Part 3 -
Voluntary Liquidation
This part is divided into 5 sections.
Section 1 - Introduction and definitions (paragraphs 56.134 to 56.135).
Section 2 - Matters applicable to all voluntary liquidations (paragraphs 56.136 to 56.154).
Section 3 - Members’ voluntary liquidation (paragraphs 56.155 to 56.166)
Section 4 - Creditors’ voluntary liquidation (paragraphs 56.167 to 56.178).
Section 5 - Subsequent compulsory liquidation (paragraphs 56.179 to 56.185).
Section 1 - Introduction And Definitions
A company may be wound up voluntarily at the instigation of its members or compulsorily by the court. Any company, (see section 735 of the Companies Act 1985) may consider voluntary liquidation but, subject to what is said below, an unregistered company cannot be wound-up voluntarily under the provisions of the Insolvency Act 1986. The provisions relating to voluntary liquidations are contained in Parts IV (excluding Chapter VI), VI and VII of the Act and Part 4 of the Rules as specified in Rule 4.1.
The EC Regulation on insolvency proceedings, came into force on 31 May 2002 and it is now considered possible for a company registered in another EU member state to be wound up voluntarily in the UK. Further guidance on these changes will be issued in due course.
Notes: [Companies Act 85 s735] [s221(4)]
Voluntary liquidation is available to the company, acting through its members, if and when they wish to wind up its affairs. There are two types of voluntary liquidation:
A members’ voluntary liquidation (MVL) (see paragraphs 56.155 to 56.164) is possible where the company’s directors are able to make a declaration of solvency (see paragraph 56.156).
A creditors’ voluntary liquidation (CVL) is where the members wish to wind up the company’s affairs but the directors cannot make a declaration of solvency (see paragraphs 56.165 to 56.178).
Notes: [s73(1)]
Section 2 - Matters Applicable To All Voluntary Liquidations
The official receiver will become involved with a company which is in voluntary liquidation due to one of the following circumstances -
A company may be wound up voluntarily -
Where a company is to be wound up voluntarily it will call a general meeting at which the resolution for voluntary winding up will be proposed. Notice of the meeting stating the type of resolution proposed must be given to all members entitled to vote but the requirements for the period of notice to be given can be waived by agreement of 95% of the members at the meeting, if held at short notice. A resolution referred to in paragraph 56.137(a) above requires a simple majority but special and extraordinary resolutions to effect winding up under subsections (b) and (c) require a 75% majority.
Notes: [Companies Act 1985 s376 to381] [s84(2)]A copy of the resolution to wind up the company voluntarily must be forwarded to the Registrar of Companies within 15 days and advertised in the London Gazette within 14 days.
Notes: [s84 (3)] [s85(1)]The winding up of the company commences when a valid resolution for winding up has been passed, irrespective of whether a liquidator has been appointed. This date will be of importance to the official receiver, for example, when considering any potential recoveries from transactions giving a preference or at an undervalue (see Chapter 31.4) and in determining the two-year period for disqualification proceedings to be commenced.
Notes: [s86] [s240(3)] [Company Directors Disqualification Act 1986 s7(2)]From the commencement of the voluntary winding up, the company will cease to trade, unless the liquidator considers that it would be beneficial for trading to continue for the purpose of the winding up. The corporate status and corporate powers of the company continue until the company is dissolved notwithstanding anything to the contrary in its articles. Any act carried out by the liquidator is done by the liquidator in the name of the company and not in his own name
Notes: [s87]
The liquidator
The appointment of any liquidator nominated at the meeting of members or creditors takes effect immediately. The chairman of the meeting must certify the appointment of the liquidator once the liquidator has delivered to him a written statement that he is an insolvency practitioner, duly qualified under the Act to be the liquidator, and that he consents to act as liquidator. He must also satisfy himself that the liquidator has security for the proper performance of his functions (see Chapter 17, paragraph 3, for details of the liquidator’s security requirements).
