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Liquidation

The Insolvency Act 1986 provides the various means by which companies may be wound up. Winding up may be either by way of compulsory liquidation, or by voluntary liquidation. Compulsory liquidation is instigated by petition to the court, with voluntary liquidation being initiated by the members of a company. The purpose of both however, is to wind up the company and distribute the company’s assets to those having a claim on them.

Compulsory Winding Up

Jurisdiction

In Scotland a company may be wound up compulsorily in the Court of Session, or, where the company’s share capital is less than £120,000, in the Sheriff Court where the company has its registered office.

The grounds under which a company may be wound up compulsorily are:

  • Where the company has resolved by special resolution to be wound up by the court;
  • Where a registered public company has failed to obtain s.761 trading certificate within a year of registration;
  • Where a company does not trade within a year of its incorporation, or suspends trading for a period of a year;
  • Where the number of company members falls below two persons (unless it is a private limited company, either by shares or by guarantee);
  • Where the company is unable to pay its debts; or
  • Where the court believes it to be just and equitable that the company should be wound up.

 

The Company’s inability to pay its debts

s.123 (1) defines the appropriate circumstances for this as being:

  • Where there is a failure to pay a debt of £750 or more, either in cash, or by granting a security, when given three weeks’ notice to do so following a statutory demand or an s.122 letter. Notably, it is possible for creditors to combine sums due to reach a total figure of £750 or more.
  • Where the induciae of a charge has expired (15 days) following an extract decree, extract registered bond, or extract protested bill;
  • Where the company is unable to pay its debts as they fall due, in circumstances where cashflow problems exist despite the company’s technical solvency;
  • Where the company’s liabilities (including contingent and prospective liabilities) exceed their assets.
  • The court’s discretion to refuse a winding up order
  • Where a creditor has proved grounds for a winding up order, a court may refuse to make an order. An order will generally be refused where:
    • The majority, by value of creditors oppose the winding up; or
    • Where the petitioning creditor (together with any supporting creditors) is owed £750 or less.

 

Voluntary Winding Up

Members’ Voluntary Winding Up

A company can be wound up voluntarily either by its members, or by its creditors. Under s.84 of the Insolvency Act 1986, a winding up by a company’s members can take effect:

  1. By way of ordinary resolution where a company has reached its expiry date or event as defined in its articles; or
  2. By special resolution if the company is deemed to be insolvent and it is advisable to wind up the company.

In either case, the company must send a copy of the resolution to the Registrar of Companies within 15 days of the passing of the resolution and must send a copy to the Edinburgh Gazette within 14 days. The winding up is deemed to take effect at the time of the passing of the resolution. The company must then appoint a liquidator and intimate that appointment to the Registrar of Companies and to the Edinburgh Gazette within 14 days of his appointment.

At the passing of the resolution the company must cease its affairs except to the extent necessary to wind the company up, but legally remains in existence until such time as it is dissolved. In the event of no liquidator being appointed, the company must dispose of its perishable assets and take steps to safeguard the rest of its assets.

The liquidator’s fees are settled in priority to all other claims. Employee contracts are not terminated on the voluntary winding up of a company, although they may be terminated on the instigation of the liquidator if he sees fit.

Once the voluntary winding up has been completed, the liquidator may write to the Registrar of Companies with the final accounts, and the company will be dissolved three months later.

Provisions relating to members voluntary winding up

Where a members voluntary winding up takes place, and a company is believed to be solvent at the time of winding up, it is expected that after repayments are made to first preferential and then to ordinary creditors, that remaining funds will be distributed among members of the company. If the directors believe that the company would be able to pay its debts in full within the succeeding 12 months, then they should make a statutory declaration of solvency to that effect. This should be made in the five weeks preceding the resolution to wind the company up and should be lodged with the Registrar of Companies within 15 days of the resolution being made. Failure to submit this with the Registrar will result in the winding up becoming a creditors’ voluntary winding up. Any unjustified declaration by the directors where they did not have reasonable grounds for making such a declaration followed by the company’s debts not being repaid in full within the subsequent twelve months may lead to the directors being fined. The process would again convert to a creditors’ voluntary winding up.

One or more liquidators will be appointed at the time of the resolution being made for a members’ voluntary winding up. The directors’ powers then cease with the Liquidator taking responsibility for ingathering company assets, paying the creditors what is due and repaying the members any sums remaining. The Liquidator will then prepare final accounts, call a final members meeting to explain what he has done and submit the final accounts to the Registrar of Companies where dissolution of the company can be completed.

Creditors’ voluntary winding up

A creditors’ voluntary winding up takes effect where the members still choose to put the company into liquidation where funds are not sufficient to make any repayments to members, but will be used only to settle the company’s creditors.

As the benefit is to creditors and not to members, the creditors have the key role in the conduct of the liquidation.

In this instance, the company must convene a meeting of all its creditors within 14 days of a resolution to wind the company up. This meeting must be advertised in the local press and in the Edinburgh Gazette. The notice must contain the name and address of an insolvency practitioner who will supply the creditors with information about the company in liquidation.

The directors must prepare a statement containing details on the company accounts and its creditors and securities to be presented at the creditors meeting.

Either the members, at their meeting in which they resolve to wind the company up, or the creditors at their initial meeting may appoint a Liquidator. The creditors’ choice prevails, unless a court determines otherwise. Both the creditors and the members may appoint a committee of up to five persons to advise the liquidator, however again the creditors’ choice prevails, unless the court decides otherwise.

On the committee’s appointment of a Liquidator, the directors’ powers cease and notice of the appointment must be sent to the Registrar of Companies to be published in the Edinburgh Gazette.

The liquidator then manages the liquidation and will continue to have annual meetings laying out the progress of the liquidation until such time as it is complete. After a final meeting the liquidator will apply to have the company dissolved.

For further information and what we can do for you please contact John Carruthers or e-mail jc@oraclelaw.com.

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