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 under which the assets of the company are collected in and sold, and the net proceeds of sale are then 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 and is 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 however also be brought by, amongst others, the company itself or the directors of the company acting together.

There are various circumstances set out in the Insolvency Act 1986 in which a company may be liquidated, but the most common reason, as discussed below, is because the company is unable to pay its debts.

Proving the company's inability to pay

The petitioning creditor has to prove to the court, from evidence of the financial circumstances of the company on the date of the hearing of the petition, that the company is unable to pay its debts.

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

  • Balance sheet test

A company is unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less that the amount of its liabilities, taking into account its contingent and prospective liabilities. All the circumstances of the case will be examined by the court but the test is not just a strict mathematical exercise or a subjective decision that the company has reached a point of no return (BNY Corporate Trustee Services Ltd and others v Eurosail-UK 2007-3BL PLC and others [2013] UKSC 28 (9 May 2013). For this reason, the burden of proof remains on the party that wants the court to find that the company's inability to pay its debts has, by means of the balance sheet test, been proven to its satisfaction.

  • Cash flow test

A company is unable to pay its debts if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due. In this test the court will look at the company's financial records to see whether it is in fact able to pay its debts as they fall due while still taking contingent and prospective liabilities into consideration. The court could on the evidence of this test find that the company is unable to pay its debts as they fall due even if the company's assets exceed its liabilities.

Unsatisfied judgment

A company in E&W will be deemed to be unable to pay its debts for purposes of liquidation if a creditor of the company has levied execution or issued another process on a judgment or other court order in favour of the creditor and that was returned either totally or partly unpaid.

Statutory demand

An inability to pay debts will also be presumed if the debtor company fails to satisfy, within 3 weeks, a statutory demand for payment of a debt of at least £750 served by the petitioning creditor. This debt must be due and payable at the time that the statutory demand is served on the debtor company.

As a statutory demand does not involve the court it is a quick and cheap way of determining whether the debtor company is able to pay its debt or whether on the other hand it disputes that it owes 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 seeking the liquidation of a company.

The statutory demand must be in the prescribed Form 4.1.

Once the company has been served with the statutory demand it has the right to make an application to the 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.

A statutory demand should be served on a company by leaving it at the company's registered office. Service may however also be validly effected by registered post to the company's registered office if it is shown that, in fact, the company received the statutory demand.

A statutory demand may be served on an unregistered limited company by any of the following methods:

  • Leaving it at the company's principal place of business.
  • Delivering it to the secretary or a director, manager or principal officer of the company.
  • Serving it in a way that the court may approve or direct.

You must make a note of the way in which you served the demand, recording what you did in order to serve it, the times and dates of service and the details of any people involved. The reason for this is that the court can refuse to allow a petition where it isn't satisfied that the creditor has taken every step reasonably necessary to bring the statutory demand to the debtor's attention.

In proceedings on a creditor's winding up petition, it is good practice to file proof of service of a statutory demand. However, there is no formal requirement to do so, and there are no specific provisions regarding the form or content. Proof of service is often given in the form of a witness statement that states:

  • The identity of the person who served the demand.
  • By whom they were instructed.
  • The means of service.

The winding-up petition

The winding-up petition must be in the prescribed Form 4.2.

In the petition details should be supplied to, amongst other issues, identify the debtor company and the petitioning creditor; to establish that the court has jurisdiction; to establish whether the proceedings will be main or non-main proceedings under the EC Insolvency Regulations; to support the contention that the company is insolvent and that a winding -up order is sought.

The statement of truth

The petition must be verified by a statement of truth.

The statement of truth can be endorsed on the petition or can be a separate document. If it is a separate document, it must identify the petition it is related to.

The prescribed petition Form 4.2 does not contain a statement of truth. The statement of truth has to be signed by the petitioning creditor or by an authorised person on its behalf. 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 thereof.

