Compulsory liquidation

Grounds

The grounds upon which one can apply for a compulsory liquidation also vary between jurisdictions, but the normal grounds to enable an application to the court for an order compulsorily wind-up the company are:

the company has so resolved

the company was incorporated as a public company, and has not been issued with a trading certificate (or equivalent) within 12 months of registration

it is an "old public company" (ie. one that has not re-registered as a public company or become a private company under more recent companies legislation requiring this)

it has not commenced business within the statutorily prescribed time (normally one year) of its incorporation, or has not carried on business for a statutorily prescribed amount of time

the number of members has fallen below the minimum prescribed by statute

the company is unable to pay its debts

it is just and equitable to wind up the company

In practice, the vast majority of compulsory winding-up applications are made under one of the last two grounds.

An order will not generally made if the real purpose of the application is other than for a winding-up, eg. the application is made just to enforce a debt.

A "just and equitable" winding-up enable the ground to subject the strict legal rights of the shareholders to equitable considerations. It can take account of personal relationships of mutual trust and confidence in small parties, particularly, for example, where there is a breach of an understanding that all of the members may participate in the business, or of an implied obligation to participate in management. An order might be made where the majority shareholders deprive the minority of their right to appoint and remove their own director.

The order

Once liquidation commences (which depends upon applicable law, but will generally be when the petition was originally presented, and not when the court makes the order), dispositions of the company's property are generally void, and litigation involving the company is generally restrained.

Upon hearing the application, the court may either dismiss the petition, or make the order for winding-up. The court may dismiss the application if the petitioner unreasonably refrains from an alternative course of action.

The court may appoint an official receiver, and one or more liquidators, and has general powers to enable rights and liabilities of claimants and contributories to be settled. Separate meetings of creditors and contributories may decide to nominate a person for the appointment of liquidator and possibly of supervisory liquidation committee.

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