Formal Insolvency Process
Liquidation, or winding up, is the process whereby a company’s affairs are taken out of control of the directors and put into the hands of a liquidator, who realizes the company’s assets, pays its debts and liabilities, and then returns any surplus to the members. Liquidation is appropriate when a company cannot continue as a going concern.
There are two methods of winding up a company, namely voluntary and compulsory liquidation. Voluntary liquidation occurs when the members of a company resolve to wind it up, and compulsory liquidation occurs when the court makes a winding-up order against a company. Voluntary winding up may be either members’ voluntary liquidation (‘MVL’), which occurs when the directors make a statutory declaration that in their opinion the company will be able to pay its debts in full within 12 months of the commencement of the winding up, or creditors’ voluntary liquidation (‘CVL’). Any voluntary liquidation in which no such statutory declaration has been made is a CVL. A Winding up that starts out as an MVL may be converted to a CVL if the liquidator forms the opinion that creditors will not be paid in full as anticipated.
Both CVL and compulsory liquidation are collective procedures, in that they are processes carried out for the benefit of all unsecured creditors. Those creditors in the same class are treated equally.
CVL is a quicker way to put a company into liquidation than compulsory winding up, and the directors and members retain control as to the timing of the process. Once the liquidation is in place CVL is also a more cost-effective alternative to compulsory winding up, as the costs of the Official Receiver are avoided, and realisations do not have to be paid into the Insolvency Services Account, where significant fees and charges have to be paid. However the directors or members may have to fund the liquidator if the company has no assets with a realizable value.
Compulsory liquidation is usually initiated by a creditor of the company, who presents a winding-up petition to the court when there is a debt owed to him or her. The ground of the creditor’s petition will be that the company is unable to pay its debts. A petition may also be presented by prescribed people on a number of specific grounds, perhaps most commonly seen where winding up is stated to be in the public interest.
When a winding-up petition is presented to the court it is endorsed with a hearing date and returned to the petitioner. It is his or her obligation to serve the petition on the company (unless the company itself is the petitioner), usually at its registered office, and to advertise it in the London Gazette in accordance with the statutory requirements. At the hearing of the petition the court may make a winding-up order, or it may dismiss or adjourn the petition, or make an interim or any order it thinks fit. The court may also make a winding-up order at the hearing of an administration application. If a winding-up order is made the date of commencement of the liquidation is the date of presentation of the petition or the date on which the order on the administration application is made.
On the making of a winding-up order the Official Receiver becomes liquidator of the company. He has a duty to call a meeting of the company’s creditors within 12 weeks of the date of the winding-up order.
There are certain consequences of winding-up proceedings and liquidation which are designed to protect the assets of the company for the benefit of creditors. However no moratorium arises as in administration.
Under IA 1986, s 126 any creditor or contributory of the company may apply to the court at any time after presentation of a winding-up petition and before a winding-up order is made to stay proceedings against it.
In liquidation and administration directors still have a number of duties, notwithstanding that their powers have come to an end. For example they must make a statement of affairs of the company, and they have a duty to co-operate with the office-holder, enforceable by way of an application to court if they fail to comply. A director may also be required to attend an initial creditors meeting in administration. Further, a director’s obligations under CA 2006 to prepare annual accounts, lay them before a general meeting of the company, and to file accounts still continue, although in practice the Registrar does not take action in default of compliance once a company is in liquidation or administration.