Imitation Furs Ltd and Creditors Easy Bank plc and Finance Co Ltd - Case Study Example

BUSINESS ORGANIZATIONS Marina & Mortimer are the Receivers of the credit on two occasions firstly from Easy bank plc and then again from Finance co. ltd. The responsibility of the firm Imitation Furs ltd. The charged asset in this case is a floating charge over the company’s stock in trade. Upon receiving fresh inflows of funds is to collect and sell enough of the company’s product to ensure healthy cash flows and turnover thus helping maintain the confidence of the investors. Maintaining the stock price and looking to expand further would be the most obvious way a company such as Imitation Furs would seek to do in the event of seeking credit. Imitation Furs Ltd. has applied for insolvency and as such, its assets are subject to liquidation in order to cover the debts secured earlier. Additionally, during the course of liquidation, it is necessary to determine the validity of each creditor and how much each stands to gain from the sale of the company’s assets. This means that a core part of the task aims at segregating creditors on the basis of the secured or unsecured nature of the debt provided to the receiver by them (Philip R. Wood, 2007). In the wake of existence of unsecured creditors, the primary role of the receiver is to be obliged to take utmost care in selling charged assets at a price not less than the market value and in the absence of a reasonable market price to ensure that the sale price is at least reasonable. In the current scenario, both creditors have provided loans to Imitation Furs on the basis of a floating charge. The problem with a floating charge is the constantly changing nature of the underlying asset (the company stock in this case). However, it is theoretically feasible to determine a fixed price that can be agreed over the value of the assets with changing values. Thus, it would be desirable to determine if Imitation Furs had reached any such understanding with either of the creditors in question. It must also be emphasized here to determine and enlist the real assets and properties held by Imitation furs and to arrive at a value of these identified assets. The liquidator needs to be aware of the fact that properties that pass out of the ownership of Imitation Furs are not subject to the floating charge. Conversely, if there is evidence that Imitation Furs had during the course of the loan period, acquired any additional assets, then such acquisitions can automatically be considered within the floating charge (Stephen Judge, 2008). Imitation Furs, with a debt under a floating charge can continue to deal and manage its assets as part of the ongoing and regular course of business and must be additionally analyzed against the reservation of title clause, which shall be done subsequently. In undertaking its daily business activities, Imitation Furs is not liable to any kind of legal charge whatsoever as the nature of the floating charge is such that it does not attach any specific item of property or assets with the debt. The holders of the floating charge cannot claim any right over the possession of assets that can be covered by the charge unless any of the events specified under the floating charge instrument result in the crystallization of the charge (Paul J. Omar, 2008). In this context, it is advised that the liquidator go through all the terms and specific conditions and events that have occurred since the filing for insolvency or that are expected to occur in the near future. with a clear oversight on this aspect, the liquidation process will be in a better position to determine whether any of the assets can be brought immediately under liquidation thereby enabling an outright evaluation of the value of the asset. Apart from analyzing the conditions agreed under the charge agreement, the liquidator is also directed to look into the provisions of the Companies Act, Part XII that are associated with the registration of company charges. As per the guidelines of the company, two registers are required to be maintained with one under the possession of the Registrar of Companies whereas the other is held by the company. as per these guidelines, a company is supposed to register the charge within 21 days of its creation and needs to be done so along with the actual instrument used to create that charge. Though it is known that both the charges in the case of Finance Co. were registered on the same day or within a short duration of the creation of the charges, it is advised to examine whether all the required processes have been duly followed and whether the proper instruments have been used in the process of the registration. In this context, it is recommended to refer to section 396 of the act (Philip R. Wood, 2007). The details of the registration can be verified by approaching the Registrar of Companies and by determining the date on which the particular of both the floating charges were received. The certificate issued by the registrar upon registration can also be pursued, which would offer conclusive insight on the date at which these particulars were issued. Imitation Furs is further bound by the requirement to maintain a register that details all charges issued to the company and must be available at its registered office. Although failure in maintaining such a register does not invalidate the charge in any case, it nevertheless calls for a fine on the part of Imitation Furs and also on every office bearer who is responsible for the default. Although the initial information suggests that the charge in the case of Finance co was registered on the same day it was created, it has been found that the company failed to do so in the case of the previous charge. Additionally, the default carried on well beyond the 21 day deadline and surpassed almost 8 months without any positive development (Royston Miles Goode, 2005). In this context, it appears quite clearly that the company did not seek an extension whatsoever of the 21 day mandatory period thus calling for the imposition of requisite sanctions and fines. As has been mentioned before, Imitation Furs is not bound by any obligation to report to its unsecured creditors about the receivership either in writing or by calling a meeting. Additionally, Easy Bank and Finance Co. are not entitled to receive any reports or obtain access to any