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01 April 2010
In recent times it has become increasingly common to consider taking action to wind up a debtor company. However, initiating this procedure on the Isle of Man must be given plenty of thought. The process can be time consuming and costly if it is not approached in the right way, and it is essential to be as prepared as possible before embarking on such action.
The jurisdiction for the Manx Court to order the winding-up of a company flows from the Companies Act 1931. Section 162 sets out the relevant circumstances which must exist for the court to make an order. Chief among these – and most relevant to creditors – is the inability of a company to pay its debts. According to Section 163 of the act, a company is unable to pay its debts if:
Under Section 163(1) a statutory demand must be signed by the creditor. It is advisable to have the appropriate local coroner serve the demand. Once served, a debtor company has three weeks to satisfy the statutory demand, failing which an application may be made for it to be wound up.
Rules of Court introduced in September 2009 stipulate that an application for winding-up is made by claim form in the Chancery Procedure and should be accompanied by a witness statement. The Companies (Winding-up) Rules 1934 prescribe the content of the claim form (previously petition) and supporting witness statement (previously affidavit) by reference to Rules 15 and 19, respectively. The claim form should include:
As well as an outline of the facts to be relied upon, the witness statement should include:
As a general rule, it is better for the creditor's retained legal adviser not to make the witness statement for his or her client so as to avoid the possibility of being called as a witness, meaning that the firm would have to decline to continue to act. The courts prefer advocates not to swear affidavits or make witness statements on their clients' behalf – that is, they would rather hear directly from the claimant.
Once proceedings have been issued, the rules provide a strict timetable in terms of the future conduct of the matter. Advertisements (in a prescribed form) must be placed in two local newspapers published and circulated on the Isle of Man at least seven days before the hearing. There must also be seven days between the service of the claim form and the publication of the advertisement.
This presents a potential catch-22 situation. Until a claim is issued by the court, the date of the hearing cannot be known. Until the date of hearing is ascertained, the publication date of advertisements cannot be determined, especially when one considers that advertisements must be submitted to newspapers two days before publication. Consequently, upon presentation of the claim form for issuance, it is advisable to request a first hearing date from the court, which will allow compliance with the various time limits.
Failure to comply with the time limits may lead the debtor to bring an application strike out on the basis that, for example, it has not been afforded the opportunity to prevent the advertisement of the petition and thus protect itself from possible reputational damage where there may be a genuine defence to the claim.
At first hearing the court will generally issue directions dealing with witness evidence and submissions as well as fixing a date for determination of the matter.
In all cases where an application is made to the court, it is necessary for a provisional liquidator to be appointed. The creditor must select a provisional liquidator who is willing to act and propose that that person be appointed by the court. The Isle of Man has no official receiver, even though reference to such term of office is made in the island's companies' legislation. As there is no public servant available to act as official receiver, where necessary a creditor has, in practice, no choice but to propose and agree to fund a professional insolvency practitioner to act as provisional liquidator and deemed official receiver. Local rules provide that a list of persons considered to be fit to act as provisional liquidators is kept by the court. It is preferable to select a liquidator from that list, although not absolutely essential. If the appointee is not on the list, the court requires satisfying of the fitness of the person to act as provisional liquidator, in respect of which some further administrative provisions must be dealt with. If a provisional liquidator appears on the list, mention of that fact must be made on the claim form. It is also preferable to obtain from the provisional liquidator a certificate of willingness to act and to append the witness statement accompanying the claim form.
The creditor is initially responsible for payment of the liquidator's fees. However, these are prima facie recoverable from the proceeds of liquidation as a first charge.
If an order is made to wind up the company, the court must appoint a liquidator (Sections 177 to 190 of the act). Usually, unless he or she withdraws consent to act, the provisional liquidator is appointed. The liquidator is responsible for the formal process of winding up the company. The liquidator's duties primarily entail:
It is wise in all cases to assess thoroughly the asset position of the debtor company before embarking on a winding-up. Regardless of whether the particular circumstances are likely to be sufficient for the granting of an order, it would be a rather hollow victory if there were no prospect of the assets covering at least a substantial part of the debts owed. Costs should also be factored into this consideration.