The liquidator must within 14 days of his appointment give notice of the appointment to the Register of Companies and advertise the appointment in the London Gazette.
Notes: [r4.101] [Form 4.27][s109(1)]
The liquidator -
Notes: [r4.49][Reg 24] [Reg 5(2)][Regs 10, 12, 14 and 15][s133(1)(b)]
The wide-ranging powers of a liquidator are set out in sections 165 and 166 of and Schedule 4 to the Act.
Notes: [Schedule 4, s165 & s166]A liquidator is an "office-holder" and as such has the following additional powers:
Notes: [s233 & s234(1) & (2)][ss236; 237][s244] [Schedule 4, part I para 3A, s238, 239 and 423][s245][ss178 and 179; r4.187; Form 4.53]
Where a vacancy occurs in the office of liquidator, the members in a members’ voluntary liquidation, or the creditors in a creditors’ voluntary liquidation, can fill the vacancy in a general meeting unless the court appointed the liquidator.
Notes: [s 92, s104]The liquidator may only be removed from office -
Notes: [s171]
Expenses properly incurred by the voluntary liquidator, including his remuneration, are payable out of the company’s assets in priority to all other claims.
Notes: [s115]The company’s property must, after payment of the costs and expenses of the liquidation and the preferential debts as set out in section 175, be applied pari passu in satisfaction of all the company’s liabilities. For further details of the order of payment, see Chapter 36.
Notes: [s107] [s175]If the voluntary liquidation continues for more than one year the liquidator must summon a meeting of the company, and in a creditors’ voluntary liquidation of the creditors, at the end of that year and any subsequent year and must lay before the meetings an account of his acts and dealings and a report of the conduct of the winding up.
A requirement of a members’ voluntary liquidation is that all creditors are paid within 12 months of the resolution to wind up (see paragraph 56.156). An annual meeting of the company will only be held where there are matters still outstanding at the end of 12 months, for example, where a tax liability has yet to be ascertained or a return to shareholders has not yet been made.
Notes: [s93] [s105][s89]
As soon as the company’s affairs are fully wound up, the liquidator must prepare an account of the winding up, showing how it has been conducted and how the company’s property has been disposed of, and call a general meeting of the company, and in a creditors voluntary liquidation, a meeting of the creditors, for the purpose of laying before it the account and giving an explanation of it.
The general meetings of the company and its creditors must be called by advertisement in the London Gazette, specifying its time, place and object. At least one months notice is required. If the liquidator fails to call final meetings as required by sections 94 and 106 he is liable to a fine.
Notes:Within one week after the meeting, the liquidator must send to the Registrar of Companies a copy of the account, and must make a return to him of the holding of the meeting and of its date. If a quorum is not present at the meeting, the liquidator must, in lieu of the return mentioned above, make a return that the meeting was duly summoned and that no quorum was present. If the copy of the account is not sent, or the return is not made in accordance with rule 106(3), the liquidator is liable to a fine and, for continued contravention, to a daily default fine.
Notes: [s94(1)] [s106(1)] [s94(2) & (4)] [s106(2)][s94(3), (5) & (6)] [s106(3), (4), (5) & (6)]The liquidator vacates office and obtains his release at the time he submits his final return to the Registrar of Companies unless he has been removed by the court or creditors have voted against his release, in which case he must apply to the Secretary of State for Trade and Industry.
Notes: [s173]The court may, on the application of the official receiver or the liquidator, or of any creditor or contributory, examine the conduct of the voluntary liquidator and if he has misapplied or retained any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company, compel him to repay, restore or account for the money or property, or to contribute such sum to the company's assets by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just.
Notes: [s212]When the liquidator has sent a copy of his final account to the Registrar of Companies (see paragraphs 56.151 and 56.152) the company will be dissolved three months after the return is registered, unless the court makes an order deferring the date of dissolution.
