322 Chapter 11Companies (2): Management, control and winding up
A company will be regarded as unable to pay its debts if it does not satisfy a court judg-
ment in favour of a creditor. For example, if Alec is awarded damages of £2,000 against X
Ltd, the company will be regarded as unable to pay its debts if it does not pay the £2,000
damages to Alec. A company is also regarded as unable to pay its debts if a creditor who is
owed more than £750 serves a written demand for payment at the company’s registered
office and is not paid within three weeks. For example, if X Ltd owed Billy £800 and Billy
served a written demand for payment at X Ltd’s registered office, X Ltd would be regarded
as unable to pay its debts if it did not pay Billy within three weeks.
Even if a court is satisfied that a company cannot pay its debts it does not have to wind
the company up. If the majority of the company’s creditors think that the best thing would
be to let the company keep trading then the court can allow this. Once a court makes a
winding up order the liquidator takes over the directors’ powers. The employees of the
company are regarded as dismissed unless the liquidator decides to re-employ them until
the winding up is finished.
A court can order the liquidation of a company on the grounds that it would be just and
equitable to wind the company up. Over the years the courts have used this power to wind
companies up for reasons such as that there is deadlock in the management of a small com-
pany, or that there is a justifiable lack of confidence in the management or that the company
was formed for a fraudulent purpose.Voluntary liquidation
A voluntary liquidation takes place without a court order. A members’ voluntary liquida-
tion can be made only while the company is solvent. The members of the company might
decide that they would like to end the company, and then share the money generated by
the sale of any assets which remained after all creditors had been paid. In order to start a
member’s voluntary liquidation the members must pass a special resolution that the com-
pany be wound up. A liquidator will be needed to wind the company up, but the company
members choose who the liquidator should be. A member’s voluntary liquidation is only
possible if the directors of the company can make a declaration of solvency. This declara-
tion states that the company will be able to pay all of its debts within a period which may
not be longer than 12 months.
If no declaration of solvency can be made, the company members might start a creditors’
voluntary liquidation. In order to do this the members would need to pass a special resolu-
tion. A meeting of all creditors would then be called and the creditors would have the
choice of who the liquidator should be.
When either type of voluntary winding up is made the company must cease trading as
soon as the special resolution is passed. The liquidator will take over the directors’ powers.
Employees would be dismissed unless the liquidator decided to re-employ them.
As regards any type of winding up, the order in which the company’s creditors are paid is
the same. First, those with a fixed charge over any of the company’s property can sell that pro-
perty and take what they are owed. Any remaining money goes into the pool of assets. Then
the liquidator sells all the company’s assets for as much as possible and gathers in all money
owing to the company. The assets gained in this way are now distributed in the following order:
(1) The liquidator’s remuneration and the costs and expenses of winding up.
(2) The preferential creditors at the time of winding up. There are several types of prefer-
ential creditors. The most important categories are wages (up to £800 per employee)
and holiday pay owing to employees, loans made specifically to pay employee’s wages
and contributions to occupational pension schemes. If director’s fees are due under a
contract of employment they will be preferential up to the £800 limit.