Understanding the Compulsory Liquidation Process
The compulsory liquidation refers to a business forced into liquidation by way of a winding-up petition presented 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, provided they are owned in excess of £750. Compulsory liquidation differs to that of voluntary liquidation – another insolvency procedure, in that it is usually forced upon the company, rather than the directors complying with their statutory duty to wind up the insolvent company in an orderly manner. Under both processes the liquidator is required to sell the company assets, with their objective to recoup as much as possible for creditors. However, voluntary liquidation is often much more flexible and with a skilled insolvency practitioner can be used as a rescue process and to achieve better results for creditors.
Below, we are outlining the compulsory liquidation procedure of a company, with advice for directors who believe their business is facing a winding up petition.
How is a company placed into compulsory liquidation?
To initiate the compulsory liquidation procedure, a creditor must present a winding-up petition to the court. The creditor will often only 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 set a date for the court hearing, formally commencing the compulsory liquidation procedure. The winding-up petition will be served up the company and shortly after, be placed in The London Gazette which will likely result in your company bank account being frozen. Where the petition debt is satisfied, the winding-up petition may be dismissed, however you will likely also have to pay costs of the same.
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 18 days to dispute the demand. As a director, you have to take action on the service of a winding-up petition in order 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.
The main thing to note with 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 is therefore crucial to act quickly, if you receive a winding up petition, to avoid personal liability.
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 powers cease to allow the liquidator control of the company. They will immediately 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. 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 as they have done in the cases of Carillion and British Steel, to assist with the process. This can create a pseudo administration process, allowing companies 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 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.
All 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 and you must attend on the liquidator as and when reasonably required to do so. If as a director you have a contract of employment with the company, this is automatically terminated and like the rest of your employees, you would 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 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 or voidable transactions 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.