Notes: [s201]
Section 3 - Members’ Voluntary Liquidation
A members’ voluntary liquidation (MVL) is available where the members wish to wind up the company’s affairs and the directors are able to make a declaration of solvency (see paragraph 56.156). This may occur when the period (if any) fixed for the duration of the company by the articles of association expires, or if the members wish to retire and realise their investment in the company. The company in general meeting will resolve that it be wound up voluntarily.
To demonstrate that the company can pay its debts in full at the date of the resolution to wind up the directors or where more than two directors a majority of them must make a statutory declaration of solvency.
The declaration of solvency must be in the prescribed form and state that the directors, having enquired into the company’s affairs, have formed the opinion that the company will be able to pay its debts, together with interest at the official rate, within the stated period, not exceeding 12 months. The declaration of solvency will also include a statement of the company’s assets and liabilities as at the latest practicable date before the making of the declaration.
Although called a declaration of solvency the directors do not have to state that the company is solvent. If the company is able to pay its debts, for example by the intervention of a third party, the directors could make a declaration of solvency.
Notes: [s89] [Form 4.70]
The responsibility for inquiring into the company’s affairs, and deciding on the company’s solvency, is placed firmly on the directors. If a director makes a declaration of solvency without having reasonable grounds for the opinion that the company will pay its debts in full, within the specified period, he will be liable, on conviction, to imprisonment of up to two years or a fine, or both.
Notes: [s89(4)]The declaration of solvency must be made within the five weeks before the company holds a general meeting at which the members will pass a resolution for the winding up of the company. The winding up commences on the passing of the resolution (see paragraph 56.140).
Notes: [s89(2)]The liquidator of the company will be appointed at the meeting. Any replacement liquidator will also be appointed by the company in general meeting.
The liquidator’s role is to realise the assets and distribute the funds to the creditors and shareholders. The liquidator’s powers and duties are discussed at paragraphs 56.143 to 56.145. Where he requires sanction for the carrying out of his duties, this will be given by an extraordinary resolution of the company.
Notes: [s92] [r4.139][s165]
On the appointment of a liquidator, the powers of the directors cease, except so far as the company in general meeting, or the liquidator, sanctions their continuance.
Notes: [s91(2)]The liquidator’s remuneration is fixed by the company in general meeting, usually when the resolution for winding up is passed. If the remuneration is not so fixed, the liquidator is entitled to remuneration calculated in accordance with the scale laid down for the official receiver. If the liquidator considers that his remuneration is insufficient, he may apply to the court for it to be increased.
Notes: [r4.148A]The rules governing the realisation of assets and distributions to creditors in a MVL are discussed at paragraphs 56.148 and 56.149.
In a members’ voluntary liquidation the assets will be realised, payment in full to the creditors will be made within the specified period and there may be a surplus for distribution amongst the members. The distribution to members will be carried out according to the rights of the various classes of shareholder as set out in the company’s articles of association. There is no statutory procedure for the making of a distribution to members. When the affairs of the company are fully wound up the liquidator will call a final meeting of the company as detailed in paragraph 56.151.
If, at any stage, the liquidator is of the opinion that the company will be unable to pay its debts in full he must, within 28 days of forming this opinion, call a meeting of creditors. As from the day on which the creditors’ meeting is held the winding up becomes a creditors’ voluntary liquidation although the commencement date remains as the date of the original resolution to wind up.
It is the duty of the liquidator to deal with the formalities of calling and advertising the meeting, preside at the meeting and prepare the statement of affairs (see paragraphs 56.166 to 56.171). The meeting of creditors will have the same effect as a meeting held under section 98 (see paragraph 56.166).
Notes: [s95] [s96] [s95] [s102]
Section 4 - Creditors’ Voluntary Liquidation
Where the members are of the opinion that the company cannot by reason of its liabilities continue its business, and that it is advisable to wind up they can cause the company to resolve by extraordinary resolution that it should be wound up voluntarily.
Once the resolution for a winding up has been passed the company must within 14 days hold a meeting of its creditors.
