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Compulsory liquidation

Compulsory liquidation or winding up by the court generally involves actions initiated against the company’s wishes, in contrast to members’ or creditors’ voluntary windings up. Proceedings are commenced by a petition that may be presented by any creditor (including contingent or prospective creditors),40 the company, the directors (with all directors joining the petition acting as a board following unanimous or majority resolution), a contributory or the clerk of a magistrates’ court in enforcement of a fine.41 Receivers and administrators are also able to present petitions: in the case of the former, to aid realisation of the assets and, in the case of the latter, after a distribution.42 In the case of creditors whose claims are disputed by the company, the court will exercise a discretion and will tend not to accede to the petition where the company disputes the claim on substantial grounds and in good faith.43 The creditor whose claim is genuinely disputed is thus poorly placed to assert that the company has ‘neglected to pay’ the debt. Where, moreover, the debtor company has an enforceable cross claim against the petitioner –

40Ibid., s. 124(1). Where a voluntary winding up has been commenced and the majority of creditors wish it to continue, a petitioning creditor has to show some good reason for there to be a compulsory winding up: see Re Ziceram Ltd [2000] BCC 1048.

41Insolvency Act 1986 s. 124(1).

42See Insolvency Act 1986, Sch. B1, paras. 65, 66, 83, 84; and pp. 390–2 above.

43Re London and Paris Banking Corporation (1875) LR 19 Eq 444; Brinds Ltd v. Offshore Oil [1986] 2 BCC 98. See further Favermead Ltd v. FPD Savills Ltd [2005] BPIR 715, where a disputed debt was present, and Abbey National plc v. JSF Financial and Currency Exchange Co. Ltd [2005] BPIR 1256, where the dispute was not deemed to be ‘real, genuine and substantial’; see also dicta of Pumfrey J in Re Ringinfo Ltd [2002] 1 BCLC 210 at 220. See generally A. Keay, ‘Disputing Debts Relied on by Petitioning Creditors Seeking Winding Up Orders’ (2000) 22 Co. Law. 40. Keay argues (p. 46): ‘To qualify as a substantial dispute a dispute must be real and not fanciful, but it does not matter that the company bears malice towards the petitioner … But, where at least £750 is indisputedly owed to the petitioner, after taking into account the disputed part of the debt, courts may decline to dismiss the petition.’ See also Hammonds (a firm) v. Pro-Fit USA Ltd [2007] EWHC 1998 – a case which highlights the difference between winding up and administration, e.g. in showing the difference between the treatment of disputed debts under the two procedures. In the winding-up context the court’s practice is that petitions based on a disputed debt will normally be dismissed. According to Warren J, this practice does not apply to administration – a procedure designed to revive and rescue a company rather than to end the company’s life. In administration the court has a discretion at large, unconstrained by practice, as to whether or not to make an order on the particular facts of the case. Thus, where there may be a dispute regarding a creditor’s claim raised by the company, the creditor may be well advised to consider applying for an administration order: see further T. Smith, (2007) Recovery (Winter) 12.

gathering the assets: the role of liquidation 537

for a sum exceeding the claim – the court may dismiss or stay a windingup petition.44

The primary grounds for a winding-up petition are that ‘the company is unable to pay its debts’.45 The Insolvency Act 1986 deems this inability to occur: (a) if a creditor who is owed over £750 has served the company with a written demand for payment (in prescribed form at the company’s registered office) and the company has ‘for three weeks neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor’;46 or (b) if, in England and Wales, execution or other process issued on a judgment, decree or order of the court in favour of a creditor of the company is returned unsatisfied in whole or in part;47 or

(c) if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due;48 or (d) if it is proved that the value of the company’s assets is less than the amount of its liability, taking into account its contingent and prospective liabilities.49 Petitions based on the above grounds will also commonly refer to the grounds set out in the Insolvency Act 1986 section 122(1)(g) that ‘the court is of

the opinion that it is just and equitable that the company should be wound up’.50

Procedurally, a winding-up petition has to be served on the company and other parties as well as advertised according to the Insolvency Rules.51 Service at the company’s registered office is demanded and advertising must take place at least seven days after service and at least seven days before the hearing. The period between presentation of a winding-up petition and its hearing is a difficult one for the company and the petitioner. The company will often want to continue trading and petitioners may fear that the directors will dissipate assets and devalue their claims. In anticipation of these potential problems, the law provides

44See Re Bayoil SA [1999] 1 WLR 147, though the court may decide to deal with a crossclaim in the litigation: see Re Richbell Information Systems Inc. v. Atlantic General Investments Trust Ltd [1999] BCC 871.

