Compulsory Liquidation

What is Compulsory Liquidation?

Compulsory liquidation (or compulsory winding up) is an insolvency procedure that applies to companies (or partnerships) forced into liquidation by a court order (winding up order).

Usually initiated by creditors in the High Court, a compulsory liquidation typically follows the presentation of a winding up petition asserting the company’s inability to pay debts.

Less commonly, a winding-up petition might be issued by the company itself, its directors, shareholders, an Official Receiver (as an officer of the High Court), administrative receivers, administrators, supervisors of company voluntary arrangements, the Financial Services Authority, the chief clerk of the Crown Court, or a clerk of petty sessions.

Compulsory liquidation is usually the last resort of a frustrated creditor to get paid, either by forcing the directors to act or gaining access to the company’s assets. It can also be initiated by HMRC even when a company has no major assets, simply to set an example for others.

Once the judge hears the petition, he or she can initiate a winding-up order, a legal decree that mandates the closure and liquidation of a company’s assets under the supervision of a liquidator.

If concerns about compulsory liquidation or financial difficulties are weighing on your business, don’t hesitate to reach out. Our licensed insolvency practitioners can offer expert, practical advice.

Why Would a Company Be Forced to Liquidate?

The grounds for compulsory liquidation^[1] Trusted Source – UK Government Legislation – Insolvency Act 1986 Section 122 include:

• When a company cannot pay debts of £750 or more
• If the court concludes that it is just and equitable, it should be wound up.
• When the limited company does not commence its business within a year from its incorporation or suspends its business for a whole year
• If the company has less than two shareholders (unless it’s a private company limited by shares or guarantee)

What’s the Compulsory Liquidation Process?

The process of compulsory liquidation is set out in the Insolvency Act 1986 (IA 1986), and The Insolvency (England and Wales) Rules 2016. Typically, the process unfolds as follows:

1. Company Receives a Statutory Demand: If a creditor hasn’t got a court judgment, they issue a statutory demand. The creditor can seek winding up if the company doesn’t pay within 21 days.
2. A Winding-Up Petition is Issued: The court sets a date to decide on this petition, which is also advertised in the Gazette.
3. Bank Accounts are Frozen: The company’s bank account is closed immediately after the petition, making credit access difficult. (» MORE Read our full article on My Company Bank Account is Frozen)
4. Court Issues a Winding-Up Order: If the court approves the petition, the company must enter compulsory liquidation.
5. Official Receiver is Appointed: This officer checks the company’s financial records, especially for any legal issues caused by the directors.
6. Liquidator Takes Over: If there are assets, a licensed insolvency practitioner may replace the Official Receiver to handle their sale.
7. Company’s Finances are Documented: The liquidator lists all the company’s assets and debts.
8. Assets are Sold Off: The Official Receiver or liquidator sells the company’s assets, like stock or vehicles, to pay off debts.
9. Company is Officially Closed: After selling the assets, the company is shut down and removed from the Companies House register. Remaining debts are usually written off unless there’s a personal guarantee by the director.

This process ensures creditors are paid as fairly as possible and the company’s closure is handled legally. The duration varies based on the company’s size and complexity.

Can We Choose a Liquidator in a Compulsory Liquidation?

The short answer is, in the initial stages, no. In compulsory liquidation, the court appoints an Official Receiver as the interim liquidator to begin the process.

However, there is a window of opportunity for influence. While the Official Receiver, a public official, initially takes charge, the creditors or the company can propose an alternative licensed insolvency practitioner to act as the liquidator. This proposal is subject to approval during the creditors’ meeting.

How Long Does Compulsory Liquidation Take?

The compulsory liquidation process will take at least a year and up to 24 months in more complex cases.

Can You Stop a Compulsory Liquidation?

Compulsory Liquidation can be stopped at the winding up petition stage under the following specific circumstances:

• if the debt is paid in full
• if the debt is disputed 
• If the debtor company agrees to terms with the creditor, who then withdraws the winding up petition.

In some cases, the debtor company may assure the court it intends to pay if sufficient time is allowed, and the court may agree to an adjournment. Very rarely are repeated adjournments sanctioned by the court, and the extension timeframes are generally weeks, not months.

If the winding up order itself has been made, it is much more difficult, but it can be done through two methods:

• Via an application to ‘stay’ the liquidation proceedings. This can be made by the Official Receiver, the appointed liquidator, any company shareholder, or a creditor.
• Any party has the right to apply for the winding up order to be rescinded within seven days. It would need to be demonstrated that the court did not have all the relevant facts when making its decision.

How Much Does a Compulsory Liquidation Cost?

The cost of compulsory liquidation for a company isn’t fixed and can significantly vary based on the complexity and specific details of each case.

For the creditor initiating the liquidation, typical expenses include:

• Preparing and serving a Statutory Demand costs between £200 and £250.
• Filing a Winding-Up Petition application with the court is £302.
• A deposit of £2,600 is required for the Official Receiver to cover their expenses during the winding-up process.

These figures represent the basic fees and do not account for additional expenses such as legal or professional advice that may be necessary throughout the liquidation. Therefore, the actual cost could be much higher, depending on the unique aspects of the case.

Getting Help with Compulsory Liquidation

Facing compulsory liquidation is tough, but you’re not alone. By reaching out to us—your team of licensed insolvency practitioners and business rescue experts—you’re taking a crucial step towards finding clarity and solutions in a challenging time. We’re here to guide you through each option, clarify your duties, and help you make informed decisions.

Contact us today to see how we can support your business through these difficult times and help you find a way forward.

To speak with one of the team to see how you can avoid compulsory liquidation, call us on freephone: 0800 074 6757

FAQs on Compulsory Liquidation

References

The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.

You can learn more about our standards for producing accurate, unbiased content in our editorial policy here.

1. Trusted Source – UK Government Legislation – Insolvency Act 1986 Section 122