Winding Up

Winding up (also called liquidation) is the legal process of bringing a company's existence to an end. Trading stops, a liquidator takes control of the company's affairs, its assets are turned into cash and used to pay its debts, and any money left over is distributed to shareholders. Once the process is complete the company is removed, or 'struck off', from the register at Companies House and ceases to exist. There are three routes into liquidation: a creditors' voluntary liquidation, where the company cannot pay its debts and the directors involve the creditors in liquidating it; a members' voluntary liquidation, where a solvent company's shareholders choose to close it down; and compulsory liquidation, where the company cannot pay its debts and an application is made to the court.

Voluntary winding up is triggered by a company resolution. Under the Insolvency Act 1986, a company may be wound up voluntarily where the articles provide for dissolution on a fixed event, or where the company resolves by special resolution that it be wound up voluntarily. Compulsory winding up, by contrast, is ordered by the court, most commonly on a petition presented by one or more creditors because the company cannot pay its debts. A company is treated as unable to pay its debts, among other grounds set out in the Act, where a creditor is owed more than £750 and can prove the company cannot pay. Parties entitled to petition for a winding-up order include the company itself, its directors, any creditor, a contributory (such as a shareholder), and the Secretary of State.

Once a winding-up order is made or a resolution passed, the directors' powers cease and a liquidator takes over responsibility for gathering in the company's assets, investigating its affairs, and paying creditors in the statutory order of priority before any surplus is returned to members.