Ultimately, the court retains wide discretion as to whether to grant an order for the winding-up of a company. Generally, it sees an application of this nature as a fairly draconian power to be exercised with some caution.
One of the key issues in the granting of an order is, by reference to Section 163(1) of the act, whether the company has neglected to pay the sum demanded. On the Isle of Man, as in England, if there is a valid objection to payment of the sum claimed, this does not amount to neglect. The position was neatly summarized in the Manx case Le Breton v Petrodel (October 29 2009) where it was stated that:
"The law is well established. A winding-up order should not normally be made if there is a genuine and substantial dispute as to the existence of the debt claimed against the company… This is a rule of practice rather than law and there is no doubt that the court retains a discretion to make a winding-up order even though there is a dispute."
To that extent, the position is the same as in England. In Re Easy Letting and Leasing  EWCH 3175 (ch) the words of Justice Chadwick in Re a Company  BCC 830 were referred to:
"It is in my view important to re-emphasize that there is no rule of practice in this court that a petition will be struck out or dismissed merely because the company alleges that the debt is disputed. The true rule, which has existed for many years, is the rule of practice that this court will not allow a winding-up petition to be used for the purpose of deciding a substantial dispute raised on bona fide grounds."
The law in respect of winding-up where a bona fide dispute is alleged can thus be summarized as follows:
The creditor must therefore tread with care where it is likely that a debt will be disputed on what may be bona fide grounds. Non-payment of the statutory demand on its own is insufficient in such cases to justify the making of an order (Re London and Paris Banking Corporation (1874) LR 19 Eq 444).
In previous cases before the Manx courts, where it has been suggested that a bona fide dispute may exist, the court has exercised its discretion to make an order affording the debtor company some time in which to pay into the account of its legal representative the sum claimed by the creditor. The sum is then held subject to the agreement of the creditor or a further court order. This approach allows the debtor company to demonstrate its solvency by payment of the sum and, if paid, separate proceedings may be brought by the creditor. Thus, the winding-up is potentially avoided.
Where winding-up proceedings are initiated, there are often creditors other than the applicant. Such creditors are afforded the right to take part in the proceedings and be heard. They may formally support or oppose the application to wind up and the creditor must furnish the court with a list of all such parties.
The presence of supporting creditors can be of great benefit to the applicant. Certainly, the number of creditors is a significant consideration for the court in making the decision as to whether to wind a company up. The larger the potential debt owed and the larger the number of creditors, the more likely the court is to conclude that winding-up is an appropriate course.
Once formally acknowledged as a creditor, a party may have the opportunity to become more involved in the application itself. If the creditor initiating proceedings withdraws its application, for example, the rules allow another creditor to apply to the court to replace the withdrawing creditor. However, this procedure is unavailable if the initiating creditor ultimately fails in its application. In those circumstances, if a second creditor wishes to pursue its claim it must start winding-up proceedings from scratch.
The most obvious alternative to winding-up proceedings is dialogue to try to secure some acceptable method of repayment. This is probably the best course of action where it is likely that a company will have insufficient assets to cover all the debts owed and the costs of liquidation.
Issuance of court proceedings to recover debt is also an option. This should be considered in cases where it is likely that a bona fide dispute may exist. By issuing court proceedings to recover debt, the dispute will be resolved one way or another. A company's non-satisfaction of a judgment is one of the grounds on which the court may make an order for winding-up (Section 163(2)).
Great care must be taken in circumstances where a creditor is owed money by a debtor company. Before making an application, debtors would be well advised to consider carefully the likely consequences of an application in terms of the assets of the company, their sufficiency to satisfy the debt owed and costs, and the likelihood of the debt being disputed.
For further information on this topic please contact Damian Molyneux at M & P Legal by telephone (+44 1624 695800), fax (+44 1624 695801) or email (firstname.lastname@example.org).
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