Winding Up Petitions
Winding Up petitions are frequently used to recover debts owed by limited companies which are not (legitimately) disputed or where more than £750 is not disputed. They are also used by Government bodies to close down companies on public interest grounds.
A company may be compulsorily winding up by the court, if:-
- It has resolved by special resolution that is it should be so wound up, or
- It is unable to pay its debts; or
- The court is of the opinion that it is just and equitable that it should be wound up.
In relation to debts, inability to pay debts is often the ground relied upon and there are 3 alternative situations where a company is deemed to be unable to pay its debts:-
- A creditor is owed more than £750, has served a statutory demand and more than 3 weeks have elapsed.
- Execution on a court judgment is returned unsatisfied.
- It is proved to the satisfaction of the Court that the company is unable to pay its debts (including contingent and prospective liabilities).
In relation to public interest petitions, winding up is based on the just and equitable ground.
Directors Disqualification Proceedings
Following a company liquidation, any liquidator appointed is obliged to investigate the conduct of the former directors (and shadow directors) and report the findings to the Secretary of State (for Business, Innovation and Skills). In some cases, the Secretary of State may consider that the conduct (or misconduct) of the former director(s) is such that they should be disqualified from being director(s) of any other company usually for period of between 2 and a maximum of 15 years.
The Secretary of State will notify the former director(s) of the intention to apply to the Court for a disqualification order and indicate the period of disqualification required, based on the severity of the misconduct. The notice will also invite the former director(s) to agree or consent to disqualification and may allow a discount for early settlement by undertaking.
The Secretary of State will also invite representations and may reconsider the period of disqualification
The costs of defending disqualification proceedings can be significant.
Directors Loan Accounts
When a company go into insolvent liquidation any liquidator appointed has a duty to investigate the company’s affairs. The purpose of such investigation is manifold but one of the first things the Liquidator will consider is whether any of the former directors have overdrawn loan accounts that need to be reclaimed.
If the loan accounts are overdrawn, former directors can expect an immediate demand for payment.
However, the sum demanded by a Liquidator may not be a true reflection of what is due and owing. In some cases, nothing is owed.
Directors need to consider what they can offset against overdrawn loan accounts to reduce or extinguish their liability.
Re-Use of Company Names - s.216 and s.217 Insolvency Act 1986
When a company goes into insolvent liquidation, the former owners/directors are often tempted to try and retain some of the goodwill associated with their former company. To achieve this, they set up another business or phoenix, using an identical or similar name. However, there are strict rules preventing the re-use of such names and those tempted need to be wary as the consequences can be very serious.
In brief terms, the Insolvency Act 1986 provides as follows:-
– restricts the re-use of the name of a company in insolvent liquidation and imposes both civil (personal liability) and criminal (imprisonment and/or fine) sanctions on individuals in breach.
– the sanctions apply to anyone who was a director or shadow director (and also anyone acting under their instruction) of a liquidated company at any time in the period of 12 months ending with the day before it went into liquidation.
– restricted names are those by which the liquidated company was known within 12 months of liquidation or which are so similar as to suggest an association and includes trading names.
– re-use of a restricted name is prohibited for 5 years from the date of liquidation unless the permission of the court is granted.
– any person caught by this section, cannot be a director or directly or indirectly involved in the promotion, formation or management of a company using a restricted name.
– whilst the court can, in appropriate circumstances, grant permission it cannot do so retrospectively.
– 3 exceptions to the need to obtain the court permission.
Malpractice by Company Directors
Certain duties and obligations are imposed on officers of a company, which includes Directors (whether actual or shadow), which apply both before and during liquidation, which if breached can give rise to both criminal (resulting in imprisonment/fines) and/or civil proceedings against office holders.
Offences arising from breach include the following:-
- Fraud etc, in anticipation of winding up – concealment of company property Assets and liabilities), removing company property, concealing, destroying, mutilating or falsifying books or records etc, making false entries in books and records, parting with or altering documents relating to company property, pawning, pledging or disposing of company property obtained on credit and not paid for.
- Transactions in fraud of Creditors – when a company is to be wound up, the officer makes or causes a gift or transfer or charge etc on company property or conceals or removes company property since, etc.
- Misconduct in Winding Up
- Falsification of Company Books
- Material Omissions from Statement relating to Company’s Affairs
- False Representation to Creditors
- Fraudulent Trading
- Wrongful Trading – at some time before commencement of winding up, knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation.
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