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WINDING UP

The meaning and effect of winding up in company lawThe seven grounds under which a registered company may be wound up by the court under the Insolvency Act

1986 (IA), are as follows:

(i) the company has passed a special resolution that it be wound up by the court;(ii) it is a public company which has not within a year since its registration obtained a certificate of compliancewith the share capital requirements;(iii) it is an old public company which has failed to re-register;

(iv) it has not commenced business within a year from its incorporation or has suspended its business for awhole year;(v) (except in the case of a private company limited by shares or by guarantee) the number of members isreduced below two;(vi) the company is unable to pay its debts;(vii) the court is of the opinion that it is just and equitable that the company should be wound up.

The most common of these grounds are (i) (vi) (vii).

If for any reason the members of the company no longer wish to continue the business they will use (i).Outsiders may apply to have a company wound up under (vi). Section 123 (IA) provides that, if a company witha debt exceeding 750, fails to pay it within three weeks of receiving a written demand, then it is deemed

unable to pay its debts.Procedure (vii) may be used in private companies where there is deadlock in management .

One of the many consequences of incorporation is that a registered company becomes a legal entity in its ownright having existence apart from its member shareholders. One of the attributes of this legal personality is thatthe company has not only separate, but perpetual existence, in that it continues irrespective of changes in its

membership. Indeed the company can continue to exist where it has no members at all. Winding up, orliquidation, is the process whereby the life of the company is brought to an end and its assets realised anddistributed to its members and/or creditors.

The rules governing winding up are detailed in the provisions of the Insolvency Act 1986 (IA) and the exactnature of procedure depends on the type of winding up involved and depends upon the solvency of the

company at the time when liquidation commences.

Just and Equitable Winding UpInsolvency Act 1986, s.122(1)(g) - a company may be wound up by the court if the court is of the opinion that thiswould be just and equitable.

(a) Locus standii (Who can petition)Any shareholder provided he has had his shares for at least 6 months during the eighteen months prior to

bringing the petition, or have inherited them, or have obtained them by direct allotment from the company.

(b) "Just and Equitable"This is not defined by the Act - the courts have described it as a broad and flexible concept. "Clean hands" areessential for a s.122(1)(g) petition.

(c) Grounds for Granting the Petition

(i) Breakdown of Mutual Trust and ConfidenceMost s.122(1)(g) petitions are brought by members of quasi-partnerships. Court will probably grant the petitionif it is evident that the members have lost confidence in each other and can no longer work together:(ii) Exclusion from Management

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This also applies only to quasi-partnership companies, where the members have a legitimate expectation oftaking part in the management of the company.

(iii) Lack of Probity of DirectorsWhere shareholders have joined a small family company or quasi-partnership on the basis that it will bemanaged in a certain way and this has not been done, the petition may be granted where the shareholders havelost confidence in the management.

The court is unlikely to grant a winding up order if the petitioner could have had an equally viable remedy undes.459. Winding up is a drastic remedy.

(d) Effect of Presentation of Petition(i) Presentation of the petition freezes the companies affairs while the matter is decided.(ii) The company can apply for a validating order, which will allow it to carry in business pending a decision.(iii) The company can take out a cross-undertaking for damages against the petitioner - the petitioner wouldthen be liable for any loss suffered by the company because of the petition if the petition eventually fails.

Corporate Insolvency1. Different types of voluntary winding upWhen a voluntary l iquidation may occurIA86 states that a company may be wound up voluntarily

When the period, if any, fixed for the duration of the company by the articles expires, or the event if any,occurs, on the occurrence of which the articles provide that the company is to be dissolved, and thecompany in general meeting has passed an ordinary resolution.

If the company resolves by special resolution that the company be wound voluntarily for any reason

whatsoever.

If the company resolves by extraordinary resolution that it cannot by reason of its liabilities carry on inbusiness and that it is advisable to wind up.

Winding up starts from the date on which the resolution is passed.

1.1 Members voluntary winding upWhere it is proposed to wind up the company voluntarily, the directors may at a board meeting make adeclaration of solvency. It must be made during the vie weeks before the resolution is passed to wind up thecompany. The declaration:

States that the directors have made a full enquiry into the affairs of the company and in their opinion, thecompany will be able to pay its debts within the 12 months from the date of the commencement of thewinding up.

Must be delivered to the Registrar for registration and must include a statement of the companys assetsand liabilities.

IA86 states that if the directors make a false declaration without reasonable grounds, they have committed a

criminal offence. If the debts are not paid within the 12 months it is presumed that the directors did not havereasonable grounds. To escape liability directors must prove that they did have reasonable grounds for making

the declaration.

At the general meeting where the resolution is passed to wind up the company (either ordinary or specialresolution), the members will pass an ordinary resolution to appoint a liquidator.

On the appointment of a liquidator, all directors powers cease but the members in general meeting or the

liquidator may sanction their further use.

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2 Compulsory l iquidationCompulsory l iquidation is a winding up ordered by the court.Grounds for winding upIA86 states that a company may be wound up by the court if:

1. The company has by special resolution resolved that it should be wound up by the court2. A public company has not been issued with a trading certificate within a year of it being registered3. The company does not commence business within a year of it being incorporated4. The number of members falls below two except in the case of a single member company5. The company is unable to pay its debts

A company is unable to pay its debts if:1. A creditor who is owed at least 750 has served a demand, in writing, for payment within three weeks and

the company has failed to pay the sum due

2. A judgement creditor has tried to enforce his judgement by execution on the companys property and the

execution has failed to satisfy the debt

3. The court is satisfied that the company is unable to pay its debts4. It is just and equitable to wind up the company

Petit ioners1. The company itself2. The Official Receiver3. The Department of Trade and Industry, following an investigation4. A contributory:

- a contributory is any person who is liable to contribute to the asset of a company when it is being

wound up; this includes the holders of both partly paid and fully paid shares

- a contributory can only petition if he is the original allottee of the shares or the shares have been

transmitted to him on the death of a member or he has held the shares for six out of the last 18months

- a contributory must prove that he has an interest in the liquidation, he must show that the company issolvent

5. A creditor

Effect of winding up1. actions for the recovery of debt stop2. company ceases business except that necessary for beneficial winding up3. powers of the directors cease4. Employees are made redundant.