45Insolvency Act 1986 s. 122(1)(f). See further ch. 4 above.

46Insolvency Act 1986 s. 123(1)(a). 47 Ibid., s. 123(1)(b).

48 Ibid., s. 123(1)(e). 49 Ibid., s. 123(2).

50See Ebrahimi v. Westbourne Galleries Ltd [1973] AC 360; Re J. E. Cade & Son Ltd [1991] BCC 360. Section 122(1) also provides that a company may be wound up if: the company has by special resolution resolved that it be wound up by the court; it, being a public company, has not been issued with a share capital requirement certificate within a year of registration; it is an ‘old company’; it does not commence or operate business for a whole year; or the number of its members is reduced to below two.

51Insolvency Rules 1986 rr. 4.8–4.10.

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that where a petitioner can show that there is a serious risk that the directors will dissipate the company’s assets and prejudice their claim, the court can appoint a provisional or interim liquidator to oversee the assets until the petition is heard.52 This person may be a private IP but usually the Official Receiver will be appointed.

Protection for claimants is also offered by the rules on avoidance of transactions and the retrospectivity of the rule governing the start of a winding up. When a winding-up order is made, the winding up is deemed to commence at the time of presenting the petition.53 Section 127 of the Insolvency Act 1986 covers dispositions of company property after this time and provides that any such dispositions and transfers of shares or alterations in the status of the company’s members shall be void unless the court otherwise orders.54

More general shielding of the company is offered by sections 126 and 128 of the Insolvency Act 1986, which provide that, during winding up, a company creditor or contributory may apply to the court for a stay of legal proceedings against the company and that, again during a winding up, any attachment, sequestration, distress or execution in force against a company is void.

52Insolvency Act 1986 s. 135. The Public Interest Unit of the Insolvency Service, also known as the PIU, deals with provisional liquidations. The court can appoint a provisional liquidator to take control of the company at any time after a petition to wind up a company has been presented. The provisional liquidator can either be the Official Receiver or a licensed insolvency practitioner. The usual function of a provisional liquidator is to protect the company’s assets and records until the court makes a ruling on the winding-up petition. In cases dealt with in the PIU, this will usually, but not always, mean that the company will be made to cease trading.

53Ibid., s. 129(2).

54See Bank of Ireland v. Hollicourt (Contracts) Ltd [2001] 2 WLR 290, [2001] 1 All ER 289, [2001] 1 BCLC 233 (CA). (Where a bank which is merely acting as an agent of a troubled company honours a cheque drawn on co-account unaware of a petition’s presentation, the liquidator can recover from the payee only. The bank was not liable under section 127 to make restitution to the company of amounts paid to the company’s creditors out of its account following presentation of a winding-up petition.) See C. Pugh, ‘Hollicourt to Reduce Banks’ Exposure under Section 127’ (2001) 17 IL&P 53; H. Mistry, ‘Hollicourt:

Bringing the Authorities Out of Disarray’ (2001) 22 Co. Law. 278; A. McGee and G. Scanlon, ‘Section 127 IA 1986: Practical Problems in its Application’ (2004) 25 Co. Law. 102. See also Re Tain Construction [2003] All ER 91, [2004] BCC 11 – change of position defences to a claim under s. 127 should be available. The deputy judge in Re Tain noted potential tensions between such restitutionary defences and the pari passu doctrine (both of which were based on ‘an overarching concept of fairness’): see further G. Stewart, ‘Section 127 and Change of Position Defences’ (2003) Recovery (Autumn) 6 at 7; cf. L. C. Ho, ‘Pari Passu Distribution and Post-petition Disposition: A Rationalisation of Re Tain Construction’ (21 November 2005, SSRN). See also ch. 14 below. The courts also have sought to bring clarity by offering procedural guidance on section 127 validation orders: see Practice Note: Validation Orders [2007] BCC 91.

