Liquidation of Companies

Liquidation of Companies

Liquidation, or dissolution, is the procedure for concluding the affairs of a company which is no longer required or cannot continue because of its insolvency. The assets of the company are realised, and the proceeds are distributed. The company’s liabilities must be paid first. Any remaining surplus will then be distributed to the shareholders.  If the assets are insufficient to pay the company’s liabilities in full, the company is insolvent, so creditors will only be able to receive part payment.

Following the conclusion of its liquidation, a company is dissolved – ie: its name is removed from the register of companies and it ceases to exist.

There are three types of winding up:

  • Members’ voluntary winding up
  • Creditors’ voluntary winding up
  • Winding up by the court

Members’ voluntary winding up

This is only available where the directors can formally declare that the company can pay all its liabilities in full within 12 months.  The company is solvent but may no longer be required for one (or more) several reasons, including:

  • it may have been formed for the purpose of undertaking a particular project which has now been completed;
  • it may be redundant following a group restructuring; or
  • the owner-manager may be retiring.

The company is placed in voluntary winding up by resolution of the shareholders who, at the same time, appoint a liquidator. If for reason, a liquidator is not appointed by the general meeting, the directors shall apply to the Court for the appointment of a liquidator.

Creditors’ voluntary winding up

This is when a company cannot continue in business because of its liabilities or where, for any reason, the directors cannot declare solvency before the start of the winding up.  As for a members’ voluntary winding up, the company is placed in winding up by the resolution of the shareholders, who also appoint a liquidator.  However, a meeting of creditors must also be held at which the creditors can, if they wish, replace the liquidator appointed by the shareholders with one of their own choices.  Where no person is nominated to act as a liquidator by either the creditors or the company, an application to the Court for the appointment of a liquidator shall be made by the company's director.

Winding up by the court

A court order imposes this following an application by the shareholders, directors, or creditors.  A public officer is appointed to act as Official Receiver to carry out the necessary investigations and subsequently report to the court the amount of issued and paid-up share capital and the estimated assets and liabilities. If the company is insolvent, the causes of the failure and whether further investigations are necessary regarding any matter relating to the company's promotion, formation, or failure of the company or the conduct of the business.

The Official Receiver may make further reports to the Court if, in his opinion, any fraud has been committed by any person or officer of the company.  The Official Receiver automatically becomes the liquidator and continues in office until the creditors appoint another person as liquidator.  It is generally desirable for the directors of an insolvent company to initiate a voluntary winding up before the position deteriorates to the point where a compulsory winding up occurs.

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