Winding Up, Insolvency and Corporate Rescue
What the exam tests
This domain tests the modes of winding up, the grounds for compulsory liquidation, the effect of liquidation on directors and creditors, and the rescue procedures introduced by CAMA 2020.
Core rules
- Modes: members' voluntary winding up (requiring a declaration of solvency), creditors' voluntary winding up, and compulsory winding up by the court.
- Compulsory grounds include a special resolution to wind up, inability to pay debts, default in statutory filings, and the just and equitable ground. Inability to pay is typically evidenced by an unsatisfied statutory demand left unpaid for 21 days or by execution returned unsatisfied.
- On winding up, the liquidator takes control, directors' powers cease, proceedings against the company are stayed, employees are dismissed and assets are realised. Priority runs: secured creditors, liquidation expenses, preferential debts including employees' wages and statutory contributions, unsecured creditors, then members.
- Rescue options under CAMA 2020 include company voluntary arrangement, administration with a moratorium against creditors, receivership and schemes of arrangement. Netting arrangements are recognised for eligible financial contracts.
- Notices of resolution and appointment must be filed with the CAC.
Worked example
A viable company faces a statutory demand it cannot immediately pay. Instead of allowing a winding-up petition, the board explores a company voluntary arrangement with creditors or administration to obtain a moratorium while a rescue plan is implemented. Winding up is a last resort because it destroys the business and staff jobs.
Traps
Thinking the company dissolves immediately on the winding-up resolution; making a false declaration of solvency, which is a criminal offence; preferring related-party creditors shortly before liquidation; ignoring employees' preferential claims.