Process and Effects of Compulsory Winding Up
There are many reasons to wind up a company. Maybe your company has ceased business activities, or maybe you're looking to minimize tax liabilities. In these two cases, voluntary winding up is possible. However, there are also two other ways to wind up a company: creditor's voluntary winding up, and by an order of the court.
Members' Voluntary Winding Up
Companies winding up voluntarily can only do so if it is still able to pay its debt in full within 12 months of commencing the winding up. Company directors will be required to make a statement to this effect once the winding up process is complete.
When a company chooses the members' voluntary winding up, the shareholders will appoint a liquidator to file the necessary notifications under the Companies Act and wind up its affairs.
No originating summons is filed in court in the case of a voluntary wind up. The Accounting and Corporate Regulatory Authority handles this instead.
Creditors' Voluntary Winding Up
What happens when a company is insolvent, or unable to pay its debts? In this case, the company can only be wound up through a creditors' voluntary winding up or by an order of the court.
If the company's Directors decide that the company cannot continue operating, due to its liabilities, a meeting must be called with the creditors to appoint a liquidator. In this case, the Directors make no declaration of solvency, which is required with a members' voluntary winding up.
It's possible that a members' voluntary winding up may transition to a creditors' voluntary winding up if the appointed liquidator forms the opinion that the company cannot pay its debts in full within the required time period.
Compulsory Winding Up
There are also cases when companies may be compulsorily wound up via an order of the court. The court may be petitioned to obtain such an order.
There are many reasons why a company may be wound up compulsorily.
- The company is not able to pay its debts.
- The company, through a special resolution, has resolved that it should be wound up by the court.
- The court decides that it is just and equitable for the company to be wound up.
- The Directors acted in their own interests in regards to the company's affairs rather than in the interests of the company as a whole.
- The company is being used for an unlawful purpose.
- A creditor has a claim against a company for more than $10,000, has served a written demand requiring the payment, and the debt was not paid within three weeks.
A Real-World Example of Compulsory Winding Up
Take, for example, the case Companies Winding Up No 192 of 2016, Summons No 5094 of 2016. In this particular case, which also highlights the importance of replying to tax income, the judge ordered the defendant to be wound up.
A petition for the order was filed by the Comptroller of Income Tax on grounds that the defendant was unable to satisfy its debts. The defendant's business was in the management and investing of property.
In 2014, the Comptroller sent a letter to the defendant stating that the gains from the sales of two properties by the defendant is taxable. The Comptroller provided the defendant with reasons for the position as well as "proposed revised tax computations" for the years of assessment between 2011 and 2013.
The defendant was given a deadline of 8 January 2015 to inform the Comptroller of any objection. The defendant failed to respond by the deadline, so the Comptroller proceeded with the revision of the tax assessments.
The defendant was sent a letter stating the additional assessment as well as Notices of Additional Assessment. The notices state the amounts of $672,319.32 and $458,682.01 for 2013 and 2011 respectively were to be paid by 21 February 2015 as additional tax.
The notices also gave a two-month deadline from the date of the notices to object to the additional assessments.
No payments were made before the deadline. Between 20 April 2015 and 28 March 2016, tax officers made calls to the defendant requesting payment. Letters and emails were also sent between 21 July 2015 and 29 January 2016.
The defendant had arranged to make payments through associate companies via cheque for part of the owed payments. Together with penalties, the defendant owed more than $1 million. Most of the additional tax remained unpaid.
The Comptroller sent a demand dated 5 July 2016, which stated that the defendant owed $1,131,130.25. The demand stated that if the defendant did not make a full payment within three weeks that the Comptroller would commence winding up proceedings against the defendant.
No further payments were made. The defendant claimed to have been dealing with health issues and other business-related matters, and for these reasons, did not respond to the statutory demand.
The Comptroller filed the application to wind up the defendant on 7 September 2016.
The court ultimately ruled that the defendant was unable to pay its debt to the Comptroller, and the court may order the winding up of the defendant under the Companies Act. The judge ordered the costs to be taxed and paid to the Comptroller out of the defendant's assets.
The Effects of a Compulsory Winding Up Order
When the court winds up a company compulsorily, the winding up is deemed to have commenced at the time the Originating Summons was presented. Once the winding up has commenced, the Directors of the company have no power to carry on business operations. The assigned liquidator then takes control over the company.
Within two weeks of the winding up order, the secretary and directors of the company must deliver to the liquidator a statement of the company's affairs. This statement contains the details of the company's liabilities and assets, and it also allows the liquidator to carry out an investigation into the company's affairs.
After the winding up order is made, no action can be taken against the company without the leave of the court. Unless the court orders otherwise, any transfer of company shares or disposition of company property shall be void.