What is meant by “winding up” a company?
A company can be wound up by the directors and the owners after fulfilling various conditions as per the nature of their company. The term “winding up” means to liquidate a company. In simpler terms, it means that the company will stop working altogether.
As per the legal implications, the company will stop all its ongoing operations and will stop existing the day it is wound up. All the assets of the company, as well as the company’s liabilities, will cease to exist.
There are three ways of liquidating or winding up a company, and they are:
- For a solvent company, the directors of the company can liquidate the company after attaining the permission of the shareholders or the permission of those who have an interest in the company and its operations.
- For an insolvent company, the directors of the company can liquidate the company after attaining the permission of the creditors of the company.
- Another way of liquidating a company is to close the company by striking it off from the Companies Register.
What is the relation between liquidation and winding up?
Although the words liquidation and winding up are used interchangeably, there is a significant difference in their meanings. Both terms stand for a different stage in the process of closing a company. And here is what it means.
- Winding-up: It is the first stage of closing a company. Once it is decided by the directors of the company that the company will close down for its business, the company will begin filing for legal compliances and will begin to finishing or closing its relationships and obligations. Be it a solvent company or an insolvent company, the companies suppliers, clients, payments, debts, the balance of creditors, etc. will come to a close. All balances of the company are finished and slowly are completely wiped off. Without closing their balances, the company cannot be liquidated or stricken off from the registers. Winding up and closing the entire businesses including all of its outstanding issues or payments are a mandatory requirement by the law.
- Liquidation: The next and the final stage is of liquidation. Herein, once all the long-term relationships, payments and operations of the company have been dealt with and severed, the company can be liquidated. Once all the assets of the company are sold, all the creditors are dealt with; the company is said to be liquidated.
However, the reality is quite far from the simple procedure mentioned above. A company can only be liquidated by a licensed Insolvency Practioner. Furthermore, it is easy when a solvent company is being wound up. For a solvent company, all balances are settled, and the proceeds gained out of selling off the assets are disturbed equally or as per the terms of the company’s AOA among the shareholders, directors and members.
However, if an insolvent company is liquidated, the assets are first sold off, and then the proceeds of the assets are distributed among the creditors first. Paying off the creditors before the company’s members is a priority as per the law. Once the creditors are paid, the remainder, if any will be distributed among the members or shareholders as per the ratio of profit sharing or according to the rules enumerated by the AOA.
Are there any legal issues to be aware of?
Well, when it comes to winding up and liquidating a company, there are many legal aspects to think about. With various legal compliances, you will need to find a licensed Insolvency Practioner for your company first.
Be it a solvent company or an insolvent company that is being liquidated; the company will require a document to be signed by the members or by the creditors, respectively. This document is a mandatory requirement to be fulfilled before filing for the company’s winding up. The document is known as Declaration of Solvency and should be true and fair. Should it turn out that the document is false, the company and its directors would face strict legal ramifications.
After signing the document, the company should fulfil and finish all of its on-going practices. It must be remembered the document should be signed in the presence of a solicitor. Also, to make sure that your company does not face any legal complications, it is advised that you as your licensed Insolvency Practioner draw up all the documents as required for the process.
What would a company need to wind up?
- In case of a solvent company applying for winding up, the company will need Members’ voluntary liquidation. With this, the company has about 12 months to finish up with all of its long-term legal proceedings and other operations. Other than this, the company will need to pay all the members and the stakeholders in proportion of their share or according to the details in the AOA.
- In the case of an insolvent company applying for winding up, the company will require Creditors’ Voluntary Liquidation. The creditors need to agree on the terms of the liquidation process. Without this, the company cannot be wound up. When an insolvent company is being wound up, the creditors need to know that they will be reimbursed if not in full, but in some parts. The winding up process for an insolvent company will begin only on the terms that are agreed by the creditors and not by the directors of the company.
Are there any fees?
If your company is being compulsorily dissolved or liquidated, then you will have to pay an amount of fees for various things. Here is an approximate expenditure you may face:
- £1600 – petition deposit
- £280 – court fee
- Other expenses incurred by your company to advertise the petition in the official gazette.