If you’re a business owner looking to wind up your limited company because it can’t pay its debts, or a creditor wanting to petition for a winding up order because a company owes you money that it can’t repay, the following guide will help you to navigate the legal process.
Sometimes winding up a company can be the only viable option for director and shareholders of an insolvent company, or for creditors who have not been paid, so by getting to grips with the legalities, this can help you prepare for what formal steps may need to be taken.
What do we mean by ‘winding up’ a company?
Winding up is where a company stops trading and an appointed liquidator sells the company assets to pay off its debts before dissolving the company and having it removed from the companies register.
Winding up can be done on either a voluntary or compulsory basis where a company is insolvent.
A solvent company can also be liquidated where the business has run its course.
Voluntary winding up is where the directors of a limited company initiate the decision to stop trading and liquidate its assets, subject to the approval of its shareholders.
In contrast, compulsory winding up is where the court makes an order for the insolvent company to be wound up on the petition of an appropriate person. This could include the directors or shareholders of a company, although compulsory winding up is typically initiated by outstanding creditors where the company cannot pay its debts.
In both cases, either once a winding up resolution has been passed by the shareholders or a winding up order has been granted by the court, the appointed liquidator (a licensed insolvency practitioner or an official receiver, depending on whether the winding up is voluntary or compulsory) will sell off the company’s assets to pay back the creditors.
It is also possible to wind up the affairs of a solvent company using a process known as members voluntary winding up. This is a tax-efficient way of closing a company where, for example, the family business has run its course and the directors are looking to retire.
Is winding up the same as insolvency or bankruptcy?
Insolvency refers to where a company cannot pay its debts. This could be where it is unable to meet its liabilities as and when they fall due, or where its outstanding liabilities outweigh its assets. In circumstances where there are no viable rescue options, an insolvent company will need to be wound up on either a voluntary or compulsory basis.
In contrast, bankruptcy is the legal process when a person, rather than a company, has been declared insolvent and can no longer pay off their debts. In the case of sole traders and partnerships, the owner can go bankrupt and the business will cease to trade.
What is a winding up petition?
A winding up petition is an application presented to the court to wind a limited company up. It essentially refers to the form used to apply to the court to liquidate a company if it owes a person or organisation money and cannot pay its debts, or where the directors or shareholders of an insolvent company apply directly to the court to have it wound up.
What is a winding up order?
If the winding up petition is approved by the court, a winding up order will be made that will force an insolvent company into compulsory liquidation. The court will appoint a liquidator to deal with the winding up process. The assets of the company will then be sold to discharge its debts and repay its creditors before the company is dissolved.
Winding up requirements
To petition to the court to wind up a company, a creditor must be owed £750 or more and be able to prove that the company cannot pay them. This is typically proven by way of an unpaid statutory demand or county court judgment.
The directors or shareholders can also propose that a company stops trading and be wound up if the company is insolvent and enough shareholders agree. This means that at least 75% of shareholders must resolve to wind the company up by way of vote at a general meeting.
Winding up process
The process for winding up a company will differ depending on whether the company is being wound up voluntarily, or whether an application is being made to the court that the company be wound up on a compulsory basis, either by creditors or by the company itself.
As a creditor petitioning to wind a company up
If you are a creditor, such as a supplier of a company, who has repeatedly tried to recover money owing to you without success, you may be looking to apply for a compulsory winding up order from the court. Serving a winding up petition is usually the final step a creditor will take in an effort to recuperate debts after all other attempts have failed. It will also only be used for sizeable debts, given the costs involved in issuing a petition.
To be able to issue a winding up petition the creditor must, in most cases, submit an online petition and pay the relevant fee (£280) and petition deposit (£1600). The deposit is to cover the liquidator’s costs, although this will be repaid if the order is not granted. There are, however, additional costs involved, such as advertising the petition in the London Gazette.
Upon receipt of the relevant documentation and fees, the court will review the petition and, if approved, it will be sent to the petitioner to be served on the company in question. A date will also be given for a hearing.
If the matter cannot be resolved within 7 days, or where the company has failed to respond within this time frame, the creditor must then place an advertisement in the London Gazette setting out the basic details of the petition and the forthcoming hearing (including the date and venue). The petition must be advertised at least 7 days before the date of the winding up hearing, but no sooner than 7 days after the petition has been served.
A copy of the advert, together with a certificate of compliance showing that the petition was duly served, will need to be sent to the court at least 5 working days prior to the hearing.
