Application for compulsory winding-up

Application for compulsory winding-up

Contents

Types of liquidation

The winding-up or liquidation (the terms are interchangeable) of a company is a process where the assets of the company are collected in and sold; the net proceeds of sale distributed to the company's creditors and any surplus paid to the shareholders. The end result of the winding-up process is that the company is finally dissolved and ceases to exist.

There are 2 types of liquidation of a company:

  • Compulsory liquidation which is a court based process (discussed below); and
  • Voluntary liquidation which is a non-court based process.

Compulsory liquidation (or winding-up) of a company is a court-based procedure, begun by the presentation of a winding-up petition to court usually by a creditor (petitioning creditor) who is owed money by the company. The winding-up petition can also be presented to court by, amongst others, the company itself or the directors of the company acting together.

There are various circumstances where a company may be liquidated, the most common is that the company is unable to pay its debts, as discussed below.

Proving the company's inability to pay

The petitioning creditor has to prove that the company is unable to pay its debts on the date of the hearing of the petition.

The 2 tests used to prove an inability by the company to pay its debts

  • Balance sheet test

If the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities, it will be regarded as unable to pay its debts. A contingent liability arises out of past events or legal obligations, and depending on future events, may or may not become due for payment. A prospective liability, on the other hand, is a debt that will definitely fall due for payment on some future determinable date.

The court will consider all the circumstances as this test is not just a strict mathematical exercise or a subjective decision that the company has reached a point of no return. The person applying for the liquidation must prove to the court's satisfaction that the balance sheet test is sufficient to prove that the company is unable to pay its debts.

  • Cash flow test

In the cash flow test the court will examine whether the company is actually paying its debts as they fall due, if it doesn't, it will be regarded as being insolvent. For this test it doesn't matter that the company has more assets than liabilities, as a company should be able to pay its way without the need to realise assets to do so.

Unsatisfied judgment

In England and Wales a company will be deemed to be unable to pay its debts if a judgment creditor has enforced its judgement by way of execution against the company's assets or has issued another process for recovery on that judgment, and the judgement debt could not be fully settled.

In Northern Ireland this will be the case if a creditor of the company obtained a court judgment and the EJO at enforcement issued a certificate of unenforceability for that judgment against the company under Article 19 of the Judgments Enforcement (Northern Ireland) Order 1981.

Statutory demand

If the debtor company fails to satisfy a statutory demand for payment of a debt of at least £750 by paying or compounding for it (i.e. agree to pay a lesser amount) within 3 weeks of receipt, the company will be regarded as being unable to pay its debts. The debt must be due and payable at the time that the statutory demand is served on the debtor company.

A statutory demand is a quick and cheap way of determining whether the debtor company is able to pay its debt or whether it disputes the amount claimed. Therefore, although a statutory demand is not a pre-requisite for getting a winding-up order, it is almost always the starting point for a creditor wanting to get a company liquidated.

In England & Wales, the contents of the statutory demand must follow a certain format prescribed by law, and must contain, for example:

  • Details to identify the debtor company including its registered office (if any)
  • The creditor's and court's details
  • The amount of the claim and the basis and amount of any interest or other charges raised, as are due on the date of the demand
  • A statement that demand is made under the relevant section of the Insolvency Act, details of the outstanding amount and that it must be paid within 21 days of receipt of the demand
  • The name and contact details of an individual that the debtor company can communicate with regarding settlement or compounding of the debt
  • A statement that the debtor company has the right to make an application to court for an injunction restraining the creditor from presenting a winding-up petition or from advertising it on the ground that the debt is disputed

The statutory demand must be authenticated by the creditor or another person on their behalf.

In Northern Ireland Form 4.01 must be used for the statutory demand.

Both in England & Wales and Northern Ireland the statutory demand should be served on a company by leaving it at the company's registered office. However, it may instead be sent by registered mail to the company's registered office, as long as it can be shown that the debtor company received it.

If the debtor company is not registered, the statutory demand can be served by leaving it at the company's principal place of business. It may also be delivered to the company secretary, principal officer, a director, a manager or served in any other way that the court either directs or consents to.

There is no requirement that proof of service of the statutory demand must be given to the court prior to it issuing the petition for insolvency. However, it remains a good idea to keep proof of service or a note detailing how service or delivery was effected in case the court asks for it.

It is normal practice to employ a process server to serve the demand.

