Close Your Company – Compulsory Liquidation

Compulsory Liquidation

A compulsory liquidation is where a business is forced into liquidation by a court – usually by way of a winding up petition caused by unpaid debts of £750 or over if the court believes the company cannot or will not repay them.

How does the process start?

To initiate a compulsory liquidation procedure, a creditor must present a winding-up petition to the court.

They would only usually take this route if all other avenues for repayment have been explored including issuing a statutory demand for the debt which gives a debtor 21 days to repay the amount or reach an arrangement to begin repayment.

If no satisfactory response is received then they will ask a court to request that the business is placed into compulsory liquidation by demonstrating that the company has been unable to make their repayments.

The procedure for compulsory winding up of a company is expensive for creditors and, as such, is seen as a last resort. The court will seal the winding up petition, and set a date for the court hearing, formally commencing the compulsory liquidation procedure.

A winding-up petition will be served up the company and shortly after, be placed in The London Gazette which will likely result in the company bank account being frozen.

If the petition debt is paid before the hearing date then the winding-up petition may be dismissed, however the debtor will also likely have to pay costs of the same.

Other options may be available prior to compulsory liquidation such as a company voluntary arrangement (CVA) or alternatively, directors may wish to take matters into their own hands and place the company into a Creditors Voluntary Liquidation (CVL) ahead of the petition.

It’s likely the creditor would then withdraw the petition, particularly with an HMRC petition.

Another factor to consider with a compulsory liquidation is that employee contracts are immediately and automatically terminated on the making of a winding up order.

In addition any disposals of assets, which can include cash at bank, between the issue of the winding up petition and the winding up order and considered void unless a validation order has been granted.

Therefore any cash payments are either repayable by the recipient or by the company directors. It’s crucial to act quickly to avoid any personal liability.

Appointing the Official Receiver and their role in the process

After the court issues the winding-up order, an Official Receiver is appointed as liquidator.

At this point, the directors powers cease in order to allow the liquidator to take control of the company. They will then immediately begin the process of valuing, marketing and selling the company assets.

The primary objective of the Official Receiver, who is a civil servant and officer of the court, is to repay as much as possible to the creditors. Their main function is to investigate the directors’ conduct and take disqualification action against them where appropriate.

As the official receiver is not a licensed insolvency practitioner, they are generally unable to deal with complex asset realisations. They will generally therefore appoint another insolvency practitioner from the rota, or special manager to assist with the process.

This can create a pseudo administration process, allowing the company to trade whilst in liquidation to find a buyer. This is rarely done and only when it is in the public interest to do so.

Creditors can also nominate an insolvency practitioner if they feel particular investigations need to be carried out. If appointed, they will replace the official receiver as liquidator.

What does the compulsory liquidation process mean for directors?

The directors powers will cease with the compulsory liquidation of a company.

They are dismissed and the Official Receiver takes over the overseeing of the company, recouping money for the creditors. However directors will still be required to assist the liquidator in providing a statement of the company’s assets.

As all directors powers cease upon compulsory liquidation, they won’t be able to manage the day-to-day responsibilities of the business and they must attend on the liquidator as and when reasonably required to do so.

If the directors have a contract of employment with the company, this is automatically terminated and like the rest of the employees, they could claim any employment entitlements from the Redundancy Payments Service.

Outcomes of the Compulsory Liquidation process

The main result of compulsory liquidation is the complete dissolution of the business.

Typically, directors are not held personally responsible for any outstanding unpaid debts, unless they have been proven to act unlawfully or have given a personal guarantee.

If the court finds the directors may have been guilty of wrongful trading or voidable transactions the director may have to make a repayment to the company.

If the directors decided to liquidate the company themselves through a Creditors Voluntary Liquidation (CVL) then they will have more control over the process including being able to appoint an insolvency practitioner of their choice and to discuss any outstanding issues with them.

They will be able to plan for what type of liquidation will mean for them and the business rather than wait to obey the orders of the Official Receiver.

Appointing the Official Receiver and their role in the process
What does the compulsory liquidation process mean for directors?
Outcomes of the Compulsory Liquidation process

Speak to an Expert

Frequently Asked Questions about Compulsory Liquidation

Does receiving a winding up petition mean the company will close?

No.

It sets the clock ticking and there will be a court hearing to decide but the business in question still has time to act.

How much does a business have to owe to be vulnerable?

A winding up petition can be brought against a business for owing as little as £750.

Will a statutory demand automatically lead to a winding up petition?

No.

A statutory demand gives a business 21 working days to respond and come up with a workable solution to clearing the debt before a winding up petition can be issued.

What if the debt isn't recognised by the business that supposedly owes it?

If they receive a statutory demand for a debt they don’t recognise, they have 18 working days to dispute it.

Why is a voluntary liquidation better than a compulsory liquidation?

A Creditors Voluntary Liquidation (CVL) gives directors a lot more agency and direction than a compulsory liquidation process.

One of the main advantages is being able to choose the insolvency practitioner rather than have an official receiver appointed instead.

Getting in touch with the Expert…