What is winding up?
The terms 'winding up' and 'liquidation' are interchangeable.
There are different types of winding up, but they are all procedures for bringing the company's business to a close and placing its assets under the control of a liquidator (who must be an insolvency practitioner), who must realise them and use the proceeds to pay the creditors what they are owed (so far as possible, and after meeting the costs of the liquidation).
The following is a very brief outline of company liquidation and related procedures.
Further detail is presently beyond the scope of this database. References are
to the Insolvency Act 1986.
The Insolvency
Service website contains a great deal of information on this whole area.
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TYPES OF LIQUIDATION
Compulsory liquidation
Winding up by court order. Very similar process to bankruptcy.
Voluntary liquidation
Winding up decision made by a special or extraordinary resolution of the company's general meeting. Two types:
Members voluntary winding up
(when the company can pay all its debts)
Creditors voluntary winding up
(when the company cannot pay all its debts)
OTHER PROCESSES
There are three other processes:
COMPULSORY LIQUIDATION
Liquidation by order of the court.
Jurisdiction
The High Court has jurisdiction to wind up any company registered in England
and Wales. The county court of the district in which the company has its registered
office has concurrent jurisdiction with the High Court if the company's paid
up share capital does not exceed £120,000 (IA sec117).
Winding up petition
Petition presented to the court requesting an order that the company be wound
up. Petition may be presented by a creditor or creditors (the usual case) or
by the company, the directors, any contributory (member), the Sec of State,
Official Receiver (if the company is already in voluntary liquidation), the
Attorney-General (if the company is a chy) (IAarit sec124).
Grounds for winding up
IA 1986, sec122 gives a list of grounds on which the court may make a winding
up order. The commonest are:
sec122 (1) (f): the company is unable to pay its debts (on which creditors
petition)
sec122 (1) (g): the court is of the opinion that it is just and equitable that
the company should be wound up (on which members may petition, e.g. where oppression,
etc.)
Other grounds:
- A company passes a special resolution to wind up
- A public company which has not been issued with a certificate within the requisite time
- A company which has not commenced business within one year of incorporation
- A public company whose membership falls below two
Creditor's petition (IA 1986, sec123)
Petitioner(s) must be owed at least £750 (unsecured). There is no statutory monetary threshold, unlike the comparable provisions relating to bankruptcy. Although in practice, if a statutory demand is served to establish inability to meet debts, this threshold applies.
Petition alleges that the company is unable to pay the debts set out in the petition, or has no reasonable prospect of being able to pay.
Must be proved by either:
- Non-compliance with a statutory demand for payment of the debt, or
- Failure to satisfy execution on a judgement debt, or
- It is proved to the court that the value of the company's assets is less than the amount of its liabilities (including contingent and prospective liabilities), or
- It is proved by other means that the company is unable to pay its debts as they fall due.
A statutory demand is a demand, in the prescribed form, for payment of the debt (or acceptable security to be given within 21 days.
Commencement of winding up
If the court makes a winding up order, the winding up is deemed to have commenced on the date of the presentation of the petition, except where the company was already in voluntary winding up, when it commences at the date of the resolution to wind up.
Effects of winding up order
The official receiver is appointed liquidator of the company (IA sec136).
The Official Receiver can require the company's directors (or founders or employees)
to:
- submit a statement of the company's affairs to Official Receiver within
21 days;
- provide all information, records and papers relating to the company's affairs;
- attend the Official Receiver when required;
- deliver up property to Official Receiver;
- All dispositions of the company's property or transfers of shares made since
the winding up began can be avoided.
- Actions against the company cannot be begun or continued without leave of
the court.
Subsequent procedure
The Official Receiver receives the statement of affairs and must investigate and report to the court:
- If the company has failed, the cause; and generally the promotion, formation, business, dealings and affairs of the company
- If there has been misconduct on the part of the directors, this report could play a part in disqualification proceedings
Official Receiver calls first meetings of creditors within 12 weeks (unless
s/he decides otherwise) (IA sec136). A meeting can be requisitioned by one-quarter,
in value, of the creditors.
At any time the Official Receiver may request, and the court may order, a public
examination of the company's officers (IA sec133) or they may be examined privately
by the court.
First meeting of creditors
The main purpose of the meeting is to decide on the appointment of a liquidator.
Separate meetings will be held for creditors and members unless the Official Receiver decides otherwise. Each meeting may nominate a liquidator. Usually they nominate the same person. If they do not nominate the same person, the person nominated by the creditors' meeting will be the liquidator unless an application is made to the court, which orders otherwise.