The duty to call the meeting of creditors is the company’s so it could be called by the liquidator, if any, appointed by the members, a director, or the secretary. It is common practice for the meetings of members and creditors to be held on the same day but the 14-day period is to ensure that the directors have time to prepare the information required by section 99 (see paragraph 56.171) to be laid before the meeting. The creditors’ interests are protected during the 14-day period by the limited powers of a liquidator or the directors once the resolution has been passed (see paragraph 56. 168).
Notes: [s98] [s99]The notice of the meeting must be sent by post to every known creditor not less than seven days before the day on which the meeting is to be held. The notice must also be advertised in the London Gazette and in two newspapers local to the company’s business area.
The notice must contain either the address of an insolvency practitioner who will provide the creditors, free of charge, with information regarding the company’s affairs, or details of an address near the company’s principal place of business where a full list of creditors can be inspected, free of charge, two days prior to the creditors’ meeting.
Notes: [s98(1)(b) & (c)][s98(2)]
Where a liquidator is appointed at the members’ meeting his powers are limited to taking custody or control of all property to which the company appears entitled, protecting the assets of the company and disposing of perishable goods or other goods whose value is likely to diminish if not immediately disposed of, until the creditors’ meeting. The leave of the court is required before the liquidator can do anything more.
If the members do not nominate a liquidator, the company remains in the control of its directors pending the creditors’ meeting but their powers are also limited to protecting the assets and disposing of perishable goods and to taking certain steps concerning the voluntary liquidation proceedings. Any other actions require the leave of the court.
Notes: [s166(2)][s114]
The creditors’ and members’ meetings must be held on a business day, commencing between 10am and 4pm and at a place convenient for the creditors to attend.
Notes: [r4.60]The directors must appoint one of their number to attend the creditors’ meeting and preside over it. If he fails to attend the creditors can appoint someone else to preside and the meeting will be valid (Re Salcombe Hotel Development Co Ltd (1989) 5 BCC 807). If a liquidator has been nominated by the company at its meeting, he is required to attend the creditors’ meeting and report on any action he has taken in the period between the meetings.
Notes: [s99(1)(c)] [s166(4)]The directors are required to prepare a statement of affairs in the prescribed form and produce it at the meeting of creditors. The statement of affairs must be verified by affidavit by some or all of the directors and show:
The statement of affairs must be made up to a date not more than 14 days before the meeting at which the winding-up resolution is proposed. Where the statement of affairs does not cover the period up to the meeting of creditors, a report is required of any material transaction relating to the company which has occurred between the date of the making of the statement of affairs and that of the meeting.
Following the creditors' meeting the directors must deliver the statement of affairs to the liquidator in office. The liquidator must file it with the Registrar of Companies within seven days of receipt. Failure to lay a sworn statement of affairs before the creditors' meeting does not invalidate the proceedings but is a matter the court may take into account when deciding whether or not the directors are unfit to be concerned in the management of a company (see paragraph 56.176).
Notes: [s99] [r4.34] [Form 4.19][r4.34(4)][r4.53B][r4.34(3)]
Voting at the meeting of creditors is by a simple majority in value of the creditors entitled to vote. The creditors are required to prove their entitlement to vote, which may be in any form, and submit any proxy requisite for that entitlement prior to the meeting. The liquidator may require a person claiming to be a creditor of the company to provide documentary evidence of his claim and has the power to admit or reject that claim. A creditor for an unliquidated debt or the value of whose debt is unascertained must not vote unless the chairman agrees an estimated value on the debt for voting purposes and admits the creditors’ proof. A secured creditor may vote in respect of any unsecured portion of his debt.
Notes: [r4.63] [r4.67 and r4.73(6)] [r4.70(1)] [r4.67(3)] [r4.67(4)]The business that can be transacted at the first meeting of creditors is restricted to:
The liquidator’s role is to realise the assets and distribute the funds to the creditors and shareholders. His powers and duties are discussed at paragraphs 56.143 and 56.145. Where he requires sanction for the carrying out of those duties this will be given by the court, the liquidation committee or, where there is no committee, by the creditors in general meeting.
