Thinking of winding up a company?

Judith Winward discusses the contract issues involved in the voluntary winding up of a company.

Some contract issues to consider in the voluntary winding up of a company.

The Chancellor has reported that the UK economy is continuing to recover and recovering faster than forecast. This is encouraging news for businesses – but for some the recovery may be coming just a little too late and they may be considering that now is the time to call it a day.

Members Voluntary Liquidation (MVL)

Where the members of a solvent limited company want to cease trading and close down the company in order to retire, or because no one else wants to run the company, or because there is no realistic prospect for more business in the future, they may choose a members’ voluntary liquidation (MVL).

An MVL may be appropriate where the company can pay its debts – but what of any contracts it may have entered into, or contemplated? It is essential to know what liabilities, other than debts, the company has incurred before the resolution to go into liquidation is passed so that the members have the complete picture.

For example:

• a sub-contract has not yet been signed on behalf of the company but materials have been delivered to site in preparation for its work to start. Beware of any clause which states that the sub-contract is deemed to have been entered into if any works have begun. The delivery of materials may be sufficient to bind the company and render it liable for damages if the work is not completed.
• a sub-contract may contain a clause which includes words that the contract shall be terminated if a winding up order is made in respect of the company. Such a clause does not necessarily apply to an MVL and the whole of the termination clause needs to be considered carefully.
• a sub-contact may refer to a sub-contractor exercising his right to suspend work. This reference has a specific meaning in construction contracts and the whole of the clause and references to it needs to be considered.
• a company may have received numerous purchase orders which it no longer wishes to fulfil. Care should be taken to ensure that the purchase orders have not been converted to binding contracts by any subsequent correspondence from the company.

Termination Clauses

If a company has entered into a binding contract and wants to cease work then it should check the termination clauses very carefully to see in what circumstances, if any, the company can extricate itself. Simply cancelling a contract on which work may not have been started but is nevertheless binding could turn out to be a costly mistake and advice should always be sought before a company tries to terminate any contracts it has entered into.

More Information

For more information on this new winding down a company contact Judith and her team.

This article was written by Judith Winward, a Solicitor in our Dispute Resolution Team. This article is only intended to provide a general summary and does not constitute legal advice. Specific legal advice should be taken on each individual matter. This article is based on the law as at March 2014.