Compulsory liquidation, also known as involuntary liquidation or compulsory winding up, is the legal process by which a company is forced to close. This process, initiated by a court order, leads to the company being legally dismantled and its assets sold to pay off debts.

Understanding the compulsory liquidation process is crucial for business owners, as it not only involves the end of a company’s operations but also has implications for its directors and creditors. This article aims to demystify the process, providing clear insights into what it means for a business.

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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 that asserts a company’s inability to pay debts when due.

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 to others.

What Compulsory Liquidation Means for Your Business?

If your business is going through compulsory liquidation, it means the company will be closed down and its assets sold off to repay debts. As a director, you may face scrutiny over your conduct leading up to the liquidation, and you could be held personally liable if wrongful trading is found. This process marks the end of your company’s legal existence and may impact your future ability to act as a director or start new business ventures.

What are the Grounds for Compulsory Liquidation?

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, that it 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
  • Has less than two shareholders (unless it’s a private company limited by shares or guarantee)

Who Handles a Compulsory Liquidation?

A compulsory liquidation is initially handled by an Official Receiver, who is an officer of the court. In some cases, the court may appoint a licensed insolvency practitioner in addition to, or instead of, the Official Receiver to conduct the liquidation process.

Who is the Official Receiver (OR)?

The Official Receiver is a court officer appointed to administer the early stages of a compulsory liquidation. Their duties include assuming control of the company, liquidating its assets, and distributing the proceeds among creditors.

Who are insolvency practitioners (IPs)?

Insolvency Practitioners (IPs) are professionals licensed to oversee insolvency proceedings within the UK, with their operations regulated by Recognised Professional Bodies (RPBs) under the oversight of the government’s Insolvency Service. Their role in compulsory liquidation involves being appointed by the court to manage particularly intricate cases. IP’s primary duties include liquidating assets, settling debts, and ensuring an equitable distribution of any remaining assets among creditors.

In terms of financial priorities, the remuneration of the liquidator is treated as a cost of the winding-up process, ranking immediately after the claims of secured creditors with a fixed charge.

Additionally, IPs have the responsibility to investigate the conduct of the company’s directors prior to insolvency, to ascertain if any actions taken reduced the potential returns to creditors. This investigative duty is pivotal in maintaining the integrity of the liquidation process and protecting creditor interests.

In What Circumstances can a Winding-up Order be Made?

A winding-up order can be made in the following scenarios:

  • Companies that cannot pay their debts.
  • If the High Court finds it necessary.
  • For companies that haven’t started trading within a year of incorporation or have stopped trading for a full year.
  • If a PLC has not secured a trading certificate within a year of its registration.
  • If a company moves from private to public without fulfilling PLC criteria.
  • Public companies with fewer than two shareholders, which doesn’t apply to private companies.
  • When the court deems it just and equitable to do so, often due to internal disputes or a loss of operational purpose.

Will I be Notified When a Winding-up Order is Made?

Yes, you will be notified if a winding-up order is made against your company. Before an order is issued, a winding-up petition must be formally served to your company, which means you, as a director, should already be aware of the impending proceedings. This petition is a critical step and cannot proceed without your knowledge.

Following the petition, if the court decides to issue a winding-up order, the Official Receiver (OR) will formally notify you. This notification typically comes in the form of a letter.

It’s essential to actively manage your company’s finances and respond to any creditor’s actions, such as demands for payment. Upon receiving notice of a winding-up petition or order, immediate action is advisable. Seeking guidance from a legal or financial professional can provide you with options and next steps. Cooperation with the OR is crucial during this process.

How Does Compulsory Liquidation Work?

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. If the company doesn’t pay within 21 days, the creditor can seek winding up.
  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: Immediately after the petition, the company’s bank account is closed, making credit access very 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.

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.

What’s the Impact of Compulsory Liquidation on Directors?

In compulsory liquidation, the role of directors significantly changes. Even after the company is wound up, directors will be required to provide assistance to the official receiver, such as supplying information or explaining company affairs.

Directors should also be aware that a key part of the liquidation process is the investigation into the directors’ conduct. The insolvency practitioner will examine if there’s been any wrongful or fraudulent trading or other breaches of legal duties during the run up to insolvency.

If misfeasance or misconduct is found, directors can face serious consequences, including personal liability for company debts and, in some cases, disqualification from serving as a director in the future.

You’ll also be prohibited from forming, managing or promoting any business with the same or similar name to your liquidated company in the future.

What does Compulsory Liquidation mean for a Creditor of the Company?