3 Explain the position of the liquidator a liquidator must be a qualified insolvency practitioner

the liquidator takes over the powers of the directors and therefore owes a fiduciary duty to the company

the liquidator can only do something expressly set out in the Insolvency Act 1986

General powers sell any of the companys assets

draw, issue, accept and endorse bills of exchange and cheques in the name of and on behalf of thecompany

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raise any money for the purpose of the liquidation by using the assets of the company as security

appoint an agent to do any business which the liquidator cannot do himself

do all the acts and execute all documents in the name of an don behalf of the company

do all such other things that may be necessary for winding up the companys affairs and distributing itsassets

Qualif ied powers in a compulsory winding upThe liquidator in a compulsory winding up can only exercise the following powers with the consent of the courtor of the liquidation committee:

bring or defend legal proceedings in the name of and on behalf of the company

to carry on the business of the company so far as it may be necessary for its beneficial winding up

Qualif ied powers in all l iquidations To pay any class of creditors in full. The liquidator must ensure that the remaining assets of the company

are sufficient to enable him to pay all the debts and liabilities of the company to creditors who rank forpayment in priority to, or equally with the class of creditors who are to be paid in full

To make compromises or arrangements with creditors. Where the amount due to the creditor is in dispute,the liquidator can reach a compromise with the creditor with respect to the amount payable by the

company To agree compromises with contributories in respect of their liability for the amount unpaid on their shares

or in respect of the companys liability to them, for example, declared but unpaid dividends.

Type of winding up Approval must be given by

Compulsory winding up The court or the liquidation committeeMembers voluntary winding up An extraordinary resolution of the members in

general meetingCreditors voluntary winding up The court or the liquidation committee

Generally, there are two types ofreceiver:1 An administrative receiver is a person appointed under a debenture which is secured by a floating chargeover all, or substantially all of, the companys assets. By their nature, floating charges are usually at least inrespect of substantially all of the companys assets.2 Areceiver(other than an administrative receiver) is any other person appointed under an instrument which issecured by a charge on the companys assets.

A copy of the resolution must be delivered to T h e Ga ze t t e within 14 days and to the Registrar within 15 days,together with the statutory declaration. A l iquidator will need to be appointed and the appointment must benotified to The Gazetteand to the Registrar within 14 days and advertised in a newspaper local to the business.

In addition, in an attempt to contact other potential creditors, the creditors meeting must be notified to TheGazetteand advertised in two local newspapers. In order to assess the extent of the companys ability to meetits debts, the directors must prepare a statement of affairs for review at the creditors meeting.

4 Exp la in the or de r of pa ymen t of cr ed it or s on wi nd ing up1. Fixed charge holders2. The liquidator3. Preferential creditors4. Floating charge holders

5. Unsecured or trade creditors6. Members: dividends7. Members: return of capital

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8. Members: any surplusPowers of the liquidator in a voluntary winding up

The lnsolvency Act 1986, s. 165 and Sch. 4 provide that the liquidator in a voluntary winding up can exercisethe following powers without sanction (either of the court or the creditors):

1 Bring or defend any action or any other legal proceedings on behalf of the company.

2 Carry on the business of the company so far as is necessary for its beneficial winding up.3 Sell any of the companys property by public auction or private contract.4 Carry out all acts and execute in the name and on behalf of the company all deeds, receipts and otherdocuments and to use, where necessary, the companys seal.5 Prove and claim in any insolvency proceedings taken on behalf of the company against any other insolventestate.

6 Draw, accept, make and endorse any bill of exchange or promissory note in the name of and on behalf of thecompany.7 Raise on the security of the assets of the company any money needed.8 Take out in his official name letters of administration to the estate of any deceased contributory and to do inhis official name any other act necessary for obtaining payment of any money due from a contributory (acontributory is any member who may be called upon to make a payment to the company in the course of the

liquidation; the term is explained more fully below).

9 Appoint an agent to do any business which the liquidator cannot do himself.10 Do all such things as may be necessary for winding up the companys affairs and distributing its assets.

Defunct companies

It sometimes occurs that the proprietors of a business simply stop trading without telling theRegistrar of Companies.They may simply pay off the debts of the company out of available assetsand not bother with a formal liquidation. If the Registrar of Companies has reasonable cause tobelieve that a company is not carrying on business or is not in operation he may initiate a procedureto strike the company off as defunct.The procedure is as follows:

1The Registrar sends the company a letter by post inquiring whether the company is carrying onbusiness or is in operation.

2 If he does not receive any answer to it within one month of sending the letter he will send within14 days after the end of the month to the company by post a registered letter referring to the firstletter and stating that no answer has been received and that if an answer is not received to thesecond letter within one month from its date, a notice will be published in the Gazette with a view tostriking the companys name off the register.

3 If the Registrar receives an answer to the effect that the company is not carrying on business ordoes not within one month receive any answer he may publish in the Gazette and send to thecompany by post a notice that on the expiration of three months from the date of the notice thename of the company will be struck off the register and the company will be dissolved.

4 So long as the Registrar receives no notification that the company is trading during this period, heduly strikes the company off and publishes a notice in the Gazette.

This has the effect of dissolving the company. It should be noted that striking off in this way has noeffect on any liability of any member of the company, and the company may still be wound up by anorder of the court

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