If a company is insolvent, either on the basis that its liabilities exceed its assets (and it is no longer capable of trading) (“the Balance Sheet Test”) or, even if it has substantial assets, is unable to pay its debts as and when they fall due for payment (“the Cash Flow Test”), then it is likely to be declared insolvent.
If insolvent, directors have a legal fiduciary duty to preserve what assets of the company remain for the purpose of maximising the return to creditors. This duty also includes a legal requirement not to continue trading and increasing the claims of creditors.
Where a director is aware (or should be aware) that his/her company is insolvent and there is no realistic possibility of rescuing the situation, then the duty to act in creditors’ interests becomes their primary obligation. Where the company as a trading entity (including its employees, reliant suppliers etc.) can be rescued and sold, then it may be appropriate to place it into Administration.
If this is not possible, then directors have a duty to minimise the loss to creditors (as a whole, whether new or outstanding) and seek shareholders’ agreement to place the company into a Company Voluntary Liquidation or, if shareholders do not consent, petition the Court to place the company into a Compulsory Liquidation.
Where neither of the above steps are taken, then the company could still be placed into Compulsory Liquidation upon the petition of any unsecured creditor of the company or the Secretary of State in the Public Interest.
Process of Public Interest Winding-Up
Once the investigator or investigators from the Companies Investigation Team has carried out their investigation and produced the evidence to the Secretary of State which confirms their opinion that the company should be wound up in the public interest, the Secretary of State will appoint solicitors who will prepare the necessary documentation to support a petition under Section 124(A) of the Insolvency Act 1986 (as amended) which gives the Secretary of State the power to petition for the company to be wound-up in the public interest.
The Winding-up Petition is then issued at the High Court in London, or at a District Registry if appropriate. However the majority of winding-up petitions in the public interest are issued in the High Court in London.
The petitions are then served upon the companies at their registered offices (often their accountants) and the date of a hearing is provided within that petition.
Notice to the company
Approximately 200 Public Interest Winding-Up Petitions are issued each year. Upon being served with a Petition, the company may already be aware of the steps being taken by the Secretary of State to investigate it and so this may not come as a surprise. In other cases, the service of the Winding-Up petition may be more unexpected.
In either case, the company (and its directors) have a duty not to dispose of any of the company’s assets, to mitigate any further loss to creditors and, if necessary, to deal with protection of the company including the potential defence of a Winding-Up petition where appropriate.
Defending a Public Interest Winding-Up Petition
Not all Public Interest Winding-Up Petitions are successful. Often, a misunderstanding by investigators or a failure by the company to deal with such investigations may lead to miscommunication of the company’s business. Often, the Petition may be issued on the basis of a misunderstanding of the company’s business.
If the Petition is issued on grounds which demonstrate any of the above, then the Directors also have a fiduciary duty to ensure that the Court’s attention is directed to the requisite circumstances and a defence is filed in opposition to the Winding-Up Petition.
If the company fails to deal with the Winding-Up Petition, then almost certainly at the 1st hearing the company will be wound-up. For more information on Winding-Up Petitions please click here.
Following the Winding-Up Order
If a Winding-Up Order is made in the Public Interest then the company, its assets and all accounting and business records are required to be disclosed to the Official Receiver, who will commence investigations into the directors’ conduct.
In a majority of these cases, as the company has been wound-up on the basis it was causing a risk to the public, the directors will almost certainly be targeted for Director Disqualification as a minimum.
Often, especially where directors are disqualified or signed a Disqualification Undertaking, they may also face criminal prosecution for a variety of offences including fraud and theft.
At Francis Wilks & Jones we have extensive experience of public interest matters and are able to advise and assist where your company faces the risk of being wound-up in the public interest or are subject to investigations by inspectors or Public Interest Winding-Up Proceedings, or where you face civil or criminal proceedings following a Public Interest winding-up order having been made.
Please call any member of our Director Disqualification team for a consultation now on 020 7841 0390. Alternatively please email us with your enquiry and we will call you back at a time convenient for you.