Power to stay or sist a winding up - bringing a liquidated company back to life

It is often considered that once the court grants a petition to wind up a company and appoints an interim liquidator, that it is the end of the road for the company. Trading will usually immediately cease, and the interim liquidator will begin to realise assets and distribute funds before dissolution. However, that outcome is not inevitable, and a little-known statutory power can, in appropriate cases, halt the liquidation altogether, allowing the directors to take back control.

Granting of a winding up order

In many cases, once a winding up order has been granted and an interim liquidator appointed, directors accept that the company cannot be rescued. The granting of first orders by the court (with warrant to intimate, advertise, and serve the winding up petition) will often have already irreparably harmed the company’s trading position. Advertisement of the petition in the Edinburgh Gazette, and a newspaper, alerts banks and counterparties, with the result that bank accounts may be frozen, credit lines withdrawn, and debtors of the company may withhold payment. By the time the winding up order is made by the court many companies have, in practice, already ceased to trade. The order simply seals their fate.

There are however solvent or viable businesses, which fail to address winding up petitions in time, perhaps due to oversight, or short‑term cash‑flow pressure, and find themselves wound up, notwithstanding their underlying viability. In such cases, section 147 of the Insolvency Act 1986 (the “IA 1986”) may provide a remedy.

Sisting a liquidation under section 147 of the IA 1986

Section 147 of the IA 1986 empowers the court, at any time after a winding‑up order has been granted, to “stay or sist" the liquidation either altogether, or for a limited time, on such terms as the court thinks fit.

The wording is perhaps unfortunate. The expression "stay" is more familiar in English law, while the broadly equivalent expression "sist" in Scots law usually refers to the pausing, or freezing, of legal proceedings. The term "recall", the legal remedy to effectively reverse an award of a sequestration in personal insolvency, may have been a clearer term to use in Scotland. Nevertheless, in practice, a limited‑time sist pauses the liquidation, whilst an order sisting the proceedings “altogether” is effectively a permanent halt, restoring control of the company to its directors.

How do courts deal with applications to sist?

There are no specific statutory factors for the court to consider when dealing with an application to sist a liquidation. Section 147(1) of the IA 1986 empowers the court, on the application of certain classes of person, such as the liquidator or any creditor or contributory of the company, and on proof to the satisfaction of the court that all proceedings in the winding up ought to be sisted, to make an order sisting the proceedings either altogether, or for a limited time, on such terms and conditions as the court thinks fit. The order may be granted at any time after a winding‑up order has been made. What is clear, however, is that the court has a broad discretion in exercising its power under section 147 of the IA 1986.

Useful guidance is provided by the leading decision on section 147 of the IA 1986, McGruther v James Scott Ltd 2004 S.C. 514. As the granting of a sist will bring to an end, or interrupt, the control over the management of the company's affairs exercised by the liquidator, the court will wish, before such control is released, to be satisfied that the interests of all parties potentially affected by any such release are duly considered, such as the creditors, the liquidator, and the members of the company. There may also, in some cases, be a wider public interest to consider.

In practice, the court is likely to be concerned with the following matters when considering an application under section 147 of the IA 1986:

• Solvency: whether the company is able to pay its debts in full, including the costs and expenses of the liquidation. A company which can demonstrate that all creditors will be paid is far more likely to persuade the court that the liquidation ought to be brought to an end.
• Creditors' interests: whether all creditors have been, or will be, paid, and whether any creditor opposes the sist. The views of creditors will carry significant weight.
• The liquidator's position: whether the liquidator supports or opposes the application. The court will have regard to the liquidator's report on the company's affairs and any concerns the liquidator may raise.
• Reason for the winding up: whether the circumstances which gave rise to the winding up order have been resolved. For example, if the petition debt has been settled, or the underlying dispute has been resolved.
• Public interest: whether there are any public interest concerns, such as the conduct of the directors, which would make it inappropriate to return control of the company to them.

The importance of timely action

The damage caused by the winding up process, from the freezing of company bank accounts to the loss of supplier credit and the reputational harm following advertisement of the petition, means that time is of the essence. Directors who believe that a winding up order should not have been granted, or who are in a position to settle the company's debts, should seek legal advice immediately, and consider making an application under section 147 of the IA 1986, as early as possible. Delay may not only make it more difficult to satisfy the court that the liquidation should be sisted, but it may also result in further erosion of the company's business and asset value.

Key takeaways

The ability to sist a liquidation under section 147 of the IA1986 is a valuable, if little-known, remedy. It provides a potential lifeline for companies which are fundamentally solvent and viable but have found themselves subject to a winding up order due to an isolated failure to deal with a debt or petition. However, there are a number of important points to bear in mind:

• The court has a broad discretion under section 147 of the IA 1986, and there are no specific statutory factors which it must consider.
• The court will have regard to the interests of all parties potentially affected, including creditors, the liquidator, and the members, as well as the wider public interest.
• An applicant must be able to demonstrate that all debts can be paid, and that the circumstances giving rise to the winding up have been resolved.
• Early intervention is critical. The general rule is that the longer a liquidation proceeds, the more difficult it will be to persuade the court to sist the proceedings.

Given the legal complexities and the significant consequences of a winding up order, legal advice should be sought at the earliest opportunity to ensure that the appropriate course of action is pursued. Our team at Brodies are on hand to provide the specialist advice required in these circumstances.

Please visit our dedicated Corporate Disputes webpage for more information on our team and what we can offer at Brodies LLP.