2020-07-21
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Winding up and liquidation – an overview

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Posted by Elizabeth Taylor on 21 July 2020

What is the difference between liquidation and winding up?

The short answer to this question is nothing: the terms winding up and liquidation are synonymous. However, there are different ways to wind up a company, and this can cause confusion.

Compulsory liquidation

This is where the court makes an order that a company be wound up. The company itself can issue a petition for a winding up order if it resolves to do so on the grounds that it is insolvent, or by a creditor because the company is unable to pay its debts.

Once the court has made a winding-up order, the company is in liquidation, and a liquidator will be appointed. This could be either the Official Receiver or an insolvency practitioner.

Creditors’ voluntary liquidation

A company may pass a special resolution that it be wound up voluntarily and nominate an insolvency practitioner to be appointed as liquidator.

The liquidation commences once the resolution has been passed. Within 28 days of the nomination, creditors must be given an opportunity to approve the company’s nomination or appoint someone else as liquidator.

Members’ voluntary liquidation

Unlike a creditors’ voluntary liquidation, a members’ voluntary liquidation is a solvent liquidation, and the procedure is typically used where a company is no longer required.

The company passes a special resolution that it be wound up voluntarily and for the appointment of a liquidator.

Creditors are not involved in the process because within five weeks before the passing of the special resolution the majority of the directors must make a statutory declaration of solvency stating that the company can pay all its creditors within twelve months.

The role of the liquidator

The role of the liquidator is to realise the assets of the company and distribute the proceeds amongst the creditors in the prescribed order of priority.

The liquidator may also issue proceedings either in his own name or the name of the company to recover assets for the benefit of the insolvent estate.

The liquidator has a duty to investigate the conduct of the directors before the liquidation and provide a report to the Disqualification Unit at the Insolvency Service.

The role of directors in a winding up

Directors remain in office after a company enters liquidation. However, in a compulsory liquidation, the directors lose their powers to control the company’s affairs or act in the company’s name when the winding-up order is made. In a creditors’ voluntary liquidation, the same applies when a liquidator is appointed.

Directors are under a statutory duty to co-operate with the insolvency office holder, to deliver up any books, papers and records in his possession and to provide such information as is requested regarding the company’s business, affairs and dealings.

What is the difference between strike off and winding up?

A company can be struck off by the registrar of companies for failure to file accounts or a confirmation statement. Notice of strike-off must be advertised in the London Gazette, and if steps are not taken to rectify the overdue filings, the company will be struck off after two months.

The company can also apply to be struck off voluntarily if it is not trading and has no assets or liabilities. This process is potentially cheaper than placing the company into members’ voluntary liquidation, but there can sometimes be tax advantages of putting the company members’ voluntary liquidation.

Once a company has been struck off, it will be automatically dissolved. Any assets of the dissolved company will, depending upon the location of the company’s registered office, become vested in the Crown, the Duchy of Lancaster or the Duke of Cornwall. This is known as bona vacantia.

In either case, a creditor can object to the striking off and should do so if the creditor wishes to issue proceedings against the company or present a winding-up petition.

Can a winding-up be reversed?

It is not possible to reverse a creditors’ or members’ voluntary liquidation.

A winding-up order can be rescinded if it has been made wrongly due to a procedural irregularity.
The application to the court must be made within five business days of the winding-up order being made.

If it is not possible to rescind the winding-up order, an application can be made in certain circumstances to stay the winding up. This might be appropriate where an application to rescind is out of time or where for example, the debts, fees and expenses of the liquidation have been paid in full. However, even where an order is made for a stay, the company technically remains in liquidation and details of the winding-up order remain on file at Companies House.

About the author

Elizabeth qualified as a solicitor in 1992. She has a wealth of insolvency experience having specialised in the field for over 25 years.

Elizabeth Taylor

Elizabeth qualified as a solicitor in 1992. She has a wealth of insolvency experience having specialised in the field for over 25 years.

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