As a company opting for voluntary winding up
If your business cannot pay its debts and there are no viable rescue or restructure options, opting for voluntary winding up may be the best way forward.
To initiate a voluntary winding up the directors must be in agreement. A general meeting will then be called for the shareholders to vote on this proposal. To proceed, 75% of shareholders (by share value) will need to agree to the winding up resolution.
Once agreed, the company will need to appoint an authorised insolvency practitioner to act as liquidator. A meeting of creditors will usually be called on the same day or shortly after the shareholders meeting, at which they will receive details of the company’s financial affairs. They may also make alternative suggestions as to the proposed liquidator.
The winding up resolution will need to be advertised in the London Gazette within 14 days of the resolution being passed, and sent to Companies House within 15 days. The liquidator will then begin the task of realising the company assets and repaying the creditors.
As a company opting for compulsory winding up
In some cases, although compulsory winding up is usually initiated by a creditor, a company may opt to apply directly to the court for an order.
To issue a winding up petition there must still be a winding up resolution, with at least 75% of shareholders in agreement. Once a resolution has been passed, the directors or shareholders can petition to the court for a winding up order. In most cases this can be submitted online and by paying the relevant fee and petition deposit.
The court will then review the petition, and, if approved, it will be sent to the petitioner so that a copy can be served on the company and a date will be given for a hearing. The petition will need to be advertised at least 7 days before the winding up hearing, and copies of the advert and a certificate of compliance will need to be provided to the court.
Winding up form
An application can be made by a number of different people to wind a company up, although in all cases they will need to complete form Comp 1, together with form Comp 2 confirming the details of the petition, on the .gov website.
The certificate of compliance to prove service of the petition is form Comp 3.
What happens at the winding up hearing?
The winding up hearing will allow for the petition to be heard, including any opposition from the company to the making of the order. At this point, the court may accept or dismiss the petition. If granted, a winding up order will be made to force the company into compulsory liquidation. The court will put an official receiver in charge of managing this process.
The official receiver will then start the process of selling off the company’s assets to discharge the company’s debts. Other creditors can register with the liquidator to claim the money they are owed. In some cases, multiple creditors may have petitioned for a winding up order.
Can a winding up order be stopped?
Once an order to wind up a company has been made, there is usually nothing the company’s directors can do to prevent the liquidation and closure of their business. The assets of the business will be sold and the company will be dissolved. The liquidator will also investigate the company directors for signs of misconduct or insolvent trading.
It may be possible to apply to the court to rescind the winding up order, for example, where the court did not have all the material facts to hand at the time of making the order. However, an application must be made within 5 working days of when the order is made. Further, the courts discretion will only be exercised where there are cogent reasons to do so.
The court also has the power to stay an order, although again this discretion will only be exercised in limited circumstances, for example, where the debts and costs of the liquidation have been paid in full and the company is solvent again.
After the winding up petition
Even though there is little that can be done once the court has issued a winding up order, there is a short period of time that action can be taken by the company to prevent the order from being issued in the first place. This is during the 7 days following service of the petition.
During this time the company must find a favourable solution to prevent further action from being taken. The available options include paying the debt in full, agreeing payment arrangements with the creditor(s) or disputing the debt said to be owed.
However, if a solution cannot be found, an advert will be placed in the London Gazette. Once the advertisement has been placed this is likely to make it much more difficult to resolve the matter as other creditors will be notified of the company’s insolvency. The company’s bank account and assets will also usually be frozen at this stage.
For a company facing a winding up order, advice should always be sought immediately from a licensed insolvency practitioner.
Winding up FAQ’s
What are the types of winding up?
There are two main ways of winding up: voluntary and compulsory. Voluntary winding up is where the shareholders vote to wind the company up, while compulsory winding up is where the court approves a winding up petition made by, for example, creditors of a company that cannot pay its debts, or even the directors or shareholders of an insolvent company.
How does a winding up order work?
Once a winding up order has been made by the court, the company is in liquidation. An official receiver will be appointed by the court to act as liquidator and manage the liquidation process. This involves selling off the company assets to discharge its debts and dissolving the company once the liquidation is complete.
Is liquidation the same as winding up?
The terms liquidation and winding up are synonymous. In broad terms, they both refer to the process in which a liquidator is appointed to wind up the affairs of a limited company. The liquidator will sell off the company assets to pay off the creditors, ie; the liquidation of assets to convert into cash, and then dissolve the company once the process is complete.
Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law, and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission. Before acting on any of the information contained herein, expert legal advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
