Winding up of a company
Winding up ends a company's life: a liquidator collects and sells its assets, pays creditors in the legal order, returns any surplus to members, and the company is dissolved.
What winding up is
Winding up (liquidation) is the process of ending a company's life. A liquidator takes control, collects and sells the assets, pays the debts in the order the law sets, and distributes any surplus to the shareholders. The company is then dissolved and ceases to exist. Winding up is the process; dissolution is the end. Under the Companies Act No. 7 of 2007, a company may be wound up by the court or voluntarily.
Winding up by the court (compulsory)
| Main ground | Example |
|---|---|
| The company resolves by special resolution to be wound up by the court | Shareholders decide the court should supervise the ending |
| The company is unable to pay its debts | It ignores a creditor's formal written demand for payment, or a court judgment stays unpaid |
| It is just and equitable to wind it up | Deadlock between the only two directors of a small company; the company's purpose has failed |
Voluntary winding up
Who may petition the court: usually the company, a creditor or a shareholder (contributory).
Steps in a winding up by the court
In a voluntary winding up the steps are similar, but it starts with a resolution instead of a court order.
Order of payment
- Secured creditors, such as a bank holding a mortgage, usually look first to the property charged to them.
- Costs and expenses of the winding up, including the liquidator's fees.
- Preferential debts named in the Act, such as certain amounts owed to employees and certain taxes.
- Ordinary unsecured creditors, paid equally in proportion to their debts (pari passu).
- Shareholders receive any surplus, according to the rights attached to their shares.
Effects of a winding-up order
- The liquidator takes custody of the company's property and books.
- The directors' powers come to an end.
- Legal actions against the company are stopped unless the court allows them.
- Transfers of shares after the winding up begins are void unless the court approves.
- The company still exists as a legal person until it is dissolved, and its business continues only so far as needed to wind it up.
When a Sri Lankan company cannot pay its suppliers and banks, a creditor may petition the court to wind it up. Employees should know that some amounts owed to them are preferential debts, paid before ordinary suppliers but after the costs of the winding up.
Short answer: “What is meant by winding up of a company?” The process by which a liquidator collects and sells a company's assets, pays its debts and distributes any surplus, after which the company is dissolved.
Structured question: “Distinguish a members' voluntary winding up from a creditors' voluntary winding up.” Members': solvent, declaration of solvency, shareholders appoint liquidator. Creditors': insolvent, creditors' meeting, creditors mainly choose liquidator.
Essay: “Explain the modes of winding up a company under the Companies Act No. 7 of 2007.” Define winding up; explain winding up by the court (grounds, who petitions, steps, effects); voluntary winding up (members' and creditors'); order of payment; dissolution.
Order of payment S-C-P-U-S: Secured (from their security), Costs, Preferential, Unsecured, Shareholders.