When carrying out a company search at Companies House you may see that the register for a company categorises it as a "non-trading company". It can be non-trading in the sense that it isn't doing business but it may still have other accounting transactions going through its books, which means that it is not dormant in a legal sense. There is no bar to taking legal action against a company described as "non-trading". However, in such a case you should make further enquiries about the company, eg when it became "non-trading", if it is going through any insolvency process, whether an application has been made to strike it off Companies Register, what assets it has etc, in order to inform any decision on legal action. Note that a dormant company will not have any accounting transactions except specific allowable ones that can be disregarded and if it is to remain dormant there can be no paid employees because their wages would have to be recorded in the accounting records.

Footnotes

  1. Sections 252-256 Insolvency Act 1986. Back
  2. Sections 264-371 Insolvency Act 1986. Back
  3. The Insolvency Act 1986 s.285 sets out a power of a court to stay legal action against a bankrupt, but this is discretionary, and aimed at protecting the bankrupt's estate for his creditors. Back
  4. Company Directors Disqualification Act 1986 s.11(1). Back
  5. Insolvency Act 1986, Schedule B1 paragraph 43. Back
  6. Insolvency Act 1986, Schedule B1, paragraph 2. Back
  7. Insolvency Act 1986, Schedule B1, paragraph 3(1). Back
  8. Insolvency Act 1986, Schedule B1, paragraph 3(1). Back
  9. Insolvency Act 1986, Schedule B1, paragraph 11. Back
  10. see Insolvency Act 1986, Schedule B1, paragraphs 14-39. Back
  11. Insolvency Act 1986, Schedule B1, paragraph 43(6). Back
  12. Insolvency Act 1986, Schedule B1, paragraph 42. Back
  13. Insolvency Act 1986, Schedule B1, paragraphs 8, 37 and 38. Back
  14. Insolvency Act 1986, Schedule B1, paragraphs 37(3)(a) and 38(2)(a). Back
  15. Insolvency Act 1986 s95(3) & Insolvency Rules SI 1986/1925 r.4.34. Back
  16. Insolvency Act 1986 s130(1). Back
  17. See above for details of how to search the Companies Register. Back
  18. Insolvency Act 1986, s126. Back
  19. Insolvency Act 1986, s130(2). Back
  20. Defined Insolvency Act 1986, Schedule 2. Back
  21. Insolvency Act 1986, s201(2). Back
  22. Insolvency Act 1986, s201 (3). Back
  23. Companies Act 1985, ss652A & 652B , as amended. Back
  24. Companies Act 1985 s652A(3). Back
  25. Companies Act 1985, s652A(5). Back
  26. Companies Act 1985 s652. Back
  27. Companies Act 1985 s652(6)(a). Back
  28. Companies Act 1985, s652B(6) as amended. Back
  29. Companies Act 1985 s652A(3). Back
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Updated 2020-12-01