Having a winding-up order issued against your company is very serious, and should be avoided wherever possible.
However, if you do find yourself in the position where a winding up order has been issued to a company of which you are a director, it’s likely that you’ll have questions about what happens next..
This article will explore the impact of liquidation for directors, beginning with the issuing of a winding up order.
What is a Winding Up Order?
A winding up order is an order issued by the courts determining that an insolvent company should be wound up and liquidated.
The courts will issue a winding up order after an unpaid creditor of the company being wound up has successfully brought a winding up petition against that company for the unpaid debts.
What Happens Next for Company Directors?
Firstly, when the court makes the winding-up order, the Official Receiver becomes the company’s liquidator. The exception is where the order follows straight on from an administration, or is made while a CVA has a supervisor in office. The court may then appoint the former administrator or the supervisor instead. The Official Receiver is in charge of the liquidation process.
As soon as the Official Receiver is appointed, the directors effectively lose their decision-making powers, though they will be required to co-operate with the Official Receiver to provide all the information necessary and facilitate the liquidation process.
As a director, you should co-operate to the fullest extent with the Official Receiver.
The Official Receiver will start their investigations into the company immediately in order to assess the current position. Within 12 weeks of the winding-up order, they must decide whether to ask the creditors and contributories (broadly, the shareholders) to nominate an insolvency practitioner to take over as liquidator. If they decide not to, they must tell the court, the creditors and the contributories, and creditors holding a quarter of the company’s debts by value can still require them to ask.
After the Official Receiver has made their decision, the liquidation will continue along the normal lines. In brief, this process will see the liquidator, the Official Receiver or both going through the process of realising the company’s assets and distributing the proceeds to creditors.
Official Receiver’s Investigation Into Directors’ Conduct
As part of the compulsory liquidation process, the Official Receiver has to investigate the actions of the company’s directors prior to the winding-up order.
The Official Receiver decides which directors or officers to question, and can require any of them to attend an interview and give information about the events leading up to the insolvency. How long the interview takes depends on the case; there is no fixed length. The Official Receiver may also require some or all of the directors to submit a statement of affairs for the company within 21 days of being given notice; the Official Receiver can extend this.
As a director, it is very important that you prepare thoroughly for any interview. You will need to have all relevant information, including accounts and statements ready to submit to the Official Receiver.
The Official Receiver can also apply to the court for a public examination of a director, and the court then directs the director to attend. This is not routine, and it is not confined to cases of suspected severe misconduct — the Official Receiver can use it more broadly, to obtain information from a director or to secure their co-operation with the investigation.
The Official Receiver’s investigation is not limited to a fixed checklist, and can cover matters such as the company’s accounting records, tax affairs and use of its assets. Three examples that come up often are:
Wrongful Trading
Where the director knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration, and did not take every step a reasonably diligent person would take to minimise loss to creditors from that point.
Transaction at an Undervalue
Where the company gave assets away, or sold them for significantly less than they were worth, in the two years before the winding-up petition was presented, at a time when it could not pay its debts or became unable to as a result. That inability is presumed where the other party is connected to the company, such as a director.
Unfair Preference
Where the company does something that puts a creditor in a better position than they would otherwise have been in on a distribution of assets. The test in section 239 of the Insolvency Act 1986 is not intention but whether the company was influenced by a desire to produce that effect, and that desire is presumed where the creditor is a connected person, such as a director. The look-back is six months before the winding-up petition was presented, or two years where the creditor was connected. A preference can only be challenged if the company could not pay its debts at the time or became unable to as a result.
Reporting on the directors’ conduct
The Official Receiver must send the Secretary of State a report on the conduct of everyone who was a director at the date of the winding-up order or in the three years before it, normally within three months of the order, and must pass on any new information that comes to light later. Where the report supports it, the Insolvency Service may bring disqualification proceedings or accept a disqualification undertaking.
None of the three is an offence. Wrongful trading, a transaction at an undervalue and a preference are all civil claims, decided on the balance of probabilities, with no finding of guilt and no fine. Conduct of the kind they describe can separately support disqualification proceedings, which can result in a ban of up to 15 years. There are also particular rights of action available to the liquidator: for example, they can apply to court to challenge a transaction at an undervalue, and the court has power to make an order restoring the position — which can include requiring the director to make a personal contribution — though the transaction is not automatically reversed, and a defence is available only if the company entered into the transaction in good faith for the purpose of carrying on its business and, at the time, there were reasonable grounds for believing it would benefit the company.
Though this can all sound very worrying, these sanctions are reserved for situations where there has been director misconduct and are there to protect the creditors of the company. The sanctions are not applied lightly and will only be levied after a full investigation.
Proceeds from the Liquidation
As the company nears the final stages of liquidation, what is left from the company’s assets after the costs and expenses of the liquidation are paid will be distributed to the company’s creditors.
Directors will not usually receive anything from the company in their capacity as shareholders, as the company was insolvent. A shareholder receives a payment only if the liquidation realises more than the debts, costs and statutory interest. However, it may be that a director stands as a creditor to the company in some other capacity. Whether they will receive their returns on these debts very much depends on the monies realised by the liquidation process and where they stand in the pre-determined order of priority for creditors.
Closure of the Company
Once the distribution of proceeds is complete, an insolvency practitioner acting as liquidator sends creditors a final account, including a summary of receipts and payments, with a notice explaining how they can object to the liquidator’s release. Where the Official Receiver remains liquidator, the Official Receiver instead gives notice to the registrar of companies that the winding up is complete. Since 6 April 2017 there has been no final meeting of creditors in a court winding up. The company is dissolved three months after Companies House registers the final account or the Official Receiver’s notice, unless the Secretary of State defers the date.
Need Help?
If you are being threatened with a winding up petition, you should speak to someone who can discuss your options and put together a plan of action as quickly as possible. Call us on 0208 444 3400 or use our Contact Us form.