Dissolution of a company
- John Deane
- Updated: Mon, 21st Nov 2016
There are broadly three ways to dissolve – i.e. terminate – a company. It can be:
- Put into liquidation by the shareholders; or
- Wound up by the court, or
- Struck off the register by Companies House, either at the request of the company itself, or for not filing its annual returns and accounts.
If the dissolution is in the context of a shareholder dispute, other issues arise which we deal with but which are not covered under this Insight.
Liquidation by shareholders
The shareholders (also called members) can, by a special resolution, appoint a liquidator and put the company into liquidation (a voluntary liquidation). The articles and or shareholders’ agreement may have replaced the need for a special resolution with other provisions. Unless the directors can make a statutory declaration that the company will pay all of its creditors and the costs of liquidation within 12 months, then the creditors have the right to appoint the liquidator (creditors’ voluntary liquidation). If the directors do make the statutory declaration, then the shareholders appoint the liquidator (members’ voluntary liquidation).
Winding up by the court
A company can be wound up by order of the court (compulsory liquidation), usually at the request of a creditor because it is not paying its debts, but sometimes for other reasons, for example it is in the public interest to wind it up. The first liquidator is the Official Receiver, but he will often be replaced by a liquidator appointed by the Official Receiver or by the creditors.
Role of the liquidator
Whether appointed through a voluntary or compulsory liquidation, the role of the liquidator is the same: to collect in and realise the company’s assets, investigate any potential wrongdoing by directors or anyone else, pay the creditors, and distribute any surplus to the shareholders.
Consequences of dissolution
When the liquidation is completed, the company is dissolved and it no longer exists. Any remaining assets belong to the Crown as bona vacantia.
Administrative striking off
When the company is no longer needed, rather than going through a formal liquidation, the directors of the company can apply for a voluntary striking off the register and dissolution. There are safeguards. The company must not in the last 3 months have traded, changed its name, disposed of any property that was stock in trade, or doing anything beyond closing down the company. The procedure is very simple – a form and a small fee. The form must be copied to shareholders, creditors, employees, manager or trustees of any pension fund and any directors who did not sign the form. Objections can be made. Assuming no objections are made, the company will be struck off. The Registrar can also strike a company off if it is no longer in business, which usually means it does not file its annual return or accounts, or there are no directors registered.
Restoring a company
If the company was struck off by the Registrar then in some circumstances it can be restored to the register by the Registrar. Otherwise it can only be restored by a court order. This would usually be done where creditor wants to make a claim against the company or it is otherwise important for the company to exist to deal with assets. Sometimes it can be simpler to apply to the Treasury Solicitor (for most of England and Wales, or another government department elsewhere) to deal with the assets as bona vacantia. Generally the government will cooperate or pass on assets where appropriate.
Retention of information and data protection issues arising upon liquidation
There are a variety of practical issues to consider when liquidating a company. One point often overlooked is data protection. Data controllers have specific responsibilities and obligations in protecting the data that it keeps. However, when a company is liquidated the liquidators are merely agents of the company and for that reason are not required to act as data controllers. However, the problem left open is where does the buck stop – considering that the company will no longer exist?
Take for example, issues relating to data protection considered in the case of Southern Pacific Loans Ltd  EWHC.
An application was made to the court by the joint liquidators to determine specific questions relating to their duties under the Data Protection Act. The company was a group belonging to Lehman Brothers, but did not go into liquidation during its collapse. It instead was brought into voluntary liquidation several years later.
An application to the court was made to decide:
- Whether or not the liquidators were data controllers?
- Whether the personal data may be deleted by them?
It was held that the liquidators were not data controllers, but information should not be deleted where it would be needed for the purposes of answering questions concerning the liquidation.
Practical points relating to data protection in a liquidation process
The key points are:
- Liquidators act as agents and because of that the company retains the responsibility for the data.
- It is crucial, whilst acting as an agent to retain the data because of potential disputes that may arise between the company and past customers.
- Intellectual property rights owned by the company were vested in the company.
- There is a subtle difference between compulsory winding up and voluntary winding up as was the case here, but they are not fundamentally different. For that reason the judge did not believe the type would effect the position.
- Liquidators are not personally responsible for complying with the Data Protection Act.
- Deleting the data would be a bad idea however, as the liquidators will still need to respond to data issues relating to the liquidation itself. So it should keep the data in order to do that.
- The company will however still need to comply with the DSARs (Data Subject Access Requests).
- Breaching data protection rules can leave you with a hefty penalty.
Implications upon an unauthorised release or destruction of data
What happens if through no fault of your own there is an unauthorised release or destruction of data?
- Answer – the person responsible, i.e. the data controller, runs the risk of fines up to £500,000 and criminal prosecution.
Under UK law, any entity (i.e. companies, partnerships or individuals) that processes personal data must take ‘appropriate technical and organisational measures’ to protect data, as a requirement of the Data Protection Act 1998. Protection is needed against a data security breach, for example, where there is a deliberate attack on the system and unauthorised people gain access to personal data.
Alex Kleanthous is head of our litigation and dispute resolution team with a specialist focus on liquidations and the wider implications. If you have any questions please do get in touch.