Notes: [s165]The voluntary liquidator’s remuneration is fixed by the liquidation committee or, if there is no liquidation committee, by a resolution of a meeting of creditors, usually when he is appointed. If the remuneration is fixed by the liquidation committee and the liquidator considers that it is insufficient, he may request it to be increased by a resolution of the creditors and ultimately he may apply to the court for an increase. If no remuneration is fixed, the liquidator is entitled to remuneration calculated in accordance with the scale laid down for the official receiver. If a creditor considers that the remuneration fixed for the voluntary liquidator is excessive, he may, with the concurrence of 25 per cent of the value of the creditors (including himself), apply to the court for a reduction of the remuneration. In certain circumstances, a liquidator may be paid remuneration and allowed expenses for work done in respect of dealing with property which is not part of the assets of the company, with such remuneration being paid out of the property in question (Re Berkeley Applegate (Investment Consultants) Ltd (No 2) (1988) 4 BCC 279 and Berkeley Applegate (Investment Consultants) Ltd (No 3) (1989) 5 BCC 803).
Notes: [r4.127]In a creditors’ voluntary liquidation, a liquidator has a duty to submit a conduct report to the Secretary of State for Trade and Industry on the company’s directors and shadow directors. If the case is considered suitable for disqualification proceedings, the matter might be referred to the official receiver. Further details are contained in Chapter 225.
Notes: [s7(3) Company Directors Disqualification Act 1986; Forms D1, D3 and D4]On the appointment of a liquidator at the meeting of creditors, the powers of the directors cease, unless the liquidation committee (or the creditors if there is no committee) sanction their continuance.
Notes: [s103]When the affairs of the company have been fully wound up the liquidator must convene final meetings of the company and its creditors as detailed in paragraph 56.151.
Notes: [s106]
Section 5 - Subsequent Compulsory Winding Up
If a company is in voluntary liquidation, creditors and members retain the right to petition the court for a winding-up order. The court will usually wish to be satisfied that there will be some advantage in having a winding-up order made or that the rights of creditors would be better served by the conversion of the winding up to a compulsory one.
If a contributory presents the petition, the court will need to be satisfied that the rights of the members are being prejudiced by the continuation of the voluntary liquidation.
In the case of a creditor’s petition, the court will make a winding-up order against the wishes of the majority of creditors only if there is some special reason to override their wishes (Re Lubin, Rosen and Associates Ltd (1975) 1 AELR 577). The court may disregard the wishes of opposing creditors who are closely associated with the management of the company (Re Falcon R J Developments (1987) 3 BCC 146). If the creditors wish to continue the voluntary liquidation and no valid reason is shown why a winding-up order should be made, the court will not make a winding-up order (Re Rhine Film Corporation Limited (1986) 2 BCC 98949). Whilst the voluntary liquidator may make representations to the court by way of affidavit to acquaint the court with relevant matters, he should not attempt to oppose the petitioner. The court has discretion on the award of costs to a voluntary liquidator who appears on the petition.
Notes: [s116]The official receiver has the power to petition for a winding-up order when a company is in voluntary liquidation. Although the official receiver is the petitioner, he is subject to the directions of the Secretary of State (specifically Insolvency Practitioners Section) and essentially it is a public interest petition. Such petitions may occur when voluntary liquidations have not been conducted in the best interests of the creditors or when the actions of a voluntary liquidator have contravened the Insolvency Practitioners Regulations 1990.
Notes: [s124(5)]A voluntary liquidator vacates office on the making of the winding-up order, as the official receiver becomes liquidator, but he must apply to the Secretary of State for his release. As voluntary and court winding up form one continuous proceeding, the commencement of the winding up remains the date of the resolution for voluntary winding up. All "proceedings" taken in the voluntary liquidation are deemed to have been validly taken unless the court, on proof of fraud or mistake, directs otherwise.