The liquidator must be an insolvency practitioner (in most cases an accountant)
(see IA sec388 - sec398).
If no meeting is held, or no liquidator appointed, or when any vacancy arises,
the Official Receiver is the liquidator (IA sec136).
At all meetings of creditors:
There are statutory rules re notices, adverts, quorum, voting, chair, etc. (see Insolvency Rules 4.50 - 4.51).
Creditors vote in proportion to the value of their debts, and to the extent they are unsecured (IR 4.67). Voting is by simple majority.
Liquidator's functions
(IA sec143(1)) The liquidator's functions are to collect the assets of the company,
realise them and apply the proceeds in the following order:
1. Payment of costs of winding up
2. Liquidator's remuneration
3. Preferential debts (Sched. 6):
12 months PAYE income tax deducted from employees
12 months National Insurance
contributions deducted from employees contributions to employees pension schemes
employees' remuneration, for up to 4 months and £800 per employee
6 months VAT
car tax various betting and gaming duties
If there is insufficient to meet all the preferential debts, pay each category
a dividend of x pence in £
4. Debts secured by a floating charge
Such debts rank below the preferential creditors, so assets the subject of the
charge could be used to pay preferential debts. The fact that a floating charge
may have crystallized on liquidation and become fixed does not affect its position
in the order of payment. The time for determining the nature of the charge is
at its creation.
5. Ordinary debts
If insufficient, pay each category a dividend of x pence in the £
6. Post insolvency interest
Any surplus is distributed among the members of the company, in accordance
with their class rights.
Secured creditors
Enforce their security and do not claim in the liquidation except to the
extent that the security is inadequate.
The assets subject to a fixed charge take priority over all other creditors.
Those subject only to a floating charge are deferred to the preferential creditors.
Both fixed and floating charges are required to be registered within 21 days
of creation under CA 1985, sec395. Failure to register makes the charge void
against a subsequently appointed liquidator.
Administration of Estate by the Liquidator
The liquidator has control over all the assets of the company. Because the company is a separate legal entity it is not necessary for the assets to be vested in the liquidator (though this may be done by order of the court).
The liquidator is entitled to all property belonging to or vested in the company.
Property in the possession of the company but belonging to another will not
form part of the estate. This will include where property is held by the company
on trust for another or, e.g., Where goods have been sold to the company subject
to a retention of title (Romalpa) clause. Such a clause provides that goods
are not to become the property of the company until they have been fully paid
for. Generally, clauses attempting to retain title where goods supplied have
been mixed with other goods so as to become unidentifiable, or to follow the
sale proceeds of goods supplied have been unsuccessful. In any case, the clause
must have been properly incorporated into the contract.
The liquidator is entitled to use own discretion in administering the estate
(IA sec168) and has statutory powers (IA sec167)
The meetings of creditors and contributories may set up a liquidation committee to supervise the liquidator: IA sec141.
Some powers may be exercised only with the consent of the liquidation committee or the court (IA Sched. 4, Pts I and II); most can be exercised without consent (Sched. 5, Pt III).
The liquidator is subject to the control of the court and any person aggrieved by the liquidator's acts may apply to the court. The liquidator may apply to the court for directions on any matter (IA sec168).
The liquidator has to keep accounts and make returns to the court and to Companies House.
Increasing the assets
Transactions at an undervalue (IA s 238)
A transaction at an undervalue is a gift or transaction for a consideration
the value of which is considerably less than the consideration provided by the
company, if it was within 2 years before the onset of insolvency (i.e. commencement
of liquidation, administration or receivership).
The liquidator can apply to the court for an order to set aside such a transaction
(or to restore the parties to their original position).
The court cannot make such an order if it is satisfied that the company entered into the transaction in good faith and for the purposes of its business and at the time there were reasonable grounds to believe that it would benefit the company. A transaction which is clearly at an undervalue can be valid by virtue of this provision.
The court can make the order only if the company was unable to pay its debts
at the time or became unable to pay them as a result of the transaction. There
is a rebuttable presumption of this if the other party to the transaction was
a connected person (IA sec240). A person is connected with a company if a director
of it or an associate of such a director. See IA sec435 for detail of who is
an associate.
For these purposes a person is 'connected' with a company if a director or
shadow director of the company or an 'associate' of a director or shadow director,
or of the company itself: IA sec249.
An 'associate' of an individual is a spouse or relative (long list in IA sec435)
or the spouse of a relative. The associate of a company is any person who, alone
or with other associates, has control of the company or (essentially) another
company controlled by the same persons: IA s 435.