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

The searches

The Practice Direction on Insolvency Proceedings 2014 (PDIP) requires the petitioning creditor to conduct a search prior to presenting the winding-up petition to court for issuing to make sure that no winding-up petition has already been issued in respect of the debtor company. If this is so, they must enquire whether the petitioning creditor is proceeding with the application. This will enable the creditor to prove the claim in those insolvency proceedings instead of taking the risk of costs when attempting to issue another winding-up petition. A second winding-up petition should not be presented for issuing except in exceptional circumstance such as if it is the Secretary of State wanting to issue and proceed with a bankruptcy application that is in the public interest.

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.

The petitioning creditor should also make sure that the debtor company has not already been dissolved and removed from the register of companies. If this is the case, if the petitioning creditor wishes to proceed, the winding-up petition must state that fact and must include as part of the relief sought an order that the company be restored to the register.

It would further be good practice to make sure that the debt is not genuinely being disputed on substantial grounds or that the debtor company does not have a right of set-off or cross-claim against the debt.

Cost of issuing the winding-up petition

When presenting the petition to court the following has to be paid to HMCTS:

  • 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 here.

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

A creditor should consider whether the EC Insolvency Regulation is relevant to the proposed compulsory liquidation of the debtor company as that would take precedence over the UK Insolvency Act and determine whether the UK courts have jurisdiction to wind up the company.

The EU Regulation would only apply if the debtor company has its centre of main interest (COMI) in an EU member state (except Denmark). The aim of the regulations is to improve the efficiency of insolvency proceedings where there is a cross-border element. The result of the Insolvency regulation is that prominence will be given to insolvency proceedings started in the EU member state where the debtor company has its COMI. These insolvency proceedings are referred to as the main proceedings and it will have effect with regard to all assets and creditors of the insolvent company wherever situated (except for some restrictions applicable to territories where non-main proceedings have already been started). Insolvency proceedings in respect of the same debtor company in other EU states where the debtor company does not have its COMI will only have local effect.

Which court to apply to

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 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 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 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 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

Because a winding-up order is deemed to commence from the time that the petition was presented to court any transaction to dispose of the company's assets, transfer its shares or that affects the status of the company, taken after that date, will be regarded as void unless the court's, preferably prior, validation for such transaction was obtained. It is possible to get a retrospective validation, although it is riskier obviously. But either way the application needs to be made before the winding up order is made.

The certificate of service

Once the petition has been issued the sealed copy thereof must be served on the debtor company, usually at its registered address, unless this is not possible. In the latter case there are alternative ways of complying with the requirement that the petition has to be served on the debtor company.

A copy of the petition must also be sent to any voluntary liquidator, administrative receiver, administrator, supervisor of a voluntary arrangement or EU member state liquidator appointed to the company.

To prove to the court that the petition was served on the debtor company in an appropriate manner a certificate of service has to be filed at court at least 5 days before the hearing of the petition. 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.

Opposing the application

The company may oppose the application and if so it has to file its evidence supporting their opposition to the order at least 5 days prior to the hearing. If the company fails to do this and it still want to oppose the application the court would normally grant it the opportunity to do so.

The advertisement

To enable other interested parties to become aware of the hearing of the petition an advertisement in a prescribed Form 4.6 must be published in the London Gazette at least 7 days prior to the date of hearing. A copy of the advert must also be filed at court at least 5 days prior to the hearing of the petition.

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 thereof in the London Gazette in Form 4.7 must be filed at court at least 5 days prior to the date of hearing. This certificate must contain various important 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; and,
  • The date it was advertised in the London Gazette.

A copy of the advertisement has to accompany the certificate when filing it at court.

Persons intending to appear at hearing

Persons who intend attending the hearing of the petition will notify the petitioner thereof. The petitioner has to prepare a list in Form 4.10 of the people that will attend the hearing. This list has to be given to the court at the hearing.

What the court may order on hearing the petition

The court has a complete discretion whether to make the order for winding-up and may take into account the wishes of other creditors and any representations made by the company as to its ability to raise additional finance.

The court could therefore:

  • 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