United Kingdom Company Law – Insolvency and Administration [Part 2]

3 Compulsory Winding Up

This process is followed if the company is solvent but for the companies being insolvent must call creditors to liquidate the company. In members voluntary winding up if the liquidator found that company have no sufficient assets to meet the obligations then directors or company itself may be fined or imprisoned to give inappropriate declaration of solvency statement. After that liquidator may call creditors in a meeting to discuss about the issue and then convert members’ voluntary liquidation into creditors voluntary liquidation.

If the company is insolvent ( unable to pay its debts) and directors are not able for statutory declaration of solvency then the liquidation is creditors’ liquidation in which all assets of the company realized to raise cash to pay the due debts of the company. Therefore in creditors voluntary winding up, creditor play major role to bring the existence of company into an end.

3.1.1 Procedure for creditors’ voluntary liquidation

This process is also similar to the members’ voluntary winding up but creditors play major role.

Calling a meeting for passing extraordinary resolution in which shareholders approve the creditors to liquidate the company.

After passing a resolution company must call creditors meeting within 14 days of the resolution and also appoints liquidator.

Directors may provide the statement of affairs about the company transactions with full detail of assets to the creditors. Company may also provide the detail of all creditors with their out standings so that they can be paid according to their priority after complete liquidation.

Creditors also have right to appoint the liquidator and the liquidation committee to facilitate the work of liquidator at the subsequent meeting of creditors.

The selected liquidator started work to liquidate the assets of the company.

After it a final meeting is called to present the liquidation report with explanation.

The copy of resolution along with liquidation report send to the registrar at the companies’ house and then finally the name of company also dissolved from the register of companies after three months.

In compulsory liquidation a court order is in place to wound up the company due to the creditors request or other reasons.

There may be following reasons in which court may order company for liquidation (compulsory liquidation).

• If company is unable to pay its debts (insolvent) and creditors are not able to liquidate the company.
• It is in the best interest of company or in the public interest to liquidate the company
• It is just and equitable way to liquidate the company
• If company is unable to meet statutory obligations
• If business is suspended for one year
• If the company is established for some illegal purpose and fraudulent objective
• If the company did not commence business by getting trading certificate
• If the company has no members
• If stewards of the company not competent and members are dissatisfied with the administration of company

Company is insolvent

If creditors or members apply for compulsory winding up the company then court may require some proofs so that it is concluded that company must be wound up.

• Evidence which shows that company owed £750 to creditors, in this regard a written demand statement by the creditor for payment which is ignored by the company may be sufficient.
• A commercial insolvency test which shows clearly that company is unable to pay debts within a given time period
• A balance sheet test which shows that total assets are less than the total liabilities

If the above criterion is meet by the creditors or members than after inspection the court may order for compulsory liquidation.

Just and equitable way to wound up the company

Members’ dissatisfaction

If members are dissatisfied and proved that directors are negligent and not working in the best interest of company than court may also give petition for winding up.

Case law: Re German Date Coffee Co 1882

In this case law the company was formed only to serve a specific patient. So it was decided that company has no objective other than this so it must be wound up.

Fraudulent trading

If there is some fraud in the company and there is no option to control it as in the case law

Case law: Re Yenidji Tobacco Co

In this case law two partners merged their business into a company but after some time they quarreled and one partner (owner) sued another for fraud and stopped all dealings so the defendant owner requires compulsory winding up in fraud action.

There are following steps in this process.

• Unlike voluntary liquidation there is no meeting and no need for resolution to pass but a court order is sufficient to begin the winding up procedure
• Copy of court order send to the registrar for compulsory winding up and informed to all members and directors also.
• No legal action could be taken against company until it is intervened by a court.
• An official receiver (liquidator) is appointed for realizing the assets of company.
• Any person who is officially appointed as liquidator must be a qualified insolvency practitioner.
• Members and creditors also can appoint liquidator and after the approval from court an official receiver may hand over all work to the liquidator.
• All the property and business dealings ceased by the liquidator.
• All the employees working in the company dismissed automatically.
• The floating charge may be crystallized.
• A meeting of creditors and members must be held by the liquidator to discuss the matters about the winding up process. A liquidation committee also established by the creditors and members to facilitate the work of liquidator
• The liquidator reports to the court about the cause of failure of company and generally about the company’s affairs.
• The liquidation process started and liquidator took control of all assets and then realized them. The collected money from realization used to pay the creditors and remaining money distributed between the members.
• A final meeting is held by the liquidator in which liquidation report described the full detail of realization process.
• After this the liquidator released from the office and also report to the government and court to examine all accounts of receipts and payments and apply to the court for dissolution.
• Registrar is informed and liquidation report sent to the registrar also and after three months the name of company removed from the register. 

In order to pay debts from realization of assets, liquidator must follow the prescribed manner given below.

Two types of assets held by the company

1. Unsecured assets
2. Secured assets

Unsecured assets

• First of all unsecured assets sold and the money collected used to pay the expenses of liquidation process which include the cost (remuneration) of official receiver and later on the expenses of liquidator.
• The cost incurred during the selling process of assets also paid primarily before paying any other debts of the company.
• Preferential debts paid like the wages of employees including overtime and holiday payments and the pension funds schemes.
• If funds remaining then unsecured creditors paid fully.

Secured assets

• Secured assets sold by the liquidator and sometime by the secured creditors themselves assets automatically transferred into their custody when condition of payment did not meet by the company.
• After selling assets, the cost of selling must be paid and all other expenses during sale.
• Secured creditors paid fully if funds are sufficient.
• If funds remaining then the dividend declared must be paid and the interest also if any.
• Any surplus remaining after paying debts and dividend, distributed between shareholders/members according to their right.

We have discussed in detail about the all liquidation process, after complete understanding we are able now to distinguish between voluntary liquidation and compulsory liquidation by some major points.