In simple terms, winding up a company means bringing it to an orderly end, or at least as orderly an end as possible. In practical terms, winding up may have different meanings depending on the exact situation.
The company directors wish to wind up the company even though it is still solvent
Although people might assume that winding up a company is invariably something which is forced on to its directors by financial circumstances, this isn’t necessarily the case. Many small businesses revolve around people rather than products and if these people decide that they want to move on from the company for any reason, for example to retire, then the only practical course of action may be to wind down the company in recognition of the fact that the departure of these people deprives the company of any meaningful assets and hence renders it valueless. In this situation, winding up a company is essentially a question of ensuring that all legal boxes are ticked so that its director(s) can be comfortable that there will be no nasty surprises waiting for them further down the line. This would include, for example, making sure any outstanding bills are paid, leases were terminated and any employees are given suitable notice of redundancy.
The company directors opt to wind up the company as it has become insolvent
Knowingly trading while insolvent is a criminal offence and hence, from a legal perspective company directors are obligated to cease trading as soon as they become aware that the company is no longer solvent. This does not, in and of itself, necessarily mean that a company has to be wound up, there may be legal options for saving it, but sometimes the only practical course of action is to accept that a company no longer has any viable prospect of long-term survival and thus it’s best to put it out of its misery as gently as possible. Although the procedure of winding up a company upon the orders of the company directors is broadly similar to the procedure for winding up a company as a result of a court order (which will be described in more detail later), the advantage to the company directors is that the insolvency practitioner will do everything they legally and ethically can to ensure that the directors’ interests are represented and that they are protected from creditors using what are effectively legal bullying tactics to try to force them to take personal responsibility for company debts.
A court orders a company to be wound up because it is insolvent
In this situation, a licensed insolvency practitioner will be appointed to oversee the winding up of the company, without any further action being taken to see if there is any possibility of saving it. The IP’s first duty will be to liquidate the company’s assets, if any, and to use the funds to pay off the company’s creditors. In this context, the term assets also includes any funds due to the company, such as unpaid invoices, and the IP may therefore take action on behalf of the company to recover funds owed to it by its customers. If the sale of the assets does not produce sufficient funds to pay all creditors in full, the IP will distribute the money according to a legal formula, the intention of which is to ensure that all creditors (large and small) receive fair and equitable treatment. The IP will also investigate the management of the company in order to establish whether its creditors could feasibly have a claim against the company directors, associated companies or even shareholders.