The consequences for a company of the presentation of a winding up petition against it can be extremely serious.
Dispositions of property are potentially void
Any dispositions of a company’s property which occur after the date of presentation of the petition are potentially void if the company is ultimately wound up by the court (sections 127(1) and 129(3), 1986 Act). The effects of this for a company are two-fold:
- The company’s bank will freeze its bank accounts so that the company will be unable to make any payments out of its accounts. This is invariably done by banks in order to protect themselves in the event that a winding up order is made against the company. A company’s accounts will usually be frozen shortly after the petition has been advertised, although it can occur at any time after presentation of the petition. Once the accounts have been frozen, the company may find itself unable to pay its employees and suppliers, and so may be forced to cease trading.
- The fact that dispositions of the company’s property will be potentially void gives rise to real difficulties for the company (and in particular its directors) in determining whether or not the company should enter into transactions or dispose of its assets before the hearing of the petition by the court.
In order to deal with these difficulties the company will normally have to seek a “validation order” under section 127 of the 1986 Act. This will involve expense and administrative inconvenience for the company.
The presentation of a winding up petition against a company can cause substantial harm to the commercial reputation of the company. The company may, for example, find it more difficult to obtain credit (for example, from suppliers) while the petition is outstanding. Existing creditors of the company may also pursue the company for repayment of outstanding debts more vigorously than would otherwise be the case.
The company will incur expense and inconvenience in dealing with the petition itself. This may involve taking legal advice on the petition and instructing solicitors or counsel to attend the hearing of the petition. Further, if the petition is well-founded the company will be obliged to pay the petitioner’s costs of the petition as well as the petition debt itself.
What are the consequences for the company if a winding up order is made?
If a winding up order is made by the court, this will ordinarily signal the beginning of the end for the company. The following consequences occur automatically on the making of a winding up order against a company:
- The official receiver becomes the liquidator of the company (section 136, 1986 Act).
- The powers of the company’s directors cease (Measures Brothers Ltd v Measures  2 Ch 248).
- The liquidator takes control of the company’s assets (section 144(1), 1986 Act).
- Any disposition of the company’s property by anyone other than the liquidator is void (section 127(1), 1986 Act).
- All company papers must state that the company is in liquidation (section 188(1), 1986 Act).
- The winding up order operates as notice terminating the employment contracts of all the company’s employees, who are thereby automatically dismissed (Re Oriental Bank Corporation, MacDowall’s Case (1886) 23 Ch D 366).
- There is a stay on the commencement or continuation of proceedings against the company except with the permission of the court (section 130(2), 1986 Act).
The liquidator of the company will seek to wind up the company’s affairs, get in all the company’s assets and then distribute those assets to creditors and members in the statutory order of priority. Once this has been done the company will usually be dissolved by the liquidator.
Exceptionally, a company which is being wound up by the court may come out of liquidation and recommence trading its business. This can occur where the court rescinds the winding up order or grants a stay of the winding up proceedings.