Winding Up

(n) Winding up is the process by which the normal activities of the corporation or association of person is stopped and the assets and liabilities of the association is assessed and distributed among the shareholders as per the existing agreement. On winding up the organization cease to be a going concern. The owners are eligible to get the share of residual property and may require to compensate in the event the assets are insufficient and the existing agreement so specifies.

Voluntary Winding Up Under section 254, voluntary liquidation of a company occurs if it passes a special resolution to take effect or when the period fixed for the duration of the company expires and a resolution of the general meeting requiring the voluntary winding up of the company is passed. Winding up commences at the time of the passing of the resolution for voluntary winding up. Where it is proposed to winding up voluntarily, the majority of the directors may at a board meeting make a statutory declaration that having made full inquiry into the affairs of the company, they have formed the opinion that the affairs of the company will be able to pay its debts in full within a period not exceeding 12 months after the commencement of the winding up: 257(1). The company at a general meeting would then proceed to appoint its liquidators. There would not be any supervision by the creditors: 258. However, should the company be unable to pay its debts within the period stated in the aforesaid declaration, the directors would have to make a financial report to the creditors and the creditors themselves may appoint the liquidator. It then becomes a Creditors' Voluntary Winding Up. Obviously directors would prefer members' winding up as this meansa that, through their de facto control, their nominee is likely to be appointed liquidator and therefore their past conduct may not be examined too closely. Dissolution of the Company The law has made special provisions which apply during the liquidation so that those who have invested in or had dealings with the company can be protected.

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Ouster of Directors and Management. This is perhaps the most important provision of all. On winding up, the board of directors becomes functus officio; its powers are assumed by the liquidator: 216(4). This is because it is those in control who have the power to cause harm and their removal is therefore essential before any remedial action can be taken. This removal occurs automatically on liquidation. Investigation of Officers' Conduct.The Act makes provisions enabling the conduct of directors and managers to be investigated. The official receiver may make a report to the court on whether further inquiry into the conduct of the company's business is desirable or whether there has been any fraud being committed. Civil Remedies Against Officers. The Act also imposes certain civil liabilities on officers of companies in liquidation. The two main provisions are section 304 and 305. Section 304 enables the court to impose personal responsibility on those who were knowingly parties to the continuation of the company's business with intent to defraud creditors or for other fraudulent purposes. However, actual dishonesty has to be proven: Re Patrick & Lyan Ltd (1933) Ch 786. Section 305 provides power to the court to investigate any misappropriation or breach of trust by any promoter or officer and to compel him to restore the money or property or to pay compensation. Liquidators. Once the liquidator is appointed, the powers of the directors cease: 261(4). The liquidator is the fiduciary agent of the company: Knowles v Scott (1891) 1 Ch 717. The property of the company does not vest in him but the company continues to exists. The liquidators makes

contracts on behalf of the company: Stead Hasel & Co v Cooper (1933) 1 KB 840. Although a liquidator is normally bot personally liable on his contracts, he has statutory duties: 277(2). He has a fiduciary relationship with the company and creditors as a body. He has to give accounts [section 281] and make good defaults [section 282].

Members' and creditors' voluntary liquidation

There are two kinds of voluntary liquidation. A members' voluntary liquidation (MVL) is when a company or limited liability partnership (LLP) is solvent and has sufficient assets to be able to pay creditors in full, including costs. A creditors' voluntary liquidation (CVL) is used when a company or LLP does not have enough assets to pay debts in full, and is therefore insolvent.

Members' voluntary liquidation

To proceed with an MVL, the directors of a company or LLP must make a formal declaration of solvency and file it with Companies House. This is done using form 4.70 - members' voluntary winding-up declaration of solvency. You can obtain this form from a legal stationer. Find legal stationers listed on the yell.com website- Opens in a new window.

A declaration must:

be based on a full inquiry into the company's or LLP's affairs state that all debts and interest can be paid within 12 months include an up-to-date statement of the company's or LLP's assets and liabilities be made by the majority of directors of a company or designated members of an LLP no more than five weeks before the passing of a resolution for voluntary winding-up of a company or no more than five weeks before the date the LLP decided that it would be wound up

It is a criminal offence to make a declaration of solvency without reasonable grounds.

A general meeting must be held by the shareholders of a company. At this meeting, resolutions for winding up the company are passed, along with the appointment of a liquidator. A special resolution must be passed by shareholders for a winding-up. However, an LLP is not subject to the same meetings requirements as a company, including those required under insolvency law. Instead, an LLP may design its own decision making process, including that required to decide whether it will enter any insolvency proceedings, including voluntary liquidation.

Notice of the resolution for voluntary winding-up of the company or the determination for voluntary winding up of an LLP must be published in the London Gazette within 14 days of the general meeting. The company or LLP must also send a copy of the resolution or determination to the Registrar within 15 days of the general meeting, as well as the declaration of solvency.

Creditors' voluntary liquidation

A company or LLP may go into CVL when it cannot continue its business because of its liabilities. A company can hold a meeting to vote by special resolution for it to be wound up voluntarily. An LLP is not subject to the same meetings requirements as a company, including those required under insolvency law. Instead, an LLP may design its own decision making process, including that required to decide whether it will enter any insolvency proceedings, including voluntary liquidation.

Once the resolution by the company - or decision by the designated members of the LLP - for a winding-up has been passed, the company or LLP must:

advertise the resolution in the London Gazette within 14 days send a copy to the Registrar of Companies within 15 days hold a meeting of its creditors within 14 days - although it is common practice for the meetings of members and creditors to be held on the same day

This gives creditors the opportunity to:

question the directors of the company or designated members of the LLP as to the reasons for the failure put forward an alternative liquidator

One of the directors or designated members must be at the creditors' meeting and preside over it. If they do not attend, the creditors can appoint someone else to preside. If a liquidator has been nominated by the company or LLP, they must be at the creditors' meeting and report on any action they have taken in the period between the meetings.

Once appointed, the liquidator takes control of the company or LLP and its assets.