In simple terms
, or liquidation, is how a company's life ends. Its assets are collected and sold, its debts are paid in the proper order, any surplus goes to the members, and then the company is dissolved.
Modes of winding up
Section 343 says a company may be wound up by the court, voluntarily, or subject to the supervision of the court. A voluntary winding up is either a members' voluntary winding up or a creditors' voluntary winding up.
Winding up by the court
Section 350 says the court may wind up a company if:
Special resolution: the company has resolved by to be wound up by the court.
Statutory report or meeting: the company has defaulted in delivering the statutory report to the Commission or in holding the statutory meeting.
No business: the company does not commence its business for a whole year.
Too few members: subject to section 67, its membership falls below the requirements of section 15.
Inability to pay debts: the company is unable to pay its debts.
Just and equitable: the court thinks it just and equitable that the company should be wound up.
Inability to pay debts defined: under section 351 a company is deemed unable to pay its debts if, among other things, a creditor owed more than the sum the section fixes serves a written demand at the registered office and the company neglects for three weeks to pay, secure or compound for it; or if execution on a judgment is returned unsatisfied.
Effects: section 357 deals with when a winding up by the court commences, section 355 makes dispositions of the company's property after commencement void unless the court orders otherwise, and section 359 stays actions against the company once a winding-up order is made.
Voluntary winding up
Members' voluntary: under section 407 the directors, or a majority of them where there are more than two, may make a that they have made a full inquiry into the company's affairs and believe it will be able to pay its debts in full within the period the section sets. Section 408 says a winding up where such a declaration is made is a members' voluntary winding up.
Creditors' voluntary: a voluntary winding up without that declaration is a creditors' voluntary winding up, in which the creditors have a large say.
The liquidator
The liquidator takes control of the company's property, collects and sells its assets, settles the list of and pays the creditors. The official receiver has a role in a winding up by the court under sections 361 to 363, and the court appoints liquidators under sections 364 to 368.
Liability of members
Present and past members may be liable as contributories under sections 344 to 348. In a company limited by shares, a member's liability is limited to any amount unpaid on his shares.
Fraudulent trading
Under section 458, if in the winding up it appears that the business was carried on with intent to defraud creditors or for any fraudulent purpose, the court may declare directors who were knowingly parties to it personally responsible, without limit, for the company's debts. Sections 439 to 446 let the liquidator challenge fraudulent preferences and transactions at an undervalue. In Re Patrick and Lyon, on the English equivalent, the court held that intent to defraud requires real moral blame, not just carrying on business while insolvent.
Dissolution
Once the company's affairs are fully wound up, it is dissolved and ceases to exist.
Words and Latin in this note
- Special resolution
- A resolution passed by not less than two-thirds of the votes cast at a general meeting of which 21 days' notice, specifying it as a special resolution, was given: section 200(2). Open the note.
- Fraudulent trading
- Carrying on a company's business with intent to defraud creditors or for a fraudulent purpose. Under section 458 directors knowingly party to it may be made personally responsible for the company's debts.
- Contributory
- A present or past member who may be liable to contribute to a company's assets in a winding up. In a company limited by shares the liability is limited to any amount unpaid on the shares.
- Winding up
- The process of ending a company's life: collecting and selling its assets, paying its debts and distributing any surplus, before dissolution. It may be by the court, voluntary, or subject to the court's supervision: section 343.
Memory map
Winding up
Winding up by the court
- Special resolution
- Statutory report or meeting
- No business
- Too few members
Voluntary winding up
- Members' voluntary
- Creditors' voluntary
Key points
- A company may be wound up by the court,…
- The court's grounds include a special…
- A company is deemed unable to pay its debts on…
- A directors' declaration of solvency makes the…
Cases
- Re Patrick and Lyon Ltd
- Ebrahimi v Westbourne Galleries…
- Re Yenidje Tobacco Co Ltd
Key terms
- Special resolution
- Winding up
- Contributory
- Fraudulent trading
Take-home points
- A company may be wound up by the court, voluntarily, or subject to the supervision of the court: section 343.
- The court's grounds include a special resolution, not starting business for a year, inability to pay debts, and the just and equitable ground: section 350.
- A company is deemed unable to pay its debts on an unsatisfied statutory demand or execution: section 351.
- A directors' declaration of solvency makes the winding up a members' voluntary one; without it, it is a creditors' voluntary one: sections 407 and 408.
- Members of a company limited by shares contribute only what is unpaid on their shares.
- Directors knowingly party to may be made personally liable: section 458; intent to defraud needs real moral blame: Re Patrick and Lyon.
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