Compulsory Liquidation Process - Understanding the Definition and Procedure

Compulsory liquidation is an insolvency procedure, initiated by a court order. The court can force you into compulsory liquidation due to a creditor petitioning for the company to be wound up. It is inevitable if a company fails to meet its liabilities and thus becomes insolvent.

Understanding the Compulsory Liquidation Process

The compulsory liquidation definition refers to a business forced into liquidation due to a winding-up petition to the court. It’s important to note that any unsecured creditor can submit a winding-up petition to the court, believing the company cannot pay their debts as they fall due. Compulsory liquidation differs to that of voluntary liquidation – another insolvency procedure. With the procedure for compulsory winding-up of a company, the business is required to liquidate its assets. They will do so under the appointment of a liquidator, with their objective to recoup as much as possible for creditors. However, voluntary liquidation refers to the company directors choosing to enter liquidation.
Below, we are outlining the compulsory liquidation of a company, with advice for directors who believe their business is facing the process.

Compulsory Liquidation Process

What happens in Compulsory Liquidation?

To initiate the compulsory liquidation procedure, a creditor must present a winding-up petition to the court. The creditor will do so after believing all avenues have been explored and that the company cannot pay their debts. They will request the business enter compulsory liquidation while demonstrating that the corporation 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 this will start the compulsory liquidation procedure. The winding-up petition will then be placed in The Gazette, after a period of time which will likely result in your company bank account being frozen. Where the petition debt is satisfied, the winding-up petition may be dismissed.

Prior to the winding-up petition, it’s more than likely a company will have been served with a statutory demand. If that is the case, you will have 21 days to make your repayments or dispute the demand, before the creditor submits a winding-up petition which must be responded to within 18 days. As a director, you have to take action on the serving of a winding-up petition to save your business. Administration is rarely an option due to the costs of an in court appointment, but a company voluntary arrangement (CVA) may be available for business rescue. A CVA is a formal insolvency process between the company and creditors. Alternatively, you may wish to take matters into your own hands and place the company into creditors voluntary liquidation ahead of the petition. It is then likely the creditor will withdraw the petition, particularly with an HMRC petition.

What circumstances may cause a Winding Up Petition

A creditor will submit a winding-up petition if they believe you cannot pay your debts. Any creditor can serve a winding-up petition to the court for repayments, and they only need to be owed £750 to do so. They will have explored other options, including the statutory demand mentioned above. A company may also be wound up if it has been acting unlawfully, and it is in the public interest.
Appealing the compulsory liquidation procedure depends on how fast you act. You can attempt to appeal if you can prove your company can pay its debts and ought not to have been wound up in the first place.

Appointing the Official Receiver and their role

After the court issues the winding-up order, an Official Receiver is appointed as liquidator. At this point, the directors will have, typically, been removed from their position to allow the liquidator to begin the process of valuing, marketing and selling the company assets. The primary objective of the Official Receiver, a civil servant and officer of the court, is to repay as much as possible to the creditors. They will also investigate directors conduct and report any findings.
Creditors may seek to appoint another individual as a liquidator and, as a director, you can seek the guidance of a licensed insolvency practitioner (IP) to help deal with the adverse outcomes of the compulsory liquidation procedure.

What does the Compulsory Liquidation process mean for a director?

In general, with the compulsory liquidation of a company, the directors powers cease. They are dismissed, and the Official Receiver takes over the overseeing of the company, recouping money for the creditors. However, as a director, you will be required to assist the liquidator in providing a statement of the company’s assets.
Most of your powers as a director will cease upon compulsory liquidation. You will not be able to manage the day-to-day responsibilities of the business, but you may assist in the disposing of company assets. It’s worth noting that employees with also be terminated upon the winding-up order and they will be given details on how to claim for unpaid wages and what they may be owed.

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 the 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, the director may have to make a repayment to the company.

Options for Creditors Voluntary Liquidation

Creditors voluntary liquidation (CVL) refers to the procedure in which the directors voluntarily place the company in liquidation. It is a formal insolvency process, carried out by a licensed insolvency practitioner, and if you do not seek advice before your company is served a winding-up petition – it can prove very costly.
The main benefit of a CVL is to give you time to talk with your insolvency practice and discuss any issues that have arisen. You can plan for what the type of liquidation will entail for your business, rather than under the orders of the Official Receiver.

If you feel your business is heading into compulsory liquidation, you must seek advice. Get in touch with one of our business rescue experts to go through options for your company.

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