What Are The Consequences of Winding Up Of A Company

 A winding up is a legal process that is used to dissolve a company and then realise its assets and apply them toward the payment of its debts following its dissolution. If there is any remaining balance after the debts have been satisfied, the remaining balance, if any, is repaid to the members in proportion to the contribution that they have made to the capital of the company." 1. Liquidation or winding up of a company is the process of ending the existence of the company and administering its property for the benefit of its creditors and members after the company has ended its life. An administrator, also known as a liquidator, is appointed to manage the company and collect its assets, pay its debts, and finally distribute any surplus among the members in accordance with the rights of each member

Consequences of winding up:

It is important to emphasize the fact that the proceedings of an insolvency petition presented against a company can have extremely serious consequences.

Property disposals may be void:

If a company is wound up by the court and its assets are sold or disposed of after the date of presentation of the petition, any dispositions of its assets may be voidable if those dispositions occur after this date. (sections 127(1) and 129(3) of the 1986 Act). A company's exposure to this type of risk has two effects on its bottom line:


  • As a result of the freezing of the company's bank accounts, the company will not be able to make any payments to its creditors out of its bank accounts as it becomes incapacitated. Banks are invariably the ones who do this in order to protect themselves from being liable for a winding up order that is issued against the company if a winding up order is made against it. When a petition is filed, the company's accounts will usually be frozen for a period of time following the advertisement of the petition, however, it is possible for this to happen at any time after the petition has been filed. If the account has been frozen, the company might find that it is unable to pay its employees and suppliers, which may force it to cease operations once the frozen account has been unlocked.


  • It is difficult for the company (and particularly its directors) to determine whether or not it should enter into transactions or dispose of its assets before the court hears the petition due to the potential voidness of dispositions of the company's property.


In order for the company to deal with these difficulties, it is usually necessary to request “validation orders” under section 127 of the 1986 Act to be able to undertake the validation process. The company will have to incur expenses as a result of this and may experience administrative inconveniences as a result.

Reputation in business:

An application for winding up can cause considerable damage to the commercial reputation of the company as a result of the presentation of the petition. As an example, if the petition remains unresolved, the company might have a harder time obtaining credit (from suppliers, for instance) while it is awaiting a ruling. There is also a possibility that the existing creditors of a company may pursue the company aggressively for repayment of outstanding debts in addition to seeking payment from the company.

Actions in court:

In order to deal with the petition on its own, the company will incur expenses and inconveniences. In order to do this, it may be necessary to take legal advice regarding the petition and to instruct solicitors or counsel to attend the hearing on behalf of the petitioner. It should also be noted that if the petition is well-founded, the company will be liable for paying both the petitioner's costs of the petition as well as the debt arising from the petition as well.

How does a winding up order affect the company?

If a court orders the winding up of a company, it is usually the beginning of the end for the firm if such an order is made by the court. As soon as a winding up order is made against a company, the following consequences will automatically take place:


  • There is a situation in which the official receiver becomes the company's liquidator (section 136 of the 1986 Act).

  • In Measures Brothers Ltd v Measures [1910] 2 Ch 248, the powers of the company's directors are terminated (Measures Brothers Ltd v Measures).

  • According to Section 144(1) of the 1986 Act, a liquidator is the person who takes control of the assets of the company.

  • There is no law that prohibits the liquidator from disposing of the company's property to anyone other than the liquidator (section 127(1) of the 1986 Act).

  • Section 188(1) of the 1986 Act requires all company papers to state that the company is in liquidation (section 188(1)).

  • A winding up order acts as a notice terminating the employment contracts of all the employees of the company, so that they are thereby automatically dismissed as a result of the winding up (Re Oriental Bank Corporation, MacDowall's Case (1886) 23 Ch D 366).

  • (section 130(2), 1986 Act, section 130A) an injunction prohibits the company from commencing or continuing proceedings against it unless it has received the permission of the court.


Liquidators will be appointed to wind up the company's affairs, collect all the assets of the company and then distribute those assets in accordance with the statutory order of priority to all the creditors and members of the company. Once the liquidator dissolves the company, the company is usually dissolved by the liquidator.

Exceptionally, a company which is being wound up by the court may come out of liquidation and recommence trading its business. This can occur where the court rescinds the winding up order or grants a stay of the winding up proceedings. 

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