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Lecture notes

Business Entities - Lecture 10 - Compulsory and Voluntary Liquidation
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Lecture notes for the Business Entities module linked to Business Law in Scotland (4th Edn). Author achieved a first-class grade for the module.

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  • June 3, 2024
  • 12
  • 2020/2021
  • Lecture notes
  • Dr lorna gillies
  • Lecture 10

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Lecture 10 – Liquidation
Podcast 1

Recommended Reading

Grier N. Company Law (5th edn, W Green 2020), Chapter 17

Black G., Business Law in Scotland (4th edn, W Green 2019), Chapter 18

Focus of this lecture

In this lecture we will consider:

▪ The objectives of liquidation

▪ The difference between voluntary winding up and compulsory winding up and how you
initiate them

▪ The Liquidator

▪ The legal effects of winding up

▪ Challenges to recent transactions



What would happen if there were no rules?

▪ Where companies are insolvent, creditors would compete to be paid, and small creditors
would suffer. Smaller creditors might struggle to pay for legal proceedings to recover what's
owed to them in comparison to other creditors.

▪ Creditors in one country might try to prevent creditors in other countries being paid.

This does in some respects depend on which country insolvency proceedings are brought. We
are only working on looking at bringing insolvency proceedings to the Scottish courts. In that
case, if there's a question as to whether liquidation could be brought somewhere else, there
is the concept known as forum shopping, which might allow creditors or members to be able
to select another place to bring insolvency proceedings. So, if there were no rules, then there
would be no basis for saying where is the appropriate place to bring insolvency proceedings
against a company.

▪ The procedures might be tainted with corruption.

If there were no proceedings in relation to insolvency available to members and creditors,
then the whole system could become quite easily corrupt.



The Objectives of Liquidation

(1) If any members owe money to the company, to see it gets paid;

(2) To gather in the company’s assets;

(3) To pay the creditors in the statutory ranking order; - So creditors will be paid depending on
their status as a creditor in relation to the insolvency of the company, and they may be paid

, in full or they may be paid proportionate, depending on how much money, how much assets
the company has at liquidation.

(4) To distribute any surplus to the members - the shareholders. Either in full or proportionate,
depending on what money is left over after the third point, the creditors have been paid.

Liquidation also applies to Limited Liability Partnerships.

Main statute: Insolvency Act 1986.



Why are companies put into liquidation?

▪ Because they are insolvent and unable to be rescued through the process of administration
or a company voluntary arrangement.

▪ Because they refuse to pay their debts leaving creditors with no alternative but to seek
liquidation as a means of enforcing the debt that is owed to them.

▪ Solvent companies are also put into liquidation if they are no longer needed. The function or
the purpose of the company has met its aims and therefore its objectives are fulfilled.



Voluntary Winding up & Compulsory Winding up

The key thing to note here is that voluntary winding up can be based on members voluntary winding
up or creditors voluntary winding up and compulsory winding up can only be facilitated by the court.

▪ Voluntary winding up is initiated (whether by members or creditors) by an ordinary resolution
of the members if the company is time-limited, or a special resolution if not – s.84 Insolvency
Act 1986. Ordinary resolution applies if the company is time limited, special resolution, if not.

▪ Voluntary Winding up can be a Members’ voluntary winding up or a creditors’ voluntary
winding up – in either case, always initiated by the members though.

▪ A members’ voluntary winding up has a declaration of solvency, that it is okay to bring the
company to a close. A creditors’ voluntary winding up does not.

▪ Members voluntary winding up can happen when the company is solvent. So this is the
members raising their ordinary resolution to bring the company to a close. Voluntary winding
up by members is therefore intended to benefits the members of the company by enabling
them to be repaid once the creditors have been repaid. So that still does not change. The
creditors must be paid ahead of the members. It requires the directors to make a declaration
that the company can pay its debts, pay the creditors, and do so within 12 months. It does
require the appointment of a liquidator. The importance of this declaration is such that if it's
not justified or the creditors are not paid, then the directors can be prosecuted. Liquidators
could also disagree about the declaration as well, and if that's the case, then it changes the
members winding up to a creditor’s winding up. So all of this needs to be taken into account
in deciding whether to proceed with a member's winding up.

It commences from date of the resolution that has been granted and notice must be given to
any qualifying floating charge holder, any creditor who is granted that form of security over
the company. Why? Because they might look themselves to appoint an administrator to be

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