The Companies Act 1997 provides several ways to reorganise a company or deal with its failure. They are not alternatives to be chosen freely: each has its own gateway, its own approval mechanics, and its own consequences.
The five routes
| Route | Part | Gateway | Who approves | Whom it binds |
|---|---|---|---|---|
| Amalgamation | XIV (ss 232–240) | Company must satisfy the solvency test after the merger | Special resolution of each company — or, under s 235, board resolutions alone in a wholly owned group | Everyone — the companies merge by universal succession |
| Compromise | XV (ss 241–248) | Reason to believe the company is or will be unable to pay its debts (s 335) | Creditors, voting at a Schedule 7 meeting | The company and every creditor given notice |
| Court arrangement | XVI (ss 249–253) | Parts XIV and XV must be not reasonably practicable (s 252) | The Court, usually after meetings it orders | The company and such persons or classes as the Court specifies |
| Receivership | XVII (ss 254–289) | A charge giving a power of appointment, and an event of default | Nobody — the chargeholder appoints in writing | Only the property in receivership |
| Liquidation | XVIII (ss 290–364) | Special resolution, a chargeholder’s appointment, or a Court order | Shareholders, a chargeholder, or the Court | The whole company and all its creditors |
If the company is solvent
Part XIV requires the board of each company to certify that the amalgamated company will satisfy the solvency test immediately after the amalgamation becomes effective (s 234(2)). It is a merger tool, not a rescue tool.
Within a group, the short form procedure under section 235 does the job by board resolution: no proposal, no shareholder vote, no public notice — but still a solvency certificate and one month’s notice to secured creditors.
A solvent company cannot use Part XV. Section 242 requires the proponent to have reason to believe the company is or will be unable to pay its debts. A compromise is not a way of escaping unwanted contracts.
Nor can it use Part XVI to do something Part XIV would achieve: section 252 blocks that unless the ordinary route is not reasonably practicable.
What it can do instead: an authorised distribution, a share buy-back, an alteration of share rights, or a sale of the business as a major transaction.
If the company is in difficulty
Once section 335 is in sight — the company is or will be unable to pay its debts as they fall due in the ordinary course of business — the analysis changes.
Directors of a company in difficulty face section 348 — agreeing to, or permitting, the company incurring a debt when it does not satisfy the solvency test — and section 348A, personal responsibility without limitation for the company’s debts where accounting records were not kept. A holding company can be caught by section 349 for the insolvent trading of a subsidiary.
Proposing a compromise, or seeking advice about one, is evidence of the board addressing the problem rather than trading on. Doing nothing is not.
| Question | Points to |
|---|---|
| Is the business viable if the debt is restructured? | A Part XV compromise — see section 335 |
| Does the deal need several classes, or a Court-determined class division? | A Part XVI arrangement |
| Does it need property vested or proceedings continued by order? | Part XVI — section 251 |
| Is a secured creditor unwilling to wait? | They may appoint a receiver regardless |
| Is the business not viable, or are assets being dissipated? | Liquidation — or a statutory demand from a creditor |
| Do the directors’ past dealings need investigating? | Liquidation — only a liquidator can attack voidable transactions or apply under section 348 |
| Is the company simply dormant and debt free? | Removal from the register |
The secured creditor sits outside all of it
Under section 246(2), a Court-ordered stay in a compromise does not affect a secured creditor’s right to take possession of, realise, or otherwise deal with charged property.
Under section 280, a receiver may be appointed, or continue to act, even after the company is put into liquidation, unless the Court orders otherwise.
So a restructuring that depends on keeping charged assets must be negotiated with the chargeholder. There is no moratorium in the Act that binds them — though a secured creditor is a creditor entitled to vote under section 241, and the Court may bind them under a Part XVI order.
The routes can be combined
- A receiver of the whole or substantially the whole of the assets may propose a compromise — section 242(1)(b).
- A liquidator may propose one — section 242(1)(c) — so a compromise can be used to end a liquidation.
- A compromise may provide for a restructuring of share capital, and a Part XVI order may include the liquidation of any company — section 251(1)(d).
- A receivership and a liquidation may run at the same time, the receiver dealing with the charged assets and the liquidator with the rest.
Where a receiver is appointed under a floating charge, or a fixed charge that was floating when created, section 279 requires Schedule 9 preferential claims to be paid ahead of the chargeholder. The same claims rank behind the liquidator’s costs in a liquidation. Which office-holder realises which asset therefore affects who is paid.
A working checklist
- Test solvency first against section 4. The answer decides which half of the Act applies.
- Identify every charge on the register of charges, and check priority under section 231 and Schedule 15.
- Ask who must be bound. Only shareholders? Part XIV. Creditors given notice? Part XV. A wider or Court-defined class? Part XVI.
- Ask who is driving. A board, a chargeholder, a creditor with leave, or a liquidator — each has different routes available under section 242.
- Address section 252 in writing before contemplating Part XVI.
- Watch the clocks — one month’s notice under section 234, one month to challenge under section 246(4), one month to file Court orders under sections 250(4) and 251(2).
- Record the board’s reasoning. Whichever route is taken, the directors’ conduct will be measured afterwards against section 112, section 115 and sections 348 and 348A.
Sources
- Companies Act 1997 — ss 4, 112, 115, 348, 348A, 349, 232–240, 241–248, 249–253, 254–289, 290–364, 320, 335; Schedules 7, 9 and 15
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.