How Do I Wind Up a Company in England and Wales?

Perhaps you own a company, are looking to retire, and have decided against a sale or transfer of the business. Alternatively, maybe you have given a loan to a company, and you wonder what your last-resort options are to recover your debt. Winding up refers to the process of removing a company from the Companies House registry. You might think of it as ‘unincorporating’ or closing the company, so that its creditors receive their money, with any remaining funds distributed to its shareholders. This article will explain the three principal ways to wind up a company in England and Wales: members’ voluntary liquidation, creditors’ voluntary liquidation or compulsory liquidation.

Overview 

We can divide the different types of liquidation processes into:

• those for solvent companies; and
• those for insolvent companies. 

In most cases, solvent companies that want to wind themselves up will do so through a ‘members’ voluntary liquidation’, where the shareholders pass a special resolution initiating the process. 

If a company cannot meet its financial obligations, it is ‘insolvent’. Depending on the circumstances, the company’s shareholders may decide to instigate a liquidation on behalf of the creditors. This is called a creditors’ voluntary liquidation. Insolvent companies may also face ‘compulsory liquidations’, where a company’s creditors will petition the court to order the company to begin winding up. 

Members’ Voluntary Liquidation for Solvent Companies

A members’ voluntary liquidation (MVL) is an option for solvent companies. Below, we explain the process for an MVL and all relevant actors in the process.

Declaration of Solvency 

Directors of a solvent company wishing to bring its business to an end must first declare that it can meet all its obligations in the next 12 months from the start of the process. In other words, they must be certain that all the company’s creditors will receive their money in full. They must accompany this declaration with a ‘statement of affairs’ that lists the company’s assets and liabilities.

Passing a Special Resolution

The company’s shareholders must pass a special resolution ordering an MVL. This requires at least 75% of the shareholders’ votes. 

Your company can do this by:

• a show of hands at a general meeting; 
• a poll at a general meeting; or
• written resolution. 

Appointing the Liquidator 

You will need to appoint an authorised insolvency practitioner at the special resolution meeting. This person will be the liquidator and will manage the process. 

Notifying Certain Creditors

If your company has any floating charges over its assets, you will need to notify these creditors in writing of the resolution. 

Advertising the Liquidation in the Gazette 

Within 14 days, you will need to advertise that the company is initiating an MVL in The Gazette. Your liquidator will also need to publish a notice of their appointment in the Gazette. 

Selling off the Assets 

The liquidator will use your company’s assets to repay your creditors according to the ‘order of priority’. This order of priority is set out under the law. 

The general rule is that your creditors will receive the proceeds from the sale of your company’s assets until they receive their money in full. At this point, the liquidator will distribute the remaining money to the shareholders, according to the rights attached to the shares. 

Final Steps 

In most cases, the dissolution of your company will occur within three months from when the liquidator delivers their Final Report to the Registrar of Companies. At this point, your company will effectively cease to exist. 

Creditors’ Voluntary Liquidation

If your company is insolvent, your shareholders may elect to begin the winding-up process on behalf of the creditors. This is a creditors’ voluntary liquidation (CVL). Below, we explain the process for a CVL and all relevant actors in the process.

Passing a Special Resolution

Like in an MVL, the company’s shareholders must initiate a CVL through a special resolution. This requires 75% or more of the shareholders’ votes. 

Appointing a Liquidator

Shareholders must nominate a liquidator at the meeting, at which point the process will have commenced. The creditors will then have the right to appoint a different liquidator. The directors will need to notify the creditors seeking their consent of the liquidators’ appointment. Like in an MVL, the directors must prepare a statement of affairs outlining the company’s assets and liabilities. 

Typically, if less than 10% of the ‘creditors in value’ disagree, the law will imply that all creditors agree. Creditors in value are measured by the amount owed by the company to each creditor.

The Liquidation Process

A ‘proof of debt’ is evidence of a debt obligation (such as a loan, bond, or trade credit) between a creditor and the company. Each creditor must submit proof of debt to the liquidator. The liquidator will then decide to approve it in whole, in part, or reject it. This will inform the liquidator of where to distribute the proceeds. Creditors with security over the company’s assets are entitled to the proceeds of the asset’s sale. The liquidator will sell the company’s assets and distribute the proceeds to the creditors according to the order of priority. 

The liquidator will pay any creditors without security on a ‘pari passu’ basis. This means that each will be entitled to a share of any remaining assets after the secured creditors are paid. The amount distributed to each creditor will be in proportion to the debts the company owes. 

Where a company is insolvent, by definition, it does not have enough money to pay back all its creditors. This means that the shareholders will receive nothing during the process, as all money must go towards paying creditors. 

Impact on Directors 

The directors’ powers automatically end when the CVL passes via a special resolution. However, the creditors can permit the directors to continue exercising certain powers at the creditors’ discretion.

Compulsory Liquidation 

If your company is insolvent, in some circumstances, your creditors may bring a petition to court to wind up your company, or a director can also ask a court to order the company to be wound up in certain circumstances. This is a compulsory liquidation. Below, we explain the process for a compulsory liquidation commenced by creditors and all relevant actors in the process.

Petitioning the Court 

In broad terms, the main distinction between a CVL and a compulsory winding-up is the court’s involvement from the outset. If a creditor has reason to think the company will not repay their debts or cooperate, it can present a ‘winding-up petition’ to a court. 

If the court grants a hearing, the company will have the chance to oppose the petition. The judge will then either:

• grant the petition and issue a winding-up order; 
• ‘adjourn the petition’, which is where the court will defer a judgment if it has reason to think the company may be able to repay its debts; or 
• dismiss the petition outright. 

The Liquidator 

If the court grants the petition, it will appoint an Official Receiver (OR), an officer of the court that manages the winding-up process. The creditors can then organise and replace the OR with a liquidator of their choice. 

The Process

When a company is subject to compulsory liquidation, an automatic statutory moratorium takes effect once the winding-up order is made. This means creditors cannot take legal action to recover debts without court permission. This temporary freeze allows for an orderly liquidation process, ensuring fair treatment of all creditors.

Directors’ Responsibilities Before Liquidation

Before liquidation, directors must act in creditors’ best interests if the company is insolvent. Continuing to trade while knowing the company cannot meet its obligations could lead to a breach of directors’ duties and wrongful trading allegations, resulting in personal liability or disqualification.

Alternatives to Liquidation

Companies struggling financially may have options before liquidation, such as a Company Voluntary Arrangement (CVA) or administration, which can allow restructuring instead of winding up.

Key Takeaways 

Companies typically wind up because they are insolvent. This will usually happen through a creditors’ voluntary liquidation or compulsory liquidation. However, a company may also simply wish to cease trading and sell all its assets, and the proceeds distributed to the shareholders. You can achieve this through a members’ voluntary liquidation.

If you need help navigating your company’s financial difficulties, our experienced commercial lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today at 0808 196 8584 or visit our membership page.

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