Effect of Winding Up on Court Proceedings

What happens when a company is placed into liquidation and is already a party to court proceedings? The answer is that it depends on the route to the liquidation. In this article I compare the straightforward position in relation to a compulsory liquidation with that of the voluntary liquidation route.

Compulsory winding up

Section 171 of the Companies Act 1931 (“the Act”) provides in relation to a winding up undertaken by the court:-

“When a winding up order has been made, or a provisional liquidator has been appointed, no action or proceedings shall be proceeded with or commenced against the company except by leave of the court, and subject to such terms as the court may impose.”

The position is therefore clear. An application should be made in the liquidation proceedings for leave.

Voluntary winding up

There is no equivalent provision contained within the Isle of Man Companies Acts in relation to a voluntary winding up.

Section 216 of the Act provides:-

“…[on voluntary winding up a company shall cease to carry on business]…provided that the corporate state and corporate powers of the company shall, notwithstanding anything to the contrary in its Articles, continue until it is dissolved.”

This would seem to imply that a company subject to a voluntary winding up continues to be a legal entity. By inference therefore it would appear that proceedings against such a company may continue if already commenced.

Furthermore Section 236 of the Act (which is also relevant to voluntary winding up) lists the powers and duties of a liquidator which include, inter alia, being able to exercise, without sanction, any powers which would be given to the liquidator during a winding up by the court. Those powers (expounded in section 184 of the Act) include being able to bring or defend any action or legal proceeding in the name, and on behalf, of the company.

Again this would seem to infer that any proceedings which had been commenced prior to the voluntary winding up may continue.

Furthermore, Rule 29 of the Companies (Winding Up) Rules 1934 (“the Rules”) provides:-

“Where an order has been made for the winding up of a company, then the judge shall have power, without further consent, to order the transfer to him of any action cause or matter pending in any other court or division brought or continued by or against the company..”

This confirms the court’s ability to stay proceedings when it has ordered the winding up of a company.

Rule 1 of the Rules provides that where any rule from its nature or subject matter or by its terms are made applicable only to proceedings in a winding up by the court then they shall not apply to the proceedings in a voluntary winding up. It seems arguable therefore that Rule 29 of the Rules applies only to winding up by the court (by virtue of the application of Ss. 216 and 236 of the Act).

The application of rule 29 to a voluntary winding up or otherwise is not something which yet appears to have troubled the Manx courts (at least not in reported cases), and so it is likely to have regard to similar cases decided in England.

The position in England (see paragraph 1014 of volume 7(4) of Halsbury’s Laws of England, Company and Partnership Insolvency is such that the passing of a resolution for voluntary winding up does not operate as a stay of proceedings, or invalidate executions, or prevent claims or other proceedings being brought or continued against a company. It does however indicate that the court has a jurisdiction to stay any claim or proceeding against a company upon such terms as it sees fit (see Re Hermann Loog Limited [1887] L.R. 36 Ch.D. 502).

The onus lies on a liquidator to show that a claim against the company should be stayed. Furthermore the court has a discretion and will not stay the claim where there is a dispute as to the liability. However if liability is admitted and there is a mere dispute as to the amount then the matter should be determined in the liquidation.

Damian Molyneux is a director of M&P Legal specialising in, amongst other things, liquidations. He can be contacted on dpm@mplegal.im This article does not constitute legal advice, specific advice should be sought for individual circumstances.

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