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Insolvency

In all cases where you are considering enforcement action against an individual or a company that may be insolvent you should seek advice through your line management to the legal liaison points who may in turn contact Legal Adviser's Office.

Bankruptcy

Bankrupt individuals

1. Bankruptcy proceedings under the jurisdiction of a bankruptcy court allow 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.

2. Bankruptcy is only applicable to individuals and not to companies. Bankruptcy orders must be published in the London Gazette.

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

4. There is no bar to initiating a prosecution against individuals who are bankrupt.

5. However issues may very well arise as to the payment of fines, costs 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.

6. 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. Legal Adviser’s Office guidance should be sought in cases where it is proposed to prosecute a bankrupt.

Bankrupt partners

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

Companies

Initial inquiries

8. The first response should be to contact Companies House either by telephone (03031234500) or through conducting a web-check at www.companieshouse.org.uk. You will need the company number for this. The webcheck will provide the most basic information, however it is often not up to date and the telephone contact centre is often the most accurate source of information. It is also advisable to double check whether a compulsory winding-up order has been made, by telephoning the general enquiry line of the Insolvency Service (020 7291 6895) quoting the company number.   

9. If the records at Companies House show that a company is not subject to any insolvency proceedings bear in mind that there can be a delay of up to 14 days between the appointment of an administrator or a liquidator and Companies House receiving notification. It is therefore worth re-checking the position after the 14 day period has passed.

10. It may be prudent to monitor the status of a company under investigation, to ensure that it is not dissolved without HSE's knowledge.  Once a company has been dissolved it no longer exists, so it would be impossible to issue proceedings against such a company, unless HSE was successful in an application to restore the company to the register.  Such an application would be unusual and would be dependent on very strong public interest grounds.  There is a facility on the Companies House website which allows anyone to set up a monitor alert on a company by registering and entering an email address and password.   There is no charge for this facility and once set up, an email alert will be sent out every time a new document is registered at Companies House in relation to the company concerned.  This would prompt the recipient to make further enquiries as to whether the status of the company had changed.

11. If you discover that a liquidator or an administrator has been appointed ask Companies House for their contact details. Although a liquidator or administrator is not legally required to keep HSE informed of any developments some are willing to do so. It can therefore be useful to write to the administrator or liquidator inviting them to firstly, note HSE’s interest and secondly, keep you informed of any developments. Companies House are also sometimes prepared to record HSE’s interest and keep HSE informed, however their willingness to do so is often dependent upon the stage the investigation is at.

Terminology

12. “Insolvency proceedings” is the phrase used by both Companies House and those practising within the insolvency field to describe a company subject to one of the formal types of intervention. Although the word insolvency implies an inability to discharge its debts or a lack of funds it is important to bear in mind that not all companies subject to a formal intervention are in fact insolvent in the true sense of the word, some may have funds.

13. The main terms you are likely to come across are:

  1. Voluntary Liquidation
  2. Compulsory Liquidation
  3. Winding-up
  4. Strike-off
  5. Administration
  6. Dissolution
  7. Restoration

Liquidation/winding-up (terms are interchangeable)

14. Liquidation is the process of bringing a company to an end by liquidating or realising a company’s assets to discharge its debts. Companies in liquidation may be solvent i.e. still able to discharge their liabilities in full and sometimes with funds left over or insolvent i.e. unable to pay their liabilities. There are three types of liquidation:

  1. Members’ Voluntary Liquidation – rare for a company to end its life through this means but a company may start this process and turn into a CVL.
  2. Creditors’ Voluntary Liquidation and
  3. Compulsory Liquidation

Members’ Voluntary Liquidation (MVL)

15. MVL is when the shareholders of a company decide to put it into liquidation, and there are enough assets to pay all the debts of the company, i.e. the company is solvent.

16. The first stage in the process is for the directors of the company to make a statutory declaration that they have made a full inquiry into the company's affairs and that, having done so; they believe that the company will be able to pay its debts in full within 12 months from the start of the winding-up. The declaration will include a statement of the company's assets and liabilities as at the latest practicable date before making the declaration.

17. The liquidation starts when the members, in a general meeting, pass a resolution to wind up the company voluntarily.

18. Notice of the special resolution for voluntary winding-up of the company must be published in the Gazette within 14 days of the general meeting. The company must also send a copy of the declaration and the special resolution to the Registrar within 15 days of the general meeting.

