S.228A Liquidations – Take Care!

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Recently, the Court was asked to consider the circumstances in which it was appropriate to use the s.228A procedure to place a company into liquidation. Given that liquidations started using this procedure are relatively infrequent, it is unusual to see the question of its use come before the court.

The background was that as a result of certain disputes, the petitioner had filed a winding-up petition on the grounds of unfair prejudice and had started a derivative action on behalf of the Company against its sole director.

The director sought to place the Company into liquidation using s.228A, justifying the use of the section by saying that:

  1.  The company’s bank account has been frozen by a winding up petition leading to lack of cash for daily operation.
  2.  Reluctance of shareholders in providing further financial support.
  3.  Carrying on business under this situation will prejudice creditors’ interest.

Liquidators were appointed at the meeting of creditors, but the petitioner objected saying that the section had been used improperly and also that it had been invoked in an attempt to prevent a trial of the petitioner’s claims through the derivative action.

As regards the second of the two grounds, the Court took the view that the director, (who was one of the respondents in the case), did have the power to put the Company into liquidation and that it would then fall to the liquidator to continue the action if he/she thought appropriate. In other words, the director could have placed the Company into liquidation by the simple expedient of convening an EGM and passing the winding-up resolution at the meeting.

However, as regards using the s.228A procedure instead of convening an EGM, the Court was clear that the language of the section must be strictly applied and unless there is a genuine reason for using this section, rather than convening an EGM, it cannot be used. Accordingly, the winding-up resolution was defective and the liquidation wrongly commenced.

There have often been suggestions that s.228A has been abused, but rarely has any evidence been put forward in support of those allegations. The decision in this case should serve as a salutary reminder to directors that using this section to commence a liquidation is one that should only be taken as a last resort.

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