Liquidation

The purpose of liquidation or ‘winding up’ is to gather in and realise the company’s assets and settle its liabilities ahead of its dissolution. There are three types of liquidation and your options will vary depending on the type.

What are the three types of liquidation?

A company can be wound up using either:

• Compulsory liquidation: a court-based procedure under which the assets of a company are forcibly realised and distributed to the company’s creditors.

• Voluntary liquidation

  • Members’ voluntary liquidation: the directors of the company swear a statutory declaration of solvency and commences by the members passing a special resolution that the company should be wound up
  • Creditors’ voluntary liquidation: the members of an insolvent company pass a special resolution that the company should be wound up and there is no statutory declaration of solvency

Liquidation can either proceed in isolation or, as is often the case, can be used by a company as an exit route from administration.

In compulsory liquidation, the only prior notice that a landlord will usually have is if they are an avid reader of the London Gazette, since the Insolvency Rules provide for a petition to be advertised in the Gazette not less than 7 business days before the hearing.

Can I recover rent arrears?

If the liquidator is using the premises for the purposes of the liquidation the rent will usually be payable as an expense of the liquidation, accruing on a daily basis. If this is not the case, you will have to prove for any arrears which fell due before the winding up order.

The tenant’s liability under the lease covenants, including the liability for rent, continues subject to the liquidator’s ability to disclaim. Following disclaimer, a landlord can prove for future rents for the discounted present value of the right to receive the rent for the unexpired lease term.

A resolution placing the company into creditor’s voluntary liquidation will not attract the benefit of a moratorium and therefore will not affect the right to issue proceedings for rent. However, a liquidator or creditor can apply to the Court for a stay of the process.

In the case of compulsory liquidation there will be a statutory moratorium following the winding-up order being made or a provisional liquidator being appointed.

Can I forfeit the lease for non-payment of rent?

If the tenant is in creditor’s voluntary liquidation then you are able to forfeit the lease, but the liquidator or another creditor may apply to the Court to restrain any proceedings.

In compulsory liquidation a statutory moratorium is imposed following the winding-up order being made or a provisional liquidator being appointed. Therefore, you must apply for leave from the Court before issuing a claim or continuing with an existing claim. In the absence of special circumstances, leave is generally granted as a matter of course.

It is not clear whether forfeiture by peaceable re-entry in respect of a tenant who is in compulsory liquidation is permitted. There are conflicting authorities on other similar provisions but none directly on the point: most legal commentators consider that forfeiture by peaceable re-entry on a tenant in compulsory liquidation remains an option for landlords.

What can I do?

You can drawdown a rent deposit (subject to its terms) or pursue a guarantor or former tenant.

In the case of compulsory winding up you can only accept a surrender or agree an assignment of the lease with the Court’s sanction; otherwise the transaction will be void.

In both voluntary and compulsory winding up there are limitations in relation to the exercise of CRAR.

In the case of a compulsory winding up or a creditor’s voluntary winding up, you can also serve notice on the liquidator giving him 28 days to disclaim the lease or lose the right to do so.

Please note the above does not cover the temporary restrictions in place at the time of writing preventing landlords taking certain steps to enforce their rights.

Key terms

Disclaim a lease: If a company goes into liquidation, the liquidator is able to disclaim the whole of an insolvent tenant’s liability under a lease if he considers it to be ‘onerous property’. The disclaimer ends all of the tenant’s rights, interests and liabilities, but both a guarantor of the current tenant and any former tenant that remains liable for the current tenant’s default, remains liable as if the lease continues to exist.