such material that is meant solely for the secured creditor. It is also advised to determine whether Imitation Furs has been depositing lists of payments and receipts, which it is obligated to do so every six months with the ASIC (Barry Cahir, 2003). The most common way in which any Creditor including Easy Bank and Finance Co. would receive money is by the revenue generated by the sale of assets. The company is allowed to continue business operation through its various assets until the point where it is sold in the form of a going concern. However, the proceeds from the sale are to be paid out in the following order: the income from selling fixed assets such as plant and machinery is paid to the secured creditor. As such, it is required to determine whether Imitation Furs in involved in any earlier debts. In case of a positive response in this scenario, a list of creditors must be identified and grouped on the basis of the nature of credit provided into secured and unsecured categories. proceeds from the sale of floating charge assets (selling stocks and stake in the firm) is distributed in a series of smaller steps. Upon deducting the costs incurred in collecting the proceeds, any ending employee entitlements or liabilities that have not been transferred to the new owners yet need to be fulfilled. It is only after these steps have been completed that the debt of the creditor is paid out. In both cases, any residual sums are paid out to the liquidator or any other appointed administrator overseeing the liquidation process (Royston Miles Goode, 2003). In case it is determined that Imitation Furs is under a security comprising both fixed and floating charges, there will be certain costs and feed of receivership that cannot be allocated through assets. Instead, these amounts need to allotted in proportion with the value of the assets. Any employee entitlements paid out through the floating charge are to be done in a specific order. Firstly, any outstanding wages as well as superannuation need to be paid out. This is followed by compensation for any outstanding leave of absence that ends with a retrenchment pay. While paying out for each class, every entitlement needs to be paid in full before the next class is paid out. Lack of sufficient funds in this scenario allows for the provision of available funds on a pro rata basis. All along, Imitation Furs does not have any obligation to pay of the unsecured creditor for any outstanding pre-appointment debts. In the case of the default in registering the charge for the Easy Bank plc, the security conferring to the company’s property against the liquidator is void as also against any creditor of Imitation Furs. Due to the absence of registration of the charge, any appointed receiver is deemed as invalid under that charge against the liquidator. Debt incurred due to the charge holder is not to be avoided and would instead be deemed as an unsecured debt within the liquidation process (Robert Bradgate, Fidelma White, 2007). Due to the avoidance of the charge, the entire debt owed to Easy Bank along with the accompanying interest is repayable on demand. The liquidator needs to examine if there were any errors or omission in the details delivered to the Registrar of Companies, in the case of which Imitation Furs or its directors can appeal to the court requesting a rectification of the omission or error. This is also applicable to the charge which was not registered on time in the case of Easy Bank. The Court needs to be convinced that the Omission was accidental and that it has not prejudiced the position of the creditors and shareholders (Denis J. Keenan, Kenneth Smith, 2006). The Insolvency Act of 1986 has further introduced additional provisions in the case of floating charges. One of the provisions states that floating charges created under the undertaking of the company will be termed invalid if created at a related time with an exception arising in cases where the company’s value was given at the same time as the creation of the charge (Peter G. Eales, 1996). When considering the case of Finance co. such a value can be estimated in terms of the goods supplied to the company as also the repayment of any outstanding debts. Another pointed to be noted from the information is the case of Synthetic Fibers plc, which had provided material under a ‘Reservation of title’ clause. As such, the liquidator is supposed to consider these debts where the asset that has been purchased from Synthetic Fibers (a creditor in this case) does not belong to the company (Imitation Furs) unless they have been fully paid for. As such, Synthetic Fibers is legally entitled to claim their assets (the supplied polymeric fibers), which can be done once Synthetic Fibers proves such a debt to the liquidator. The above discussion has provided a thorough insight to the liquidator on the various aspects that need to be considered by the liquidator while outlining and devising a case of insolvency for Imitation Furs plc by taking into consideration the floating charges and their accompanying factors for both the creditors namely Easy Bank plc as well as Finance Co. Ltd. The liquidator also needs to take into account the reservation of title clause with which the company purchased raw material from Synthetic Polymers. in both cases, it can be seen that all factors and details have been thoroughly provided for by the Company Act, which can be used effectively in determining the liquidation of Imitation Furs plc. References 1. Stephen Judge (2008), Q & A: Company Law 2008 and 2009. Oxford University Press. 2. Philip R. Wood (2007), Principles of international insolvency. London: Sweet & Maxwell. 3. Paul J. Omar (2008), International insolvency law: themes and perspectives. ondon: Ashgate. 4. Philip R. Wood (2007), Set-off and Netting, Derivatives, Clearing Systems. London: Sweet & Maxwell. 5. Royston Miles Goode (2005), Principles of corporate insolvency law. New York: Wiley. 6. Barry Cahir (2003), Insolvency law. London: Routledge. 7. Royston Miles Goode (2003), Legal problems of credit and security. New York: Prentice. 8. Robert Bradgate, Fidelma White (2007), Commercial Law. Oxford University Press. 9. Peter G. Eales (1996), Insolvency: A Practical Legal Handbook for Managers. London: Woodhead. 10. Denis J. Keenan, Kenneth Smith (2006), Smith & Keenans law for business. New York: Pearson. Read More