3 Types of Winding Up

8/3/2019 3 Types of Winding Up

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Insolvency (Winding-up)

Insolvency Act 1986 - a result of long and lengthy consultations, the result of the"Cork Report", whose committee was first established in 1977.

A company only comes to life through the operation of the law, and may only bekilled off by the operation of the law.

Analogies between the death of a company and the death of a person - assets aredistributed to the members, etc., but with one crucial difference - the company's

assets have to be dealt with before the desolution of the company

A company can be wound up while still solvent, without any complications. The winding-up of an insolvent company, on the other hand, can prove quite

complicated.

One of the main reforms of the Insolvency Act 1986 was the introduction ofInsolvency Practitioners

Insolvency Practitioners:

s.388-393 IA 1986 contains rules regarding the minimum qualifications, competence

and appointment of such practitioners. Before this legislation, neither liquidators nor

receivers had to have any qualifications, and this in turn lead to "dodgy" practice, as

companies lost out on money, etc.

Types of Winding-up

There are two types of winding-up - compulsory and voluntary (s.73(1) IA 1986)

a) Compulsory Winding-up s.122(1) & s.125 IA 1986 - judicial discretion s.122(1) contains 7 grounds for compulsory winding up:

1) if there is a special resolution by the company that it be wound-up by thecourt;

2) a company which has been registered, but not issued with a certificate toconduct business;

3) an oldcompany ("old" has a special meaning within the legislation, but is beyond the scope of this course);


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4) the company has not started to trade or conduct business within 12 monthsof its incorporation;

5) the number of members is reduced to 2 (unless it is a private company);6) it is unable to pay it's debts * most important *7) the court is asked to reach a just and equitable winding-up

There are four main areas a court will consider, particularly in regard to 6) above:a) if a creditor owed a debt exceeding 750.00 for 3 weeks after making a

written request for payment of that debt;

b) execution process issued on a judgement is returned unsatisfied, in wholeor in part (in practice, the minimum sum must exceed 750.00);

c) if it is proved to the satisfaction of the court that the company is unable topay its debts as they fall due;

d) if the company's assets are worth less than the amount of its liabilities,taking into account contingent and prospective liabilities

There are several people who can bring a petition for winding-up - creditors, thecompany itself, directors and the members. This is subject to a general proviso

that they have held their shares for at least 6 months and they have an interest in

the winding-up

Just because a company has debts, dies not mean that a court will order thewinding-up - the mere existence of debts is not sufficient grounds

Comes back to the court's general discretion to grant a winding-up order, and thatthe court will take into account all contributor's and member's interests, but

especially the interests of other creditors.

Re ABC Coupler & Engineering Ltd [1961] 1 All ER 354

In this case, a creditor had a debt of 17,500. In order to try and get back some of the

money he petitioned the court for a winding-up order. There were a number of other

creditors, and all of them opposed the compulsory winding-up. This was consideredof importance by the courts. Also considered important was that the company had

extensive goodwill. The court also looked at the fact that although the company was

money poor, it was asset rich - its assets were extensive and would more than cover

the liabilities. For these reasons, the creditor was denied his petition for winding-up.


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b) Voluntary Winding-upThere are two types of voluntary winding-up:

1) members voluntary winding-up - largely under control of members - wheredirectors swear a statutory declaration of solvency

2) creditors voluntary winding-up - largely under control of creditors - wheredirectors failed to swear a statutory declaration of solvency

With respect to a creditors voluntary winding-up, a meeting of creditors will be

called, and they will appoint a liquidator and they can also appoint, if they should so

wish, creditors representatives to sit on the liquidation committee.

In the case of a members voluntary winding-up, there will be a meeting of members,

and possibly contributors, and they will have to pass a resolution for the winding-up

of the company and appointment of a liquidator.

Voluntary winding-up may commence in the following ways:

s.84 IA 1986 - if the company resolves by extraordinary resolution to be wound-up on the basis that it cannot by reason of its liabilities continue its business

if the company resolves to be wound-up voluntarily by special resolution if a fixed period has been settled for the duration f the company, and the fixed

period has now elapsed, then the company may be wound-up be ordinary

resolution.

Notice of winding-up:

A requirement of the Insolvency Act 1986 is that notice of a winding-up be reported

in theLondon Gazette

Malpractice and Conduct

Malpractice with regard to Insolvency

Where someone has misapplied the monies, or misappropriated the property of thecompany, and is guilty of any breach of fiduciary duty and / or duty of care.

In these cases, the court may order repayment of the money, it can also orderrestoration of the property. It can also demand any contribution related to the

breach of duty, as it thinks fit.


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This is also related to the "fraudulent trading" aspects of malpractice, particularlys.213 IA 1986, which covers, in particular, situations where a person or persons

knowingly carry on the business of a company with intent to defraud creditors or

for any fraudulent purpose. Any such person can be ordered to contribute to the

company' s assets.

The main phrase concerning the court is "unreasonable behaviour"The Conduct of the Liquidation

s.233 IA 1986

This was a direct result of the recommendations of the Cork Committee, and is

primarily concerned with preventing the abuse of "economic muscle" by the suppliers

of utilities (stop "pay up or be cut off", etc.)

s.216 IA 1986

Designed to stop the "phoenix situation" - places certain limitations on companies

using the same name or very similar names. The old name of a company cannot be

used for a period of 5 years from the date of liquidation. For example, in the case of

Thorne & Silverleaf (1994), the defendant was a director of two companies, which

had been liquidated - called Mike Spence (Reading) Ltd and Mike Spence (Motor

Sport) Ltd. He personally guaranteed these two companies' overdrafts, and when they

got a little large, he formed a third company called Mike Spence (Classic Cars) Ltd.

IT was argued that he was personally liable for the third company' s debts, and because

the three companies were so similar, there was an association between these three

companies. Notwithstanding the corporate veil, the court agreed that he was liable for

all three companies.

When a liquidator has realised the company' s assets, they have to pay off the debts,

and there is an order of priority. There are two main bodies - firstly, the liquidator' s

pay including the costs of liquidation, and then the preferential creditors. There are

several recognised preferential creditors, each have an equal claim on the remaining

assets.


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Fraud and deception:

There are various offences of fraud and deception which can be committed during a

liquidation. Five of the most important are:

1) Fraud in anticipation of a wind-up (s.206 IA 1986)2) Past or present officers of the company making gifts, transfers or charges

on a company' s property (s.207 IA 1986)

3) Misconduct by past or present officers (s.208 IA 1986)4) Falsification, destruction or mutilation of the company' s books (s.209 IA

1986)

5) Material omission from statements relating to the company' s affairs (s.210IA 1986)

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