The winding-up petition

England & Wales

The contents of the winding-up petition must follow a certain format by law, showing details:

  • Identifying the court and the petitioner
  • Identifying the debtor company, its shares and nature of its business
  • Identifying the petitioning creditor and the grounds for the winding-up petition
  • Details to establish that the court has jurisdiction

The statement of truth

The petition must be verified by a statement of truth. While there is not a specific form to use for this purpose, it must contain certain information prescribed by law. The Insolvency Service has made an example document to to verify the petition available.

If the statement of truth is part of the petition, it must identify the petition it is related to. The petitioning creditor, or someone else authorised to do so on their behalf, must sign and date the statement of truth no more than 10 days before the petition is issued.

In the statement of truth, the contents of the petition have to be confirmed as the truth and it has to be confirmed why it is considered that the EC Insolvency regulation will or won't apply and if so why the proceedings should be regarded as main or non-main proceeding in terms of the EC Insolvency Regulation.

The statement of truth has to be made and signed no more than 10 days before the petition is issued.

Northern Ireland

The winding-up petition must be in Form 4.02.

You must also use Form 4.03. to verify the winding-up petition.

This has to be made and signed no more than 10 days before the petition is issued.

The searches

The creditor must do a search before presenting the winding-up petition to make sure that a winding-up petition has not already been issued against the same debtor company. If this is so, it would be better for the creditor to rather prove their claim in those insolvency proceedings instead of taking the risk of costs when issuing another winding-up petition.

In England and Wales, the search can be done by attending on or phoning the Companies Court to check in the Central Registry of winding up petitions. All details of their telephone number and address and the daily Companies Court winding up list can be obtained from HMCTS.

In Northern Ireland this search can be done on the court service website. To do this you will have to create an online account first and the pay a fee to complete the search online. Alternatively, you can contact a law searcher to do this for you, although they are likely to charge more.

If the creditor wishes to proceed with a winding-up petition after the debtor company has already been dissolved and removed from the register of companies, the winding-up petition must state that fact and must include an order that the company be restored to the register.

The creditor must, before issuing a winding-up petition, make sure that the debtor doesn't dispute the debt on substantial grounds or maybe has a right of set-off or cross-claim against the debt.

Cost of issuing the winding-up petition

The costs of issuing a winding-up petition are:

  • An Official Receiver's deposit (also known as a 'petition deposit') to help cover the costs of administering the insolvent estate
  • A court fee

These fees are listed on the gov.uk website for England & Wales and for Northern Ireland.

There may also be a small 'search fee' if a search wasn't already carried out just before issuing the petition.

Consider the EC Insolvency Regulation

The Recast EC Insolvency Regulation on insolvency takes precedence over the UK Insolvency Act for determining the appropriate court where there is a cross-border element to the insolvency proceedings. However, the EU Regulation would only apply if the debtor has its centre of main interest (COMI) in an EU member state (except Denmark). Under the Insolvency regulation prominence is given to insolvency proceedings started in the EU member state where the debtor has its COMI. These main proceedings are effective regarding all assets and creditors of the insolvent wherever situated (except for some restrictions regarding those territories where non-main proceedings have already been started). Non-main proceedings for the same debtor in EU states where the debtor does not have its COMI only has local effect.

Which court to apply to

Northern Ireland

The High Court in Northern Ireland has the jurisdiction to wind-up any company registered in NI, a company that has its main COMI in NI and unregistered companies,

England & Wales

The courts of England and Wales have jurisdiction to wind-up any company registered in England and Wales; a company with cross-border activities that has its COMI in England or Wales, and unregistered companies.

The following criteria should be applied to decide which is the appropriate county or High Court for issuing the winding-up petition:

  • If the application falls outside the London insolvency district

If the place that has been the company's registered office for the longest during the 6 months immediately preceding the presentation of the petition for winding up does not fall within the London insolvency district (see below), the winding-up petition for a company registered in England and Wales may be presented in the county court or the High Court if the company's paid up share capital is £120,000 or less, otherwise only in the High Court.

  • If the application falls within the London insolvency district

If the place that has been the company's registered office for the longest during the 6 months immediately preceding the presentation of the petition for winding up does fall within the London insolvency district (see below) the winding-up petition for a company may only be presented in the High Court.