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As for the discretion of the court to grant a winding-up order, this will normally be exercised in favour of the petitioner if there is no opposition.55 The court may, however, refuse an order under section 125 of the Insolvency Act 1986 if it is opposed by the majority of creditors. In deciding this issue, the court will look to the numbers of opposing creditors, to the value of the debts owed, and to the quality of those creditors.56 On this last point, the court will give less weight to the claims of creditors who are connected with the company (for example, as directors or shareholders)57 or who are fully secured58 (and so have a limited interest in the liquidation). The court, moreover, will resist the use of liquidation to serve the petitioners’ ulterior motive rather than general creditor benefit.59

As soon as a winding-up order is made, the Official Receiver automatically assumes the role of the liquidator until another liquidator is appointed.60 After this time no legal actions may be taken against the company without the leave of the court and, subject to any conditions imposed by the court, the winding-up order ends the powers of the directors, passes control of the company’s assets to the Official Receiver and operates as notice discharging the employees (except where the business continues for the purposes of beneficial winding up, the liquidator indicates a wish that employment should continue and the employees agree to continuation).61 A winding-up order does not, in itself, however, repudiate other types of contract and the company is not deprived of the legal title to its assets.62

The liquidator is an officer of the court and has powers (and is obliged) to take into his custody or control all the property of the company.63 Under section 144 of the Insolvency Act 1986 this includes all the

55Conversion to compulsory liquidation may be supported by the court, particularly where there is a deemed need for investigation into the directors’ conduct.

56See, for example, Re Holiday Stamps Ltd (1985) 82 LSG 2817; Re Flooks of Bristol (Builders) Ltd [1982] Com LR 53.

57Re Vuma Ltd [1960] 1 WLR 1283.

58Re Flooks of Bristol (Builders) Ltd [1982] Com LR 53.

59Milman and Durrant, Corporate Insolvency, pp. 107–8; Re Greenwood [1900] 2 QB 306;

Re A Company (No. 0013925 of 1991), ex parte Roussel [1992] BCLC 562; Re Leigh Estates Ltd [1994] BCC 292.

60Insolvency Act 1986 s. 136(1) and (2). As in voluntary liquidation the powers of the directors cease.

61See Re Oriental Bank Corporation (Macdowell’s Case) (1886) 32 Ch D 36.

62Ayerst v. C and K Construction Ltd [1976] AC 167.

63On the implications of status as an officer of the court see e.g. C. Villiers, ‘Employees as Creditors: A Challenge for Justice in Insolvency Law’ (1999) 20 Co. Law. 222.

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property to which the company appears entitled. He or she may call on officers and employees of the company to provide statements of affairs64 and, as in a voluntary liquidation, there is a power to disclaim onerous property and contracts. There is, in addition, a discretion to call meetings of creditors and contributors, though these parties may compel the calling of a meeting if they have the support of one tenth in value of their body.65

Turning to controls over the liquidator in a compulsory winding up, he or she will be answerable to the Liquidation Committee of a company’s creditors set up under section 141 of the Insolvency Act 1986. The liquidator may, with the sanction of the court or the Liquidation Committee, exercise any of the powers set out in Parts 1 and 2 of Schedule 4 of the Insolvency Act 1986 (payment of debts, compromise of claims etc., institution and defence of proceedings, carrying on of business of the company) and, as in a voluntary liquidation, the liquidator may carry out, without the need for court approval, the set of powers contained in Part 3 of Schedule 4. In compulsory liquidations, however, liquidators will be subject to control to a greater degree than in voluntary liquidations. They will, for example, require the sanction of the court or committee to initiate or defend legal proceedings in their name or in the name of the company, or to carry on the business of the company.66 Court review of liquidator activities is provided for by section 168(5) of the Insolvency Act 1986 which allows any person aggrieved by a liquidator’s act or decision to apply to the court, whereupon the court may confirm, reverse or modify the act/decision and make orders as it thinks fit.

The key function of the liquidator is to ‘secure that the assets of the company are got in, realised and distributed to the company’s creditors and, if there is a surplus, to the persons entitled to it’.67 Failure to fulfil that function may result in penalties for the liquidator, which may

64Insolvency Act 1986 s. 131; Insolvency Rules 1986 rr. 4.32–4.38.

65Insolvency Act 1986 s. 168. A creditor who wishes to vote and who requires dividends is required to submit (lodge) a formal claim – a proof of debt – to the liquidator: IR 1986 rr. 4.73, 11.6(1). On proof of debt see, for example, Wight v. Eckhardt Marine GMbH [2004] 1 AC 147, [2003] 3 WLR 414; I. Fletcher, ‘Right to Participate in a Distribution’ (2004) 17

Insolvency Intelligence 91; Day v. Haine and Secretary of State [2007] EWHC 2691 (protective awards granted to employees after a company had gone into liquidation were held not be provable debts as they had been made after the date of liquidation (decision reversed on appeal – [2008] EWCA Civ 626)).

66Ratification is, however, possible for uncontentious actions: see r. 4.184(2).

67Insolvency Act 1986 s. 143(1).