19. In a members’ voluntary liquidation the liquidator is appointed by the members and his or her appointment must be notified to Companies House within 14 days of the resolution. A notice of appointment must also be published in the Gazette and the local newspaper.  

20. The role of the liquidator is to assume control of the company, collect the assets, pay the debts and distribute any surplus to company members according to their rights. Until such time as the company’s affairs are fully wound-up the liquidator must send regular reports to the Registrar.

21. Once the process is complete the liquidator presents an account to a final meeting of creditors and members of the company. He or she must advertise the meeting in the Gazette at least one month before. Within one week of the meeting having taken place, the liquidator must send the account to the Registrar and a return of the final meeting.

22. The final stage of the process is dissolution. Unless the court makes an order deferring the dissolution of the company, it is dissolved 3 months after the return and accounts are registered at Companies House [for deferral of dissolution – see later].  

Creditors’ Voluntary Liquidation (CVL)

23. A company may go into Creditors’ Voluntary Liquidation when it accepts it cannot pay its debts.  A members’ voluntary liquidation may become a creditors’ voluntary liquidation if the liquidator concludes that the company will not be able to pay its debts in full in the period stated in the directors' statutory declaration of solvency.

24. The process to be followed for a CVL is similar to  MVL save that the company passes a special resolution so say that it cannot continue in business because of its liabilities and that it is advisable to wind up.  The resolution must be:

25. A meeting of creditors must be held in the next 14 days after passing the resolution. Notice of the meeting must be sent to the creditors at least 7 days before the meeting. Also, the directors must prepare a statement of affairs for consideration at the meeting, and appoint one of them to attend and preside over the meeting. When the liquidator is appointed, the directors must provide him or her with a statement of affairs and otherwise co-operate with the liquidator.  

26. The role of the liquidator in a CVL is the same as that in a MVL including the sending of a report to Companies House at the conclusion of the winding-up. The same time scales apply for dissolution, namely three months after receipt of the return and the final account unless an application to defer dissolution is made.

Voluntary (MVL and CVL) and Prosecution

27. There is no legal bar to prosecuting a company in either type of voluntary liquidation; whether this is an appropriate course of action will depend on the circumstances of each case. For further guidance on the application of the public interest test to such cases you should refer to the section on “Public Interest” below.

28. If a decision is taken to prosecute a company in liquidation there is no special procedure which must be adopted. You do not have to obtain the permission of the liquidator, the creditors, the Registrar or the Court. All cases should, however be notified to LAO before proceedings are commenced.

Compulsory Liquidation (CL)

29. CL is when the company is ordered by a court to be wound up. There are a number of potential applicants however the most common is on the petition of a creditor or creditors on the grounds that the company cannot pay its debts and where it has not been possible to reach a voluntary agreement on liquidation.

30. Any petition must be advertised in the Gazette unless the Court directs otherwise. If the petition is successful, the company must send the winding-up order to the Registrar straightaway and it will be placed on the company's public record. The Official Receiver becomes liquidator unless the court orders otherwise.

31. The Official Receiver has a duty to investigate the company's affairs and the causes of its failure. If you are a director of a company that falls into Compulsory Liquidation, you will become subject to a comprehensive investigation which could lead to action disqualification as a company director.

32. The OR will decide whether to call meetings of the creditors and contributories (that is, those people liable to contribute to the assets of the company if it is wound up) for the purpose of appointing a liquidator in his place. If he decides not to call meetings, he must notify the creditors, contributories and the court of his decision. On the other hand, if he decides to call meetings, a liquidator may then be appointed in place of the Official Receiver. The liquidator must notify the Registrar of his or her appointment immediately.

33. The same process applies at the conclusion of the winding-up; save that for compulsory liquidation a report into the directors’ conduct is also filed.

Compulsory Liquidation And Prosecution

34. As with voluntary liquidation there is no legal bar to prosecuting a company in compulsory liquidation; whether this is an appropriate course of action will depend on the circumstances of each case. For further guidance on the application of the public interest test to such cases you should refer to the section on “Public Interest” below.

35. If a decision is taken to prosecute a company subject to a petition for winding-up or a winding-up order the leave of the Court must be obtained. The Court can refuse, grant leave or grant leave with conditions including time limits. In considering such applications the Court is likely to have in mind the gravity of the offences alleged, taken with the seriousness of any actual or potential harm; the history of the company's compliance with health and safety legislation; whether the company has fallen far below the standard required giving rise to significant risk; whether there has been a failure to comply with other enforcement action e.g. improvement notice or prohibition notice and whether there has been an intentional obstruction of the investigation/inspectors in the lawful course of their duties.

