Insolvency procedures: winding up part 11

Serving a proper statutory demand and allowing the three weeks to elapse is obviously the most certain way of proceeding to a winding up petition. Although there are other ways in which a failure to pay can demonstrate insolvency, a statutory demand is obviously a more certain route. Why then would one want to rely upon a less certain route and a shorter timescale which might lead the company to seek to say that it was solvent and that no proper opportunity to respond been given?

The reason lies in the significance of the timescale. If a statutory demand is served then the three weeks provided for have to elapse before presentation of the petition. Where a company is in trouble a lot can happen in that three-week period which could be massively detrimental to the creditor. A company losing money can lose a lot more in that sort of timescale. However the way the courts treat commencement of winding up is critical for understanding the different consequences.

As we will see in subsequent articles, when a company has been wound up there are various steps which certain persons such as the liquidator (and in some cases creditors) can take in order to attack previous transactions. For example the company as it got into trouble might have chosen to pay off monies borrowed from the director rather than pay the outside creditors. The company might have sold valuable assets to the directors for less than their proper value. There are various steps which the court can take to set aside such transactions or otherwise cause the guilty parties to make recompense to the company.

However all of those require a case to be made out against the alleged defaulting person. Far simpler is a situation where the transactions are simply void. When a petition for winding up is presented if a winding up order is eventually made the winding up is deemed to have commenced on the day the petition was presented. Section 127(1) of the Insolvency Act 1986 provides that: "in a winding up by the court, any disposition of the company's property, and any transfer of shares, or alteration in the status of the company's members, made after the commencement of the winding up is, unless the court otherwise orders, void.". There are various exceptions for certain financial transactions, but in general that means that once the petition is presented then if a winding up order is eventually made unless you go before the court and get the court to sanction it, not only will any transfer of shares or alteration of the members' rights not be valid, but any disposal of any of the property of the company will not be valid either.

Disposition of a company's property is very widely construed. This is so that this can protect creditors. It deals with transfers of property from the company but does not affect transfers of property to the company. Property for this purpose is defined under section 436 of the Act as including money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property". Without going into the detail of exactly what all these things mean, it is very wide, covering money, physical goods, rights of all sorts. If a wrongful disposal is made then unless the property is capable of being recovered from the transferee, it can be recovered from any director responsible for the disposition.

What this means therefore is that the sooner a petition is presented against an insolvent company, the less time there is for transactions to take place which could harm the creditors. That is probably why most petitions are not based upon statutory demands.