Preferences (IA sec239)
A preference is where the company has done anything, or suffered anything to be done, which had the effect of putting a creditor (or surety or guarantor for any debt) in a better position in relation to the liquidation, and the company was influenced by a desire to achieve this, for example paying a creditor or giving a charge or other security. The use of the word 'influenced' is designed to require less than a dominant intention to prefer.
Examples of preferences are:
eg paying a creditor
giving a charge or other security to a creditor
The court can make an order restoring the parties to their original positions provided the preference was given within the 6 months before the onset of insolvency and the company was unable to pay its debts at the time or became insolvent as a result of the transaction.
If the recipient was a connected person the time period is 2 years and there is a rebuttable presumption that the company was influenced by the requisite motive. The inability to pay debts must still be proved.
Avoidance of floating charges (IA sec245)
A floating charge on the company's undertaking or property will be invalid to
the extent that it was created to secure an existing debt, i.e. except to the
extent that consideration (in the form of money, goods, services or the discharge
of debt) was given to the company at the time of or subsequent to the charge.
To be valid security the charge would have to be granted in return for money
advanced, goods supplied, etc. at the time of, or subsequent to, its creation.
The debt becomes unsecured if the charge can be avoided.
If the charge was given to someone not connected with the company it will be void only if:
- it was created within 12 months before the onset of insolvency (i.e. the commencement of the liquidation, administration or receivership); and
- the company was unable to pay its debts at the time or become unable to pay them as a result of the creation of the charge.
If the charge was given to someone who was connected with the company it will be void if it was created within 2 years before the onset of insolvency (regardless of whether the company was able to pay its debts).
The provision is aimed at preventing directors giving themselves priority over
unsecured creditors by means of a floating charge given to secure a loan already
made by them to the company.
Fraudulent trading and wrongful trading
The liquidator may apply to the court to make an order against the company's directors or ex-directors if they have been guilty of fraudulent trading or wrongful trading.
Fraudulent trading (IA sec213)
If in the course of the winding up of a company any business of the company
has been carried on with intent to defraud creditors of the company or creditors
of any other person, or for any fraudulent purpose....the court, on the application
of the liquidator, may declare that any persons who were knowingly parties to
the carrying on of the business in [such] manner are liable to make such contributions
(if any) to the company's assets as the court thinks proper.
Liability for the debts of the company is not imposed, but the court can decide how such a person should contribute to the assets of the company.
Fraudulent trading is also an offence under CA 1985, sec458 and ground for a
directors' disqualification order: Company Directors Disqualification Act 1986,
sec4.
Wrongful trading (IA sec214)
A person who has been a director or a shadow director of a company can be held
to be liable for wrongful trading if the company has gone into insolvent liquidation
and, sometime before it did so, the director knew or ought to have concluded
that there was no reasonable prospect that the company would avoid doing so
and then failed to take every reasonable step to minimize the potential loss
to the company's creditors. The person will be liable to make such contribution
(if any) to the company's assets as the court thinks reasonable.
This section was designed to overcome the difficulty of establishing fraudulent trading. An order can only be made if the company has gone into insolvent liquidation and can only be applied for by the liquidator. Liability usually arises where a company continues to trade and incur liabilities after a time when it was clear that insolvent liquidation was inevitable or probable.
To determine what a director ought to have known, sec214 lays down the facts
which would be known by a reasonable diligent person having:
(a) the general knowledge, skill and experience that may reasonable be expected
of a person carrying out the same functions as are carried out by that director
in the relation to the company, and
(b) the general knowledge, skill and experience that the director has.
Wrongful trading is also a ground for a directors' disqualification order, but it is not a criminal offence.
Misfeasance proceedings (IA sec212)
This section applies if in the course of the winding up of a company it appears that a person who has been an officer of the company has been concerned or taken part in the promotion, formation or management of the company and has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.
The court may, on the application of the official receiver, liquidator, or any creditor or contributory examine the conduct of such person and may compel them to repay or restore or account for the money or property (with interest) or to contribute to the company's assets, as the court thinks just.
This applies also to the acts of liquidators, administrators and receivers.
This provision establishes a means of recovering money or property from a person
who has committed a wrongful act according to established principles of company
law, such as the making of secret profits. It offers a simpler procedure than
bringing a High Court action. It does not, of itself, create any legal rights
or liabilities.
