The first two methods of ending corporate existence are by means of a member's voluntary winding up and a creditors' voluntary winding up. Court involvement is limited. The difference between these two forms of voluntary winding up is that in a members' voluntary winding up the company must be solvent, while this will not be the case in a creditors' voluntary winding up. The third method of winding up is that of a compulsory court ending up. This method would be used where a creditor of the company is owed money.
MEMBERS' VOLUNTARY WINDING UP
The company must be solvent, and, for whatever reason, the members of that company have decided to end its existence.
Declaration of solvency
Feature of members' voluntary winding up is the declaration of solvency which must be sworn by the directors of a company, or majority of them, at a meeting of the directors.
It should be noted that where, contrary to the statutory declaration sworn by the directors, a company is in fact insolvent, the Companies Act 1963 provides for the imposition of personal liability for the debts of the company, on the directors.
The resolution to wind up
After the directors of a company have made their declaration of solvency, and the independent person has given his report, the directors should then call an extraordinary general meeting ('EGM') of the company. This should be held within 28 days of the date of the declaration of solvency.
CREDITORS VOLUNTARY WINDING UP
A creditors voluntary winding up will usually arise where the members in general meeting resolve that the company cannot by reason of its liabilities continue its business, and that it be wound up voluntarily. The essential features of a creditors' voluntary winding up are the absence of a declaration of solvency and also the fact that the winding up is precipitated by the members themselves, usually on the advice of the directors. In this section the following issues in creditors' voluntary winding up are considered:
Set out below is an outline of the procedures and further detail can be provided if the directors wish:
Step 1
- The directors convene a formal meeting of the directors at which the following maters are formally proposed.
- The directors resolve to convene an extraordinary general meeting of the members at which the members will consider a resolution to wind up.
- Written notice along with proxy forms must be sent to the members and as the resolution to wind up is an ordinary resolution, seven clear days notice must be given. The members' notice must be sent on the same day as the creditors' notice. Notice requirements should be easily met but directors would normally ensure that notice is formally posted to all members along with members' proxy forms, examples of which can be provided.
- The directors also set in motion the procedures for the convening of a meeting of creditors normally for the same day as the EGM. This meeting would be convened by post and by newspaper advertisement in two daily newspapers. The notice required for a meeting of creditors is ten clear days notice although 14 days from date of issue to the meeting date would be preferable. The newspaper advertisement would also appear at least 10 days prior to a creditors meeting.
- Prepare to arrange for the preparation of a statement of affairs to be approved by a further meeting of directors. A template for the statement of affairs could be provided if necessary. The statement of affairs is laid before the meetings of members and creditors. It would be important to ensure that any statement of affairs is accurate particularly the estimated to realise figures which should be realistic.
- The directors must also decide among themselves which director will chair the meeting of creditors (note that this is a statutory obligation). In general where the business is a family operation, only one director tends to be present at the meeting of creditors.
- The Extraordinary General meeting is held at which the members consider and if they think fit, pass an ordinary resolution that the company be wound up.
- At that meeting the members resolve to appoint their choice of liquidator.
- The members' meeting can also propose one or more representatives for the Committee of Inspection. The tendency is that members do not select representatives but there is no reason not to do so.
- At the creditors meeting (nearly always held on the same date), the director appointed to chair the meeting must provide the creditors present or represented with a copy of the statement of affairs (a list of creditors to be attached) and usually will read out a history of the business and answer questions. It is common practice in this country for a solicitor to accompany the chairman, who will advise the chairing director where necessary on the responses to questions and also advise on any technical points regarding voting rights that may arise.
- It is common practice to provide a "chairman's agenda" which will help the chairing director with the process. The advising solicitor will be familiar with the process so this agenda may not be needed but one can be provided in any event.
- The need for solicitor will very much depend on the level of creditors 'claims and the directors' rapport with the creditors. It is clearly a matter for the directors to consider and the directors should consider whether any issue might arise where legal advice might be needed. This is a point that could be considered closer to the time.
The primary duties of a liquidator are normally the realisations of assets, agreement of creditors' claims and the distribution of available assets to the creditors in accordance with their statutory priorities. The liquidator also has a general duty to investigate the conduct of the directors during the period to liquidation. This general duty, which would have been carried out by most insolvency practitioners, has been given extra weight as a result of the commencement of the Company Law Enforcement Act 2001.
COMPULSORY COURT WINDING UP
A compulsory liquidation, will arise where the High Court is petitioned to have a company compulsorily wound up. This procedure is often used by creditor owed money by the company.
The first stage in the process is service of a document known as a Statutory Demand which gives the company 21 days to make payment. If payment is not received or the demand challenged the next stage is to issue a Winding Up Petition seeking the Winding Up the company. The Petition is given a date by the Court and it is advertised in national newspapers and at the hearing date if payment is not made a Liquidator will be appointed and the company will be put into Liquidation.
Thereafter Liquidator will deal with the realisation of assets of the company and deal with the general affairs of the company.