Can a 50% shareholder put a company into liquidation?

Understanding the powers and limitations of shareholders, especially those holding significant holdings can be complex. In this edition of Ask the Expert, our insolvency solicitors will break down the options available to a 50% shareholder looking to put a company into liquidation. We’ll cover the different types of liquidation, the processes involved, and the circumstances under which a shareholder with 50% of the voting rights might be able to begin liquidation proceedings.

Can a shareholder put a company into liquidation?

Yes, a shareholder can put a company into liquidation and in the case of voluntary liquidation processes, shareholders have to pass an ordinary or special resolution in order for the liquidation process to start. The shareholders then have to appoint a liquidator to liquidate the company.

Why would a shareholder want to put their company into liquidation?

There are many reasons and these will depend on whether the company is solvent or not.

Where the company is solvent, it is usually because the directors wish to retire or there is no one else to take over the family business and the shareholders don’t want to sell it. The company may have completed its purpose and is no longer needed or may no longer be viable due to legal changes or changes in government policy. Sometimes, companies are liquidated because their assets have been transferred as part of a group reorganisation and the remaining company shells are liquidated to deal with any residual debts and liabilities.

Where the company is insolvent, a shareholder may want to put their company into liquidation to avoid a creditor issuing a winding-up petition against them and having to go down the compulsory court-led liquidation route. It may be done to prevent any further trading losses and/or due to fear that the directors could be held liable for wrongful trading.

What types of liquidation are available to a company?

Voluntary liquidation and compulsory liquidation. A voluntary liquidation can be two possible types, a Members’ Voluntary Liquidation (MVL) or a Creditors’ Voluntary Liquidation (CVL), as set out in more detail below.

Voluntary Liquidation

Members’ Voluntary Liquidation (MVL)

A members’ voluntary liquidation is a shareholder (or members) led process that applies to a company that is solvent, but for whatever reason no longer wishes to continue its corporate life. Perhaps the directors or shareholders want to move in different directions and cash in their investment, or the company has come to the end of its natural life for any number of reasons. The key here is that a company can only use this process if it is solvent. The creditors should be paid back in full and they are not involved in the process. If the liquidator believes the company will not be able to pay back its debts in full, it can convert the process from an MVL to a CVL. The proceeds of sale of an MVL goes to shareholders.

Creditors’ Voluntary Liquidation (CVL)

A creditors’ voluntary liquidation is a procedure by which the company or the directors of an insolvent company, which has no reasonable prospect of recovery from the financial problems it is facing, formally place the company into the liquidation process to cease trading, wind the company up and deal with its creditors according to insolvency legislation. The proceeds of the sale of assets from a CVL will go to the creditors of the company.

Compulsory liquidation

A compulsory liquidation is a court-led process, where a winding-up petition is issued against an insolvent company by a debtor, or occasionally by the company itself, and the court then issues a winding-up order that the company be wound up which commences the liquidation process. A winding-up petition is commonly issued by a creditor intent on forcing the company into liquidation.

If you would like to explore any of the options mentioned above you can arrange an initial no-obligation consultation with one of our insolvency solicitors.

How can a shareholder put their company into one or more of these liquidation procedures?

MVL

As this is a solvent liquidation process only, the directors must be able to swear a declaration that the company is able to meet all of its debts (both current and contingent) in full with interest within a period of not more than 12 months of the start of the winding-up. If a declaration is not possible, then the company should look at alternative winding- up methods.

If it is possible, then the company’s shareholders or members must vote on the MVL by passing a special resolution to commence the MVL process. This resolution must be passed within five weeks of the statutory declaration of solvency made by the directors. A special resolution requires agreement of not less than a 75% majority shareholding of the total voting rights of eligible members to pass the resolution. The members then appoint a liquidator to wind up the company and distribute its assets.

CVL

This process can only be initiated by a resolution of the company’s shareholders. There are two types of resolution that can progress this method.

• Ordinary resolution: a company may enter voluntary liquidation if either it has a fixed period which has expired, or an event has occurred which its articles say is an event leading to liquidation. In that case, the company must also have passed an ordinary resolution to wind-up – which requires a simple majority (i.e. more than 50% of the votes) of the members attending the meeting for it to be passed. 
• Special resolution: alternatively, the shareholders must pass a special resolution that the company be wound-up voluntarily. This requires not less than a 75% majority shareholding of the total voting rights of eligible members to pass the resolution.

The company’s memorandum or articles of association will normally contain provisions regarding convening a meeting of members. The directors must call these meetings.

14 days' notice of the shareholders’ meeting is usually required for whatever resolution is required at the meeting, although the shareholders can agree to a shorter notice period.

As a result, a shareholder would need to own over 50% of the voting shares to put the company into CVL by way of ordinary resolution, in the event that the company was only set up for a fixed period which has now expired, or there has been an occurrence which according to the company’s articles, means that the company should come to an end. Otherwise, a special resolution requiring 75% or more of shareholders to vote is necessary.

A voluntary winding up (either MVL or CVL) commences when the company's members pass a resolution for its winding up.

Compulsory liquidation

Shareholders have the option to put the company into liquidation by way of compulsory liquidation. They can serve a winding-up petition against the company in certain circumstances set out below. 

If a shareholder was owed money by the company personally, they may be able to apply to the court for a winding-up order against the company as any creditor would who has a debt outstanding from the company. This will only be an option if they are owed an undisputed sum of at least £750. 

This would usually be proved by one of the following methods:

• if the shareholder has served a statutory demand on the company and the 21-day period has expired without payment. While a statutory demand is not a strict precursor to a petition, it is a good way of showing that a debt is owed and remains unpaid;
• if the shareholder has a judgment against the debtor which remains unsatisfied;
• if the shareholder can prove to the court that the sum is owed and the company is unable to pay its debts as and when they fall due; or
• where the shareholder can prove to the court that the company has less assets than liabilities.

In certain circumstances, a 50% shareholder can place their company into liquidation by applying to the courts for a winding up petition on ‘just and equitable’ grounds. They present a just and equitable winding up petition and the court decides the outcome.

Conclusion

Generally, a 50% shareholder has limited options to place a company into liquidation, as this usually requires a special resolution by the members which requires a 75% majority. There is an option for a 50% shareholder to place the company into compulsory liquidation by applying to the courts for a winding-up petition on ‘just and equitable’ grounds or if the shareholder is owed an undisputed sum of at least £750 by the company.

An insolvency solicitor can discuss the options available to you and can help you determine the best approach to take. It is important to seek legal advice early on. Although you may be tempted to deal with it yourself, you may unknowingly act in a way which may have legal repercussions and open you up to liability further down the line if you do not follow the correct procedures.