Disclaimer of onerous property
The liquidator may disclaim onerous property notwithstanding that s/he has taken
possession of it, tried to sell it or exercised any rights of ownership over
it (IA sec178).
Onerous property is an unprofitable contract or any other property which is unsaleable or not readily saleable or may give rise to a liability to pay money or perform any other onerous act.
Disclaimer terminates the rights, interests and liabilities of the company in respect of the property but does not otherwise affect the rights or liabilities of any other person.
Any person suffering loss or damage is deemed to be a creditor of the company for that amount and may prove for such loss in the winding up.
The liquidator cannot disclaim if an interested person has previously served notice asking the liquidator (or predecessor) to decide whether to disclaim and no notice of disclaimer given within 28 days.
When a disclaimer has been made any interested party can apply to the court
for an order vesting the property, etc. (IA sec181).
Completion of the liquidation (1A 1986, sec146)
On completion of the winding up the liquidator will call a final meeting of creditors and present the final report and accounts. The meeting decides whether the liquidator should be released, which will discharge the liquidator from all liability in respect of the liquidation.
Creditors can question the liquidator about the final report and can resolve against granting a release. In such a case the liquidator has to apply to the Secretary of State for a release.
Notice is sent to the Registrar of Companies and the company is dissolved three
months later: IA sec205. Dissolution after three months is automatic unless
application is made to the Secretary of State to defer for a specified period
the date of dissolution and this application has been granted.
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MEMBERS' VOLUNTARY WINDING UP
This type of winding up can be used only if the company is solvent.
A statutory declaration of solvency must be made by the directors (or a majority
of them where more than 2), to the effect that they have made full enquiry into
the company's affairs and are of the opinion that the company will be able to
pay all its debts in full within a specified period, not exceeding 12 months.
The declaration is filed at Companies House (IA sec89).
The declaration is ineffective unless made within five weeks immediately before the date of the resolution being passed to wind up the company. It must also contain a statement of the assets and liabilities of the company as at the latest practicable date before the date of the declaration.
A general meeting of the company is called to pass a special resolution to wind up and an ordinary resolution to appoint a liquidator.
On the appointment of the liquidator the directors' functions cease and the liquidator sets about the task of realising the company's assets and using them to pay the costs of the liquidation, the payment of the creditors (in full) and the distribution of the balance among the members of the company.
On completion of the liquidation the liquidator calls a final general meeting, submit to it the final account. A final return is sent to the Registrar of Companies and the company is dissolved three months later.
If the liquidator comes to the conclusion that the company will not be able
to pay all its debts, s/he must call a meeting of creditors and turn it into
a creditors' voluntary winding up (IA sec95).
Once the creditors meeting has been held, the IA provides that the declaration
of solvency is deemed never to have been made and the creditors and members
meetings already held are those required in a creditors winding up. However,
the date of commencement of the winding up remains the date the special resolution
was passed by the members.
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CREDITORS' VOLUNTARY WINDING UP
If the directors are unable or unwilling to make the statutory declaration of solvency, they must:
- Call a general meeting
- To pass an extraordinary resolution that the company cannot by reason of its liabilities continue in business and should be wound up; and
- Call a meeting of creditors
- To be held within 14 days after the general meeting (often held on the same day);
- Present a statement of affairs to the creditors' meeting.
The liquidator is appointed by the general meeting and the creditors' meeting. In the event that the two meetings nominate different persons, the person nominated by the creditors' meeting is the liquidator unless, on the application of any creditor or contributory, the court orders otherwise.
A liquidation committee may be appointed to supervise the liquidator.
The liquidator's functions are as in any other winding up. As the company may not be able to pay all its debts, payment must be made in the order of priority applying in compulsory liquidation.
A liquidator in either type of voluntary winding up enjoys greater freedom than a liquidator in a compulsory winding up in that more powers can be exercised without the sanction of the court.
At the conclusion of the liquidation the liquidator prepares a final account
and submits it to a general meeting and a meeting of the creditors, who resolve
on his release. A final return is made to Companies House and the company is
dissolved three months later.
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OTHER PROCESSES
There are three other processes:
ADMINISTRATIVE RECEIVERSHIP
An administrative receiver (who must be an insolvency practitioner) is appointed
to enforce a debenture which is secured by a floating charge over all (or nearly
all) the assets of a company. The receiver's function is to collect the assets
charged and use the proceeds to pay the debenture. Before doing so, any debts
taking priority over the debenture must be paid (e.g. any secured by a prior
charge, or the preferential debts which take priority over a floating charge)
and the receiver's own expenses and remuneration will be met before payment
is made to the debenture-holder.