Notes: [s136 and r4.136; r4.122] [s129(1)]The official receiver should contact the voluntary liquidator and inform him of the making of the winding-up order. Reference should be made to Chapter 3 of this manual for details of initial enquiries to be made where a company has been in voluntary liquidation. In addition, it is useful to obtain details of the former voluntary liquidator’s receipts and payments, of any unrealised assets and details regarding the company’s affairs and the directors’ conduct. The official receiver should arrange with the voluntary liquidator for the handing over of the company’s assets including any realisations which have not been paid into the Insolvency Services Account. Often the funds held will be net of expenses and remuneration paid but "net" assets should not be accepted where the approval of the court is required (see paragraph 56.183 below).
Notes: [Form NTVL] [r4.138(1)] [r4.219]Any remuneration paid to the voluntary liquidator prior to the presentation of the petition for winding up does not need to be approved by the court. However, where a voluntary liquidator claims to be entitled to remuneration but has not been paid prior to the presentation of the petition, he should make an application to the court under rule 4.219 to determine -
These items will rank in priority with the expenses specified in rule 4.218(1)(a) (see Chapter 36 for further details of priority of payment of expenses). If the former voluntary liquidator does not make such an application the official receiver should draw this omission to the court’s attention. If the official receiver is concerned, for whatever reason, at the deduction already made from the assets of the company, he may make an application to the court. Generally, the voluntary liquidator will apply to the court by claim form in which the official receiver or liquidator is made the respondent. The claim form should be supported by an affidavit setting out the former voluntary liquidator’s remuneration and expenses. The official receiver’s report should be filed in court prior to the hearing and should include a brief summary of the events leading from the passing of the resolution for voluntary liquidation to the making of the winding-up order. The official receiver should consider the amount of remuneration (if any) already paid to the voluntary liquidator, the authority under which it was paid and if this amount is comparable to the rate which would have been charged by the official receiver. If there is a substantial difference, this fact should be included in the report to the court. The official receiver should also consider whether there were any special circumstances arising in the voluntary liquidation which would have warranted a higher level of remuneration being charged.
The official receiver will need to confirm that the expenses incurred in the preparation of a statement of affairs and convening meetings were reasonable and necessary and also that other expenses (e.g. agents’ and legal fees) were properly incurred. If the expenses are unreasonable, or if unnecessary work has been done, the official receiver should comment in his report to the court. Where a winding-up order is made immediately after a voluntary liquidation, the remuneration and expenses of the voluntary liquidator allowed by the court are payable in priority with (i.e. on a par with) the expenses properly incurred by the official receiver or the liquidator in preserving, realising or getting in the company’s assets.
Notes: [r4.219][r4.218(1)(a)]
There is no statutory provision to prevent a former voluntary liquidator accepting nomination as liquidator of the company when a winding-up order is made, but he will need to consider whether there would be any conflict of interest or other difficulties in accepting the nomination. The official receiver should consider whether any complaints have been received relating to the administration of the voluntary liquidation and whether some objection might be made to the nomination of the former voluntary liquidator and, if so, bring these matters to the attention of the meetings (see paragraphs 16.80 and 16.81). Where a former voluntary liquidator is subsequently appointed to be liquidator of the company, it is not necessary for a further certificate of specific penalty (security) to be issued in respect of the later appointment.
Notes: [Reg 13 IPR]If a winding-up order follows a creditors’ voluntary liquidation, any disqualification report submitted by the voluntary liquidator will be entered on LOIS and Disqualification Unit will, on request, forward a copy of any conduct report to the official receiver, on a confidential basis. The official receiver should bear in mind that an application for a disqualification order should be made within 2 years of the date of the company going into liquidation at a time when it was insolvent (see Technical manual Volume 2 Chapter 222). The leave of the court is required for the bringing of proceedings outside this period.
Notes: [s6 Company Directors Disqualification Act 1986]