Closing down: Everything Must Go
Through the international media we have seen the effects of the global recession on former heavyweight companies forced to erect ubiquitous signs such as "Closing down: Everything Must Go". Several companies in Jamaica from the financial, insurance, and tourism industries have fallen victim to liquidation. In this current economic climate it is therefore important that all stakeholders: customers, suppliers, shareholders, business owners, employees, and members of society understand the winding up process of companies.
The life of a company is usually terminated by an intricate process of winding up, dissolution, and striking off the company from the Register of Companies. At the end of the winding up process the company is essentially a shell and to complete the liquidation process the company must be dissolved. Upon dissolution the company ceases to exist and is struck off the Register of Companies.
The Companies Act does not define corporate insolvency but outlines various modes of winding up a company. Under the Act a company may generally be wound up by the Court or voluntarily either by the Members or by the company's creditors. A company will however be considered to be 'commercially insolvent' where it is unable to pay its debts as they fall due. This means that though the company's overall assets position may not be in deficit, it has cash-flow issues. In addition, a company will be described as 'balance sheet insolvent' if the value of its assets is less than the amount of its liabilities.
Winding Up by the Court
A company may be wound up by the Court upon the presentation of a Petition for the winding up of a Company either by the company, or by any creditor or creditors or contributories in the following circumstances:
- the company has by special resolution resolved that the company be wound up by the Court;
- default is made in delivering the statutory report to the Registrar of Companies or in holding the statutory meeting;
- the company does not commence business within a year from its incorporation or suspends its business for a whole year;
- the company is unable to pay its debts; and
- the Court is of the opinion that it is just and equitable that the company should be wound up.
The company, in this type of winding up, will be classified as being unable to pay its debts in the case where a creditor is owed at least $500,000 and a demand is served on the company that remains unpaid for three weeks. The company will also be deemed to be unable to pay its debts if a judgement of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part.
Where the Court has made a winding up order or appointed a provisional Liquidator, a statement outlining the affairs of the company should be submitted to the Trustee in Bankruptcy. The Trustee in Bankruptcy must in turn submit a preliminary report to the Court indicating the amount of capital issued, the estimated amount of assets and liabilities, and if the company failed the reasons for its failure and whether a further inquiry is needed.
The Court may appoint a Liquidator who will have conduct of the Liquidation. Where a Liquidator is not appointed by the Court the Trustee in Bankruptcy will be the Liquidator of the company. The Liquidator has a number of powers that include but are not limited to: bringing or defending any action or other legal proceedings in the name and on behalf of the company; carrying on the business of the company; selling the real and personal property of the company; summoning general meetings of creditors or contributories to determine their desires in relation to the company; and doing all things necessary for winding up the affairs of the company and distributing its assets.
In addition, the Court may appoint a Committee of Inspection (which will consist of creditors and contributories of the company) to act with the Liquidator.
Voluntary Winding Up
In a Members' voluntary winding up the members are essentially allowed to settle their affairs without undue influence of creditors or the Court. On the other hand, in a Creditors' voluntary winding up the autonomy of members is diminished in favour of the creditors who have more to lose because of the company's financial state.
In the case of a Members' voluntary winding up, the company must be solvent. The directors of the company must at a meeting of directors make a Statutory Declaration to the effect that they have made a full inquiry into the affairs of the company and they are of the view that the company will be able to pay its debts in full within such period not exceeding twelve months from the commencement of the winding up. Further, the company at a general meeting may appoint a Liquidator. In comparison, in the case of a Creditors' voluntary winding up a meeting of creditors must be summoned to propose a resolution to wind up the company. The creditors may then appoint a Liquidator and thereafter a Committee of Inspection.
It is important to note that once a company has resolved that the company be voluntarily wound up, the Court may make an order that the voluntary winding up should continue but subject the supervision of the Court.
In relation to proof and ranking of claims, in every mode winding up all debts payable and all claims against the company, present or future are admissible against the company. However, when a company is insolvent the rules regarding rights of secured and unsecured creditors and debts provable will apply.
In summary the winding up of a company results in the following:
- management of the company is removed from the directors of the company;
- the business is brought to an end and the company ceases to carry on its business, except as far as may be beneficial for the winding up;
- the assets of the company are identified and realised;
- the debts of the company are paid out of proceeds of realisation based on priority; and
- any remaining balance is returned to the shareholders.
Over the past few years various committees and stakeholders have considered the issue of insolvency law reform with a view to making the law more user friendly and taking a holistic approach to the implementation of a more efficient system. It is hoped that this will result in a decrease in the number of signs indicating "Closing down: Everything Must Go".
Stephanie Sterling is an Associate at Myers, Fletcher & Gordon and is a member of the firm's Commercial Department. Stephanie may be contacted via firstname.lastname@example.org or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.