An administrative receiver is there to enforce the debenture and not to pay off creditors generally. The company may also be put into liquidation and a liquidator appointed.
An administrative receiver is usually appointed by notice in writing by the
debenture-holder in accordance with the terms of the debenture. The court may
appoint where the debenture so provides, or where the property on which the
debt is secured is in 'jeopardy', i.e. it is threatened by some unusual occurrence
such as execution by a judgement creditor.
The receiver has the powers set out in IA 1986, Sched. 1. These include full
powers to collect and realize the assets charged and to carry on the company's
business (with a view to its sale as a going concern). In these circumstances,
the receiver is personally liable for any debts incurred but is entitled to
an indemnity out of the assets of the company.
Within three months of appointment the receiver must send a report of the receivership
to the creditors and, unless the court orders otherwise, must call a meeting
of the unsecured creditors for consideration of the report. The creditors may
appoint a creditors' committee. If the company is in liquidation the liquidator
must be sent a copy.
Other processes
VOLUNTARY ARRANGEMENT(Insolvency Act 1986,
sec1-7)
A voluntary arrangement is an arrangement between the company and its creditors
(or class of creditors) to accept some form of compromise or arrangement instead
of the company going into liquidation. It must be administered by an insolvency
practitioner. A specific set of proposals will be drawn up by the insolvency
practitioner and put to a meeting of creditors and to the company's general
meeting. If approved by the general meetings and by a three-quarters majority
(by value) of the creditors affected it is binding on all creditors except non-assenting
preferential and secured creditors. If a winding up petition is presented, the
court may make an administration order (see below).
other processes
ADMINISTRATION ORDER (Insolvency Act 1986,
sec8-27)
The administration order procedure was introduced by the Insolvency Act 1986
to provide a mechanism for a company to be sold as a going concern, or some
other arrangements made, where there is no debenture-holder secured by a floating
charge, and so no administrative receiver may be appointed. Such a debenture-holder
may veto an administration.
An application to the court for an administration order can be made by the company itself, or its directors or any creditor or creditors. As from the presentation of the petition for an administration order the company may not be wound up, nor any security or distress, execution, etc enforced or or legal process taken against the company.
This does not prevent an administrative receiver being appointed or acting,
nor does it stop a winding up petition being brought against the company (IA
1986,sec10). The petition will not be heard unless and until the administration
order petition is dismissed.
The court can make an administration order if it is satisfied that the company
is or is likely to be unable to pay its debts and that an administration order
would be likely to achieve one or more of the following purposes:
(a) the survival of the company, and the whole or any part of its undertaking,
as a going concern; or
(b) the approval of a voluntary arrangement or
(c) a scheme under CA 1985, sec425 (a similar provision); or
(d) a more advantageous realisation of the company's assets than would be effected
on a winding up.
The effect of the order is that the affairs, business and property of the company
shall be administered by an administrator appointed by the court (IA 1986, sec8).
When making the order the court must specify the purpose for which it is made.
On the making of an order any winding up petition is dismissed. No order can be made if an administrative receiver has been appointed unless the debenture-holder consents. If an order is made, the administrative receiver is dismissed (IA s 11) and the right of a debenture-holder to appoint an administrative receiver is suspended for the duration of the order.
As from the making of the order:
(a) the company may not be put into liquidation and no receiver appointed;
(b)no steps may be taken to enforce any security over the company's property,
no repossession of goods made, legal proceedings brought, execution, distress
or other legal process levied or taken against the company or its property
except with the consent of the administrator or the court.
(c)The administrator must be an insolvency practitioner and has a general
power (IA s 14) to do all such things as may be necessary for the management
of the affairs, business and property of the company and specific powers in
IA 1986, Sched. 1. Within three months the administrator should submit proposals
to the creditors (and, generally, to the members) and call a creditors' meeting
for the consideration of the proposals. The administrator then reports the
proposals and the effect of the meeting to the court. If the proposals are
not approved the court may dismiss the administrator.
If the proposals are approved the administrator has a duty to take control over the company's property and to manage the affairs of the company in accordance with them.
The creditors' meeting may establish a creditors' committee to protect their interests.
The administrator may at any time apply to the court for directions or to have
the administration order varied or discharged. The administrator must apply
for the order to be discharged if the purpose specified in the order has been,
or is capable of being, achieved. The administrator is released from such time
as the court may determine.
other processes
The Insolvency
Service website contains a great deal of information on this whole area.
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