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Commercial Question

Dissolution during legal proceedings

updated on 30 September 2013

Question

What happens when a company that is party to legal proceedings is dissolved or wound up during the course of the proceedings?

Answer

It is not uncommon for companies that are party to litigation or arbitration proceedings to be dissolved or wound up while the proceedings are ongoing. The litigation or arbitration, or the claims leading to them, could be the “nail in the coffin” for the company, or the dissolution or winding up could be an effort to escape or limit liability. In this situation, the questions that immediately arise concern whether (i) any claim by or against that party can continue, and (ii) the acts carried out by or on behalf of that party following its dissolution or winding up can have any effect on the legal proceedings.

The Companies Act 2006 (the 2006 Act) draws distinctions between the different methods by which a company can be dissolved. These methods can be generally broken down into two types:

  • the administrative act of striking off a company from the companies’ register pursuant to the registrar’s power to remove a defunct company (eg, because the company is no longer trading or has failed to file its annual accounts); and
  • a dissolution following either a striking off at the request of the company or a formal members’ or creditors’ liquidation process.

From both a legal and a common sense perspective, a company that has been dissolved has no legal personality, as it does not exist. It therefore stands to reason that any proceedings started by or against such a company prior to its dissolution cannot continue provided the company remains dissolved. However, what happens if such a company is subsequently revived and its legal personality is restored? Both the Companies Act 1985 (the 1985 Act) and the 2006 Act provide for reviving a dissolved company, depending on the manner of its dissolution.

If a company is restored, what is the legal personality of such a company during the period following its dissolution and prior to its restoration and what is the legal status of any claims by or against the company? The answer depends in part on whether the company was dissolved under the 2006 Act or the 1985 Act.

The position under the 2006 Act

From a practical standpoint, the vast majority of companies that are party to any proceedings in existence today will be subject to the 2006 Act, as it is likely that they were or will be dissolved after the relevant provisions of the 2006 Act came into force on 11 October 2009. Under the 2006 Act, if a company is restored to the register (whether through the administrative procedure because it was struck off by the registrar, or through the court procedure because it was dissolved following an insolvency process or struck off voluntarily or by the registrar), it is then deemed to have continued in existence as if it had not been dissolved or struck off the register,  as was confirmed by Joddrell v Peakstone Ltd  (2013). Therefore, any claims by or against the company which arose prior to its dissolution, as well as any related proceedings, are also deemed to have continued without abeyance throughout the period of its dissolution (Joddrell, Top Creative Ltd v St Albans District Council (2000)). The Joddrell v Peakstone case confirmed that proceedings issued after the company in question had been struck off were effectively deemed to have been served once the company was later restored to the register. Any issue regarding service of proceedings can be resolved by court directions as part of an order to restore a company under Section 1032(3) of the 2006 Act, which gives the court broad powers to “give such directions and make such provision as seems just for placing the company and all other persons in the same position (as nearly as may be) as if the company had not been dissolved or struck off the register”. In addition, any acts carried out by or on behalf of the company during this time are retrospectively validated once the restoration has taken place.

The position under the 1985 Act

In the unlikely situation that one is dealing with a company that was wound up and dissolved under the 1985 Act, the answer could be different.

If a struck off or dissolved company was restored to the register under Section 651 of the 1985 Act, then there is no provision deeming the company to have continued in existence. Therefore actions by or on behalf of the company and proceedings issued against the company while it was struck off will not be recognised. Such a company would be deemed to have ceased to exist and any pending actions by or against it will die with the dissolution and cannot be revived (see Morris v Harris (1927) and Foster Yates v HW Edgehill Equipment (1978)). Consequently, any proceedings and awards involving such a company will be null. That said, because the cause of action has not disappeared during the period of dissolution, a wound up company can, following its revival, bring or defend a fresh claim, subject to any applicable time bar issues (as in Foster Yates v HW Edgehill Equipment).

In contrast, the position in relation to a company that was administratively struck off by the registrar (eg, for failing to file accounts) and later restored to the register pursuant to the Section 653 of 1985 Act is the same as that under the 2006 Act (Tyman's v Craven (1952)), namely that the company is deemed to have continued as if it had not been struck off.

Other considerations

Although some of the cases referred to above concern arbitration proceedings, while others concern court proceedings, the principles from these cases apply equally to both types. It is also worth bearing in mind that, with the exception of Morris v Harris, most of the cases referred to above relate to claimant companies that have ceased to exist, rather than defendant companies. However, there does not appear to be any compelling logic why the principles derived from the jurisprudence as set out above should not apply to a defendant company just as well.

Malene Wang is a second-year trainee at Ince & Co.