The London insolvency district

If any of the following county court hearing centres is closest to the place which has been the company's registered office for the longest during the 6 months immediately preceding the presentation of the petition for winding up then the application falls within the London insolvency district:

Barnet

Bow

Brentford

The County Court at Central London

Clerkenwell and Shoreditch

Edmonton

Lambeth

Mayor's and City of London Court

Wandsworth

West London

Willesden

The effect of presenting the petition to court

Any transaction to dispose of the company's assets, transfer its shares or that affects the status of the company, taken after presentation of the winding-up petition, will be regarded as void unless the court's permission was obtained.

The certificate of service

The issued, sealed copy of the petition must be served at the company's registered address by giving it to a person at that address who is believed to be or has acknowledged to being a director, officer or employee of the company. It may also be given to a person who said that they are authorised to accept service of documents on the company's behalf. If this type of service is not possible the petition can be served by leaving it at the company's registered office in such a way that it is likely to come to the notice of a person going into the office.

If the company does not have a registered address the petition can be served by leaving it at the company's last known principal place of business in England and Wales or Northern Ireland (depending on where the application is being made). This must be done in such a way that it would most likely be noticed by someone there or by giving it to a secretary, director, manager or principal officer of the company irrespective of where that person may be found.

A copy of the petition must also, within 3 business days of service on the Company, be sent to any voluntary liquidator, administrative receiver, administrator, supervisor of a voluntary arrangement or EU member state liquidator appointed to the company.

A certificate of service must be filed with the court. If the court is not satisfied from the contents of the certificate of service that the petition has come to the notice of the debtor company, it may require that the petition be re-served.

In England & Wales, while there is not a set form for the certificate of service, it must follow a certain format prescribed by law and filed at court with a 'statement of truth'.

In Northern Ireland the certificate of service must be in Form 4.04 if the petition was delivered to registered office or in Form 4.05 if it was not possible to deliver the petition to the registered office.

Opposing the application

If the debtor company wants to oppose the winding-up application it has to file its evidence at least 5 days before the hearing. However, even if it fails to do this the court would normally grant it the opportunity to oppose the application.

The advertisement

To enable other interested parties to become aware of the hearing of the winding-up petition an advertisement, must be published in the Gazette at least 7 days after service of the petition on the Company and at least 7 days prior to the date of hearing.

In England & Wales, this advertisement must contain certain necessary details prescribed by law. In Northern Ireland the advertisement must be in Form 4.06.

Interested parties can inform the petitioner whether they will attend the hearing and whether they support or oppose the application.

The certificate of compliance

A certificate of compliance with the rules relating to the service of the petition and the advertisement of it in the Gazette must be filed at court at least 5 days before the date of hearing. A copy of the advertisement has to accompany the certificate when filing it at court.

The certificate must be signed and dated by the petitioner.

In England & Wales must give the following dates:

  • The date of presentation of the petition
  • The date fixed for the hearing
  • The date that the petition was served on the debtor company
  • The date it was advertised in the Gazette

In Northern Ireland the certificate of compliance must be in Form 4.07.

Persons intending to appear at hearing

Persons who want to attend the hearing of the petition must notify the petitioner so that the petitioner can prepare a list for the court of the people that will attend the hearing. Both the contents of the notice as well as that of the list of persons must follow a certain format prescribed by law.

What the court may order on hearing the petition

The court has complete discretion whether or not to make the winding-up order or any other suitable order, such as:

  • dismiss the application;
  • adjourn the hearing;
  • make the winding-up order;
  • make an interim order before making the final winding up order such as appointing a provisional liquidator to safeguard the assets of the company; or
  • make any other order it thinks fit in the circumstances, such as backdating a winding up petition to the date a company, restored to the companies register, was originally dissolved.

Consequences of the winding-up order

When a winding-up order is made the registrar of companies will, after being notified, enter it in the records relating to the company. This is so that any person can, by doing a search, find out whether the company is being wound-up.

No action, without leave of the court, can be taken or proceeded with against a company that is subject to a winding-up order, except in as much it is a secured creditor taking enforcement action against its security. The winding-up is regarded as effective from the date the petition was presented to court.

All communications whether electronic or otherwise of the insolvent company must clearly reflect the fact that the company is in liquidation.

All employees of the company will be automatically dismissed when the winding-up order is made and they may be able to claim for certain amounts as preferential creditors in the liquidation of the company, such as:

  • Contributions to occupational and state pension schemes
  • Wages and salaries for work done in the 4 months before the insolvency date, up to a maximum of £800 per person
  • Holiday pay due to any employee whose contract has been terminated, whether that termination takes place before or after the insolvency date