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Liquidation

Chapter 25


Liquidation


Chapter Contents


25.1    Types of winding up


25.2    Fair dealing


25.3    Malpractice


25.4    The conduct of the liquidation


Summary


Self-test questions


Further reading



It is beyond the scope of this work to give a detailed survey of the law on liquidation. This area of law is a complex one. Not only is the Insolvency Act 1986 devoted in part to the law on liquidation (or winding up), but this is supplemented by detailed insolvency rules governing the practice of insolvency (Insolvency Rules 1986).


The law on winding up as well as personal bankruptcy was updated by the Insolvency Act 1985 following the Report of the Review Committee on Insolvency Law and Practice (the Cork Report – Cmnd 8558, 1982). The Committee had been appointed as long ago as 1977 with the allotted task of making proposals to reform the law on personal bankruptcy and corporate insolvency. This was then consolidated in the Insolvency Act 1986. The Enterprise Act 2002, as has been noted, makes some fundamental changes to insolvency law (Chapter 21).


25.1  Types of winding up


There are essentially two types of winding up. There is compulsory winding up – a winding up by court order – and voluntary winding up – winding up initiated by the members of the company. Voluntary winding up then splits into two types:


(a)  members’ voluntary winding up, which is largely under the control of the members where the directors swear a statutory declaration of solvency; and


(b)  creditors’ voluntary winding up, which is largely under the control of the creditors as the directors have seen fit not to swear a statutory declaration of solvency.


25.1.1  Compulsory winding up


Section 122(1) of the Insolvency Act 1986 sets out the grounds of compulsory winding up. They are as follows.


A company may be wound up if:


(a)  the company has by special resolution resolved that the company be wound up by the court;


(b)  the company is a public company that has registered as such on initial incorporation but has not been issued with a certificate to do business under s 761 CA 2006 and more than a year has expired since it was so registered;


(c)  it is an old public company, within the meaning of the Consequential Provisions Act 1985;


(d)  the company has not commenced business within a year of incorporation or suspends business for a year;


(e)  the number of members is reduced below two, unless it is a private company to which the exemption relating to a membership of one now applies;


(f)  the company is unable to pay its debts; or


(g)  the court is of the opinion that it is just and equitable that the company should be wound up.


The court clearly has a discretion as to whether or not to grant a petition. This point receives support from s 125 of the Insolvency Act 1986, which provides that the court may dismiss a petition or adjourn the hearing conditionally or unconditionally, or make an interim order or any other order that it thinks fit.


Only the last two grounds in s 122(1) are of great importance. The inability to pay debts is ‘fleshed out’ in s 123 of the Act. This has been covered above (section 23.6). In considering the various grounds that demonstrate inability to pay debts, the court will take account of any disputed debts and if it feels that there is a bona fide dispute concerning a debt, no winding-up order will be granted unless it is clear that more than £750 is owed by the company.


In Re Welsh Brick Industries Ltd [1946] 2 All ER 197, the Court of Appeal held that a judge was competent to grant a petition on the basis of the evidence before him even though unconditional leave to defend the debt had been given to the company. In Re Ringinfo Ltd [2002] 1 BCLC 210, however, the judge, Pumfrey J, considered that a debt disputed on genuine and substantial grounds cannot support a petition.


Even if it is demonstrated that there is a dispute concerning the debt, a winding-up petition may be granted if it is established that at least £750 is owing. Thus it was established in Re Tweeds Garages Ltd [1962] Ch 406 that the garage owed at least the minimum amount then required by the Act and the petition was granted.


Yet the existence of a debt of the requisite amount is not sufficient of itself to force a winding-up petition. The court has a discretion and will consider the views of contributories and especially of other creditors. In Re ABC Coupler and Engineering Co Ltd [1961] 1 All ER 354, a judgment creditor with a debt of in excess of £17,500 petitioned for an order that the company be compulsorily wound up. The petition was not supported by any other creditor and was opposed by a number of them. The company had extensive goodwill and a considerable excess of assets over liabilities. The petition was not granted.


The various grounds on which a petition to wind the company up on the just and equitable ground may be granted have also been considered above (see section 15.6). The petition here is presented by a member or contributory, as he is termed in a liquidation situation (see s 124(2) of the Insolvency Act 1986). The presence of the remedy of just and equitable winding up is a clear demonstration of the fact that winding up is available in situations other than where the company is in financial difficulties. The appellation insolvency as applied to the Insolvency Act is in some ways misleading. Indeed, it seems that the contributory whose shares are fully paid must show that he has an interest in the winding up, which means that he must demonstrate that assets will be available for distribution, i.e. that the company is solvent. The question was left open in Re Rica Gold Washing Co (1879) 11 ChD 36.