36. An application for leave to prosecute a company subject to a winding up order or petition should be made to the Court that made the winding up order or the Court dealing with the winding up petition. The application should be made on notice and would need to be supported by an affidavit from the inspector setting out the nature and background of the case.  

Administration

37. The rules governing administration were amended under the provisions of the Enterprise Act 2002 (EA 2002). Administration is when an administrator, is appointed for a period of up to one year (although it can be extended by Court or with creditors’ consent) to manage a company’s affairs, business and property for the benefit of the creditors. The main objectives of administrations are to:

  1. rescue a company as a going concern;
  2. achieve a better price for the company’s assets or otherwise realise their value more favourably for the creditors as a whole than would be likely if the company were wound up (without first being in administration); or
  3. in certain circumstances, realise the value of property in order to make a distribution to one or more preferential creditors

38. An administrator may be appointed by either an administration order made by the court; or the holder of a floating charge; or the company or its directors. When a company enters administration any pending winding-up petitions will be dismissed or suspended and there will be a moratorium on insolvency and on other legal proceedings.

39. As soon as reasonably practicable, an administrator must send a notice of his or her appointment to the company and each of its creditors and publish notice of his or her appointment in the Gazette and in a newspaper in the area where the company has its principal place of business.

40. The administrator will request a statement of the company’s affairs from relevant people (e.g. an officer or employee of the company). No later than 8 weeks after the company enters administration, the administrator must make a statement setting out proposals for achieving the purpose of the administration or explaining why they cannot be achieved. The proposals may include a voluntary arrangement or a compromise or arrangement with creditors or members. The statement setting out the proposals must be sent to:

The business of the initial creditors’ meeting will be to approve (with or without modifications) the statement of proposals. Following the initial meeting, the administrator may hold further creditors’ meetings; form a creditors committee; or deal with matters in correspondence between the administrator and creditors.

41. There are several ways in which administration may come to an end. The most common are to move into creditors’ voluntary winding-up or move to dissolution if the administrator thinks that a company has no property with which to make a distribution to its creditors. The administrator must send notice to the Registrar and send copies to the court and each creditor. Three months after the date the form is registered with the Registrar, the company will be dissolved unless, on application to the court, an order is made to extend or suspend the period or stop the dissolution.

Administration and Prosecution

42. HSE can still prosecute a company in administration, whether this is an appropriate course of action will depend on the circumstances of each case. For further guidance on the application of the public interest test to such cases you should refer to the section on “Public Interest” below.

43. If a decision is taken to prosecute a company in administration or continue a prosecution the consent of the administrator or leave of the Court must be sought before any information is laid or proceedings continued. The application is made pursuant to Schedule B1 Section 43(6)(b) of the Insolvency Act 1986. The appropriate Court is the Court dealing with the administration of the company – this can be the County Court or the High Court depending upon the amount of share capital. Any application to the Court must be on notice (served upon the administrator) and must be supported by an affidavit from the inspector seeking consent to institute criminal proceedings. If you are seeking the consent of the administrator you should set out in writing the factual background to the case, the nature of the allegations and the reasons you say it is in the public interest to prosecute.   

44. The case of Re Rhondda Waste Disposal Ltd [2001] Ch 57 sets out the factors the Court and the administrator will have in mind when considering the question of consent. The following factors, amongst others, are likely to be relevant: - 

Strike-off

By the Registrar

45. Strike-off is the process whereby the company is removed from the Register. It is not necessarily directly linked to a company’s financial position; however it can follow a failure by the company to file its accounts – in which case a company would be struck off at the instigation of the Registrar.

Upon Request

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

47. The Registrar will publish notice of the proposed striking off in the Gazette to allow interested parties, including HSE if appropriate, the opportunity to object. A copy of this notice will be placed on the company’s public record. If there is no reason to delay the Registrar will strike the company off the register not less than 3 months after the date of the notice. The company will be dissolved on publication of a further notice stating this in the relevant Gazette. From the date of dissolution, any assets of a dissolved company will belong to the Crown.

Prosecuting a Company subject to a strike-off proposal or application

48. HSE can still prosecute a company subject to a proposal or application to strike off; whether this is an appropriate course of action will depend on the circumstances of each case. For further guidance on the application of the public interest test to such cases you should refer to the section on “Public Interest” below.

