Under the terms of the Insolvency Act, the Court can decide that a company must be wound up
(or undergo compulsory liquidation). This means that it must stop trading; its assets will be sold to repay creditors and possibly,
although unlikely, shareholders. Compulsory liquidation usually happens when a creditor of the company, who has lobbied without success to obtain payment, petitions the High Court for a Winding-up Order and places a notice in the London Gazette. The fact that a company may already be in receivership, voluntary liquidation or has no assets will not stop a petition being made. In addition to creditors, other parties can petition the court for a Winding-up order. These include:
- Directors or shareholders of the company;
- Administrative Receivers;
- Other administrators;
- Supervisors of failed company Voluntary Arrangements;
- The Financial Services Authority; and
- The Secretary of State (where closure of the company is in the
Officials involved in Compulsory Liquidation
The Official Receiver
who is both a Civil Servant and
officer of the Court, handles cases of Compulsory Liquidation, particularly at the outset. The OR:
- Deals with the administration of the Compulsory Liquidation;
- Investigates the affairs of the individuals in the Compulsory liquidation;
- Reports to The Insolvency Service’s Directors Disqualification Unit on individuals whose behaviour has shown them unfit to be company directors;
- Tell creditors and shareholders that the company is being wound up. In cases where there are significant assets at stake the Court may also appoint an Insolvency Practitioner (IP) to act as Liquidator in place of the OR.
are usually practising solicitors or accountants,
regulated mainly by Recognised Professional Bodies, and sometimes by the
former Department of Trade and Industry. The IP as Liquidator will:
- Administrate the liquidation;
- Realise the assets;
- Pay any fees and charges associated with the Liquidation;
- Pay preferential and secured creditors;
- Divide any remaining money, raised through the sale of assets, between
unsecured creditors on a Pari Passu basis. This means that the percentage of the overall debt owed to each creditor is calculated and they receive the same percentage of the total sum available. Shareholders receive a share of any funds remaining after creditors have been repaid
in full. In reality, this rarely happens.
Reasons for winding up a company
The principal reason why companies are wound up is because they are unable to pay a debt and a creditor, who has a significant amount of money owed to them, has petitioned the High Court for a Winding-up Order. However a Winding-up Order can also be granted because:
- The company has decided it should be wound up;
- It has existed as a public limited company for less that one year and has not yet received a trading certificate;
- It is an ‘Old' public company; and
- The Court decides that winding up the company would be a just and equitable decision.
Notice of a Winding-up Order
A Winding-up Order should come as no surprise to any competent company director. Directors should know if their company is facing difficulties, and particularly whether one or more creditors of the company are putting pressure on for repayment of monies owed. If a creditor petitions the Court, the Court will notify the company. Costs associated with taking out a petition are high. To make the petition worthwhile there must be at least undisputed debts of ₤750, the creditor must have made significant previous efforts to recover the debt and, prior to taking out the petition, must send a Statutory Demand to the company for the amount owing to be paid in 21 days. On receipts of
a winding up petition the company must decide whether to:
- Try and halt or stop the petition;
- Pay the debt;
- Prepare to defend the action in Court, and instruct a barrister.
Even if the debt is paid it may be necessary for the winding up hearing to take place, and it is possible that between the date of payment and the date of the hearing another creditor could come forward to take the place of the one that has been paid. This is referred to as piggy backing.
Stopping a Winding-up petition
There are several ways to stop a Winding-up Order. If the company believes the information presented to the Court is wrong or incomplete they must apply,
not less than five days before the hearing, to get the order rescinded. If the application to stop or halt the Order fails, they can appeal the decision. The OR, Liquidator, shareholders, or a creditor can also apply to the court for the Winding-up order to be suspended or stopped permanently. Stopping a Winding-up order in its tracks can be difficult and other than those officially appointed, anyone planning to do so should seek professional advice.
Behaviour of directors
Directors have a duty to behave responsibly to protect the interests of creditors and shareholders. This includes taking appropriate action as soon as problems with the business start to arise and the danger of insolvency becomes real. Compulsory liquidation is a very serious step and it carries consequences for directors. Once a Winding-up Order is granted, directors lose control over the business and its assets and, other than providing information required by the IP, cannot represent the company. If the director is an employee of the company, employment will be terminated and they will be told how to claim any wages due. A director of a company going into liquidation cannot:
- Dispose of Company assets in order to pay creditors;
- Remove assets for their own purpose;
- Be involved in a company or business that uses a name which implies that it is in someway connected to the business in liquidation
(there are some exceptions).
Providing they are not subject to a disqualification order, a receiving order or are an undischarged bankrupt, a director can continue
or commence to be a director of a different company.
A director who has previously given personal guarantees on debts may be asked to personally contribute to the assets of the company. Directors who have misapplied company funds, allowed the company to trade wrongfully or fraudulently, or have ignored the fact that others are doing so may also be liable to
Winding-up Order granted by the Court
Once the petition has been lodged and the hearing has taken place
the Official Receiver will be appointed by the Court. If the company is still trading it will be closed down and any premises and assets secured ready for valuation and sale. Shareholders who are holding shares not paid for in full will be asked to pay the remaining amount into the company assets. Employees will be dismissed and may have an entitlement to redundancy pay or damages on the grounds of unfair dismissal.
The interview with the Official Receiver
The OR or IP will interview each director of the company being wound up. Directors must cooperate and provide whatever information is requested. Before the interview directors will be asked to complete a questionnaire and bring it to the interview together with any company records, accounts, bills or other information about the company which they hold. They should also tell the
OR or IP about any other director who holds such records. The director will also be expected to make a statement of the company’s assets and liabilities. If a director fails to attend the interview, or provide the information requested, they can be questioned in Court. If a director fails to attend Court when required to do so an arrest warrant can be issued and a charge of contempt of court made against the director. Such behaviour would suggest strongly that the person concerned is not fit to be a director and may, ultimately, result in a period of imprisonment.
The following considerations apply to creditors:
- Who will be expected to prove their claim to the OR or IP;
- They can form a Creditors Committee to help the OR or IP carry out their duties;
- Must be kept informed of developments;
- Cannot instigate legal proceedings against the company without permission of the Court; permission to pursue proceedings for monetary relief are likely to be refused:
- Can challenge the level of the remittance to the IP. Where it is in the interests of the liquidation a Court Order can be obtained to remove the IP who is administrating the company; a Creditors Committee can also decide this.
The Company ceases to exist
Once the assets have been sold and creditors repaid, the OR or IP will ask the
Secretary of State (where applicable) to release them from the office of Liquidator, a final shareholder’s meeting will be held after which the IP will inform the Registrar of Companies that liquidation of the company has taken place. The company will be dissolved and remove from the records at Companies House, usually within three months.