In addition, s 124(2) of the Insolvency Act 1986 provides that a contributory may only present a petition if the number of members is reduced below the statutory minimum or he holds shares that were originally allotted to him, or have been transmitted to him on the death of a former holder, or he has held the shares for at least six months from the previous 18 months before the commencement of the winding up.


The progress of a compulsory liquidation is that the petition is presented, for example, by a creditor if it is on the ground of inability to pay debts or by a contributory if it is on the ground that it is just and equitable that the company should be wound up.


The Secretary of State may also, on occasion, present a petition and also if, following a report made or information received in relation to company investigations or information obtained under s 2 of the Criminal Justice Act 1987 in relation to fraud investigations or under s 83 of the Companies Act 1989 in relation to assisting overseas regulatory authorities, he thinks that it is expedient in the public interest that a company should be wound up.


Once the petition has been presented, it is then for the court to decide whether the case has been made out. If it has been made out, the petition may be granted at the court’s discretion and an order to wind the company up may be made. The commencement date of the liquidation is the date the petition is presented; that is, retrospectively the date of the commencement of liquidation is the date of the petition. This is material in many situations as certain acts or transactions may be rendered invalid within certain time limits.


As has been noted, s 125 of the Insolvency Act 1986 provides that on hearing a winding-up petition, the court can grant the petition or adjourn the hearing conditionally or unconditionally, or make an interim order. It should not refuse to grant a winding-up petition solely on the ground that the company’s assets have been mortgaged equal to or in excess of the company’s assets, or on the basis that the company has no assets.


Once a winding-up petition has been presented, the company or any creditor or contributory can apply to the court for a stay of proceedings where proceedings are pending in the High Court or Court of Appeal and in any other case may apply to restrain further proceedings (s 126 of the Insolvency Act 1986). The actual making of the order operates to stay all proceedings but this provision enables action to be taken to stay proceedings upon presentation of the petition.


Once a winding-up petition has been presented, any disposition of the company’s property and any transfer of shares or alteration of its status is void unless the court orders otherwise where it has been committed after the commencement of the winding up (s 127 of the Insolvency Act 1986). Since the commencement date of a winding up is the presentation of the petition, this renders void dispositions after the presentation of the petition.


Section 127 includes payments that are made into and out of a company’s bank account; see Re Gray’s Inn Construction Co Ltd [1980] 1 All ER 814. The principles on which dispositions may be validated were discussed by the Court of Appeal in Re Gray’s Inn Construction Co Ltd. Buckley LJ said that in general the interests of the unsecured creditors will not be prejudiced in making any validation decision. He went on to say that a disposition carried out in good faith in the course of business at a time when the parties are unaware that a petition has been presented would normally be validated by the court.


Where a winding-up order is granted, the court will appoint a provisional liquidator and that liquidator will be the official receiver (s 136(2)). The official receiver may require some or all of the company’s officers, those involved in its formation within the previous year, those in its employment or previous employment within the last year, or those who are officers or in the employment of a company which was within the previous year an officer of the company, to provide a statement of affairs to the official receiver setting out the company’s assets, debts, liabilities, names and addresses of its creditors, securities held by them and the dates on which the securities were given.


Section 139 provides that separate meetings of creditors and contributories may be called for the purpose of choosing a permanent liquidator. The creditors and the contributories at their respective meetings may nominate a person to be liquidator. The liquidator will be the person nominated by the creditors in the event of any conflict. Yet the contributories may go to court to overturn the decision seeking the appointment of the person nominated by them. The same meetings of creditors and contributories may nominate people to a liquidation committee. The purpose of the liquidation committee will be to liaise with the liquidator during the course of the winding up. The liquidation committee is not able or required to function whilst the official receiver is liquidator.


Certain powers of the liquidator in a compulsory winding up can only be exercised with the sanction of the liquidation committee (see s 167(1)(a) of the Insolvency Act 1986).


It is the function of the liquidator to realise the company’s property for cash during the liquidation. The proceeds should then be distributed to the company’s creditors, and, if there is a surplus to the persons entitled to it, generally the contributories (class rights are again relevant here – see section 7.6): s 143 of the Insolvency Act 1986.


The liquidator takes into his custody and places under his control all the company’s property and things in action (s 144 of the Insolvency Act 1986).


25.1.2  Voluntary liquidation


Voluntary liquidation may commence in the following ways:


1   If a fixed period has been settled for the duration of the company and the fixed period has now passed or if the company is to come to an end after a certain event, then the company may be wound up by ordinary resolution.


2   If the company resolves to be wound up voluntarily by special resolution.


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