49. If a decision is taken to prosecute such a company or continue a prosecution consideration should be given to HSE lodging an objection in writing to the company being struck off until the criminal proceedings are finalised. This will prevent the company being removed from the Register and dissolved.  

“Non-trading” companies

50. 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 e.g 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.

Dissolution

51. When considering the public interest test in deciding whether to bring a prosecution, para 4.12. c) of the Code for Crown Prosecutors says that, "In deciding whether a prosecution is required in the public interest, prosecutors should take into account the views expressed by the victim about the impact that the offence has had".  A VPS, if there is one, may provide information that assists in meeting the requirements of para 4.12 c). However, whether or not the victim chooses to participate in the VPS scheme, the approval offices should still apply the Code for Crown Prosecutors, as set down in OM 2003/106, and take account of any significant views expressed by the victim.

52. If you intend to make such an application you should seek the advice of the Legal Adviser’s Office. 

Prosecuting a dissolved company

53. As the company no longer exists HSE cannot prosecute a dissolved company unless the company is either restored to the Register or the dissolution is declared void. There would need to be strong public interest grounds before embarking upon such an application. The process to be followed is a complicated one and you should refer to the Legal Adviser’s Office before embarking upon such a course.

The public interest test

54. It is not HSE policy that all prosecutions will be stopped or prosecutions not pursued against companies in administration, liquidation or other formal interventions.  Each case must be considered upon its own merits and by reference to both the Enforcement Policy Statement and the Code for Crown Prosecutors.  The Code (January 2013 version) at paragraph 4.12 requires prosecutors to consider a series of questions so as to identify and determine the relevant public interest factors tending for and against prosecution including whether a prosecution is a proportionate response. It refers to the cost of bringing a case when weighed against any likely penalty.  However whilst the likely penalty is one public interest factor in considering a prosecution, it is by no means the only one.  If a decision is taken not to prosecute or stop a prosecution, this has to be a balance of all the public interest factors which go for or against a prosecution.  A prosecution is not only intended to punish the defendant but also to deter others and this needs to be taken into account.

55.  A prosecution will usually take place unless the prosecutor is satisfied that
there are public interest factors tending against prosecution which outweigh those tending in favour.The public interest factors that weigh in favour of a prosecution include, amongst others; the seriousness of the offences alleged, taken with the seriousness of any actual or potential harm to the victim; the level of culpability of the suspect; the history of the company's compliance with health and safety legislation; whether the company has fallen far below the standard required giving rise to significant risk; whether there has been an intentional obstruction of the investigation/inspectors in the lawful course of their duties and whether there has been a failure to comply with other enforcement action e.g. improvement notice or prohibition notice.

56.  The public interest factors that weigh against a prosecution include, amongst others; the question of proportionality and that HSE is unlikely to recover its costs and a nominal penalty may be imposed; a defendant may not attend Court and a Court may be reluctant to proceed in absence.  These are not all of the factors that may be taken into account and the Code for Crown Prosecutors should be fully considered.

Receivership

57. A company's creditors who have advanced money to it in the past are likely to hold "debentures", that is a document acknowledging the debt, which usually provide for a charge on the company's assets. This charge will be called a `fixed charge' where it is secured on particular property, or a `floating charge' where it is secured on the assets generally.

58. Remedies are available to debenture holders who are concerned about the recovery of their debt. A holder of a debenture secured by a fixed charge may appoint a receiver to deal with the disposal of the property charged only. A debenture holder who is secured by a floating charge may appoint an administrative receiver who will be responsible for the administration of the company.

59. An official receiver may be appointed on an application to the court by debenture holders where a compulsory winding-up is in progress. An administrative receiver is appointed to control the financial dealings of the directors, and to ensure that the debenture holder's interest is not prejudiced by the way the company is run. An administrative receiver must advertise his appointment in the London Gazette.

60. A company in receivership is not necessarily in liquidation, and the appointment of a receiver or an administrative receiver does not necessitate of itself the company's winding up, (although the winding up of the company may well follow). Therefore if the company is simply in receivership it may be prosecuted.

61. As it is possible that the company is both in liquidation (being wound up) as well as in administrative (or other) receivership, it is essential that you have clear information as to the true position. When you discover a company is in receivership you should, therefore, check whether they are also in liquidation.

62. Winding up in the interest of the creditors may proceed notwithstanding the appointment of a receiver on behalf of a debenture holder(s). The role of administrative receiver will be vacated if the company is made subject of an administration order.

Proceeding against the Receiver

63. 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 Legal Adviser's Office.

Updated 2013-03-26