This is the first article in 'Back to Basics', a series of articles looking at insolvency processes in Scotland. In this article I examine the court process for winding up a company.
A winding up petition is a form of legal action that can be used when a company is unable to pay its debts as they fall due. Sections 122 to 124 of the Insolvency Act 1986 (‘the Act’) deal with how to wind up a company in Scotland.
When is a company deemed unable to pay debts?
Section 123 of the Act states that a company is deemed unable to pay its debts if:
a) the company owes more than £750 and has failed to comply with a statutory demand served on the company requiring payment to be made within 21 days;
b) a charge for payment has been served on the company and the period of the charge (14 days) has expired without payment being made;
c) it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due; or
d) it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.
What is the procedure for winding up a company in Scotland?
Section 124 of the Act sets out the procedure, however, in summary:
An application to the court for the winding up of a company is made by petition presented by one of the following:
- the company;
- the directors;
- a creditor(s) (including any contingent or prospective creditor or creditors); or
- a contributory or contributories
In Scotland, if the company’s paid up share capital does not exceed £120,000 a winding up petition can be presented to the local Sheriff Court in which the company’s registered office is located. If the share capital is more than £120,000 then the petition requires to be presented to the Court of Session in Edinburgh.
Once the court has considered the petition, a First Order will be given for service and advertisement. The petition can then be served on the company and advertised in both the Edinburgh Gazette and a local newspaper. At the same time, the order will also be displayed on the walls of court.
Once the petition is served and advertised, there follows a period of 8 days in which the company or any other interested party can lodge answers with the court. If answers are lodged, then a hearing will be fixed to determine whether the winding up order should be granted. If, however, no answers are lodged then the petitioner can go back to the court and request that the winding up order is granted.
Once the winding up order has been granted, the nominated Insolvency Practitioner (there is no Official Receiver in Scotland) will be appointed as interim liquidator. Thereafter, the interim liquidator must, within 28 days of being appointed, seek nominations from the company’s creditors for the purpose of choosing a person to be liquidator (who may be the same person as the interim liquidator).
Under certain circumstances and on cause shown (such as dissipating assets), the court may, at any time after the presentation of a winding-up petition and before the winding up order is granted, appoint a provisional liquidator. The role of a provisional liquidator is to safeguard the company’s assets pending determination of the petition and they are granted specific orders from the court, for example, to sell perishable or wasting assets.
How has coronavirus (COVID-19) affected winding up petitions?
At present, a winding up petition cannot be presented on the basis of a statutory demand and in addition a petition cannot be presented to the court unless the petitioner can show that COVID-19 has not had a financial effect on the company or the company would have been unable to pay its debts even if Covid-19 had not had a financial effect.
The threshold for presenting a petition is therefore very high and as a result of this, in most circumstances there will be little prospect of success. The compulsory liquidation (i.e. court winding up) of companies has essentially been placed on hold since the Corporate Insolvency and Governance Act 2020 came into effect on 25 June 2020.
These restrictions on the use of winding up petitions are due to remain in place until 30 September 2021 but there is scope for this to be further extended by the UK Government.
The court procedure in Scotland for winding up a company is generally an efficient and timely process making it a favoured option for many creditors. However, the current restrictions have meant that the use of winding up petitions has plummeted during the pandemic.
It will therefore be interesting to see whether the Covid-19 measures currently in place will be further extended or whether these will come to an end on 30 September 2021 allowing creditors, once again, the option of petitioning for the winding up of a company.