As the creditor of a company in liquidation, you’ll want to know your chances of being paid, plus the likely timing of when this might happen. Typically, you will be contacted by the OR or the IP running the case with this information after they are assigned: they’ll be your point of contacts as the process unfolds.

In a typical scenario, secured creditors get priority in repayments. If you are an unsecured creditor, your chance of repayment comes after settling secured debts and covering the costs associated with the liquidation. The amount you might receive largely depends on the total assets available and the debts the company owes. It’s common for unsecured creditors to receive only a fraction of their claims.

To be considered for any repayment, you must submit a proof of debt form. The OR or IP will guide you through this process. However, the time frame for the liquidation process can vary significantly, which means payments to creditors can be delayed. The OR or IP will keep you updated on the progress, including any potential distributions.

It’s important to maintain realistic expectations throughout the process. In cases where the company’s assets are insufficient, unsecured creditors might recover little or no repayment.

What Does Compulsory Liquidation Mean for an Employee of the Company?

For employees, compulsory liquidation means the end of the employees as the company will be closed.

Employees become creditors of the company they worked for and will be paid from the sale of corporate assets for wage arrears, holiday pay or other entitlements. Employees may be entitled to statutory redundancy pay.

» MORE Read our full article on Employee Rights in Insolvency 

Can You Appeal or 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 to have the winding up order 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?

There is no set cost for liquidating a company, since costs vary widely depending on the complexity of the case and the specific circumstances involved.

Typically, these are the costs for the petitioning creditor:

ActionEstimated Cost (£)
Preparing and serving a Statutory Demand200 – 250
Filing a Winding-Up Petition application with the court302
Making a deposit to the Official Receiver to cover their expenses during the winding-up process2,600

Moreover, these are basic fees, and they don’t include additional costs, like legal or professional advice that might be required throughout the process. The real cost could therefore be much higher depending on the individual circumstances of the case.

What is the Difference Between Compulsory and Voluntary Liquidation?

When comparing compulsory and voluntary liquidation for a company, there are several key differences to consider

In compulsory liquidation, creditors often start the process by seeking a court order, known as a Winding-Up Petition (WUP), usually because they’re owed money. On the other hand, voluntary liquidation is typically initiated by the company’s directors and shareholders, who recognize the company’s insolvency and choose to wind it up voluntarily.

With compulsory liquidation, once a Winding Up Order is issued by the court, control of the company shifts to the Official Receiver, stripping the directors of their decision-making power. In contrast, during voluntary liquidation, the directors and shareholders retain some control, such as choosing the insolvency practitioner to act as liquidator and having a say in asset sale decisions.

Compulsory liquidation is a complex and lengthy process, taking considerable time from the issuance of the WUP to the company’s final closure. Voluntary liquidation is generally faster and more straightforward, lacking the need for court involvement and enabling quicker asset distribution and company dissolution.

Finally, the cost of compulsory liquidation tends to be higher due to court fees and potentially lower asset recovery values, as assets might be sold off hastily. Voluntary liquidation can be more cost-effective, allowing for an orderly sale of assets, which may yield better returns for creditors.

Pros and Cons

Pros

  1. Creditor Protection: Ensures assets are used for debt settlement.
  2. Investigation: Thorough check of company’s affairs for misconduct.
  3. Closure: Ends operations of unviable businesses, allowing stakeholders to move on.

Cons

  1. Loss of Control: Directors lose control; the Official Receiver manages and decides on asset distribution.
  2. Reputation Damage: Harms the company and directors’ reputations, affecting future ventures.
  3. Personal Liability Risk: Wrongful trading can lead to directors’ personal liability and disqualification.
  4. High Costs and Lower Returns: Involves court and administrative costs, with asset sales often yielding less.
  5. Job Losses: Leads to immediate unemployment for employees, with little time for them to find new jobs.

Alternatives to Compulsory Liquidation

When a company faces financial difficulties, compulsory liquidation is usually seen as the last resort. Several alternatives provide a potential way for the company to either recover or wind down in a more controlled manner:

  1. Company Voluntary Arrangement (CVA): This is a formal agreement between a company and its creditors where the company proposes a plan to repay its debts over a period of time, often at a reduced amount or slower rate. It gives a company some breathing room and allows it to continue trading while paying off its debts. This arrangement needs the approval of 75% of creditors by debt value.
  2. Administration: Administration aims to rescue the company as a going concern, or if this is not possible, achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up without first being in administration. An administrator is appointed to manage the company’s affairs, business and property for the benefit of the creditors.
  3. Receivership: A secured creditor, such as a bank, may appoint a receiver to take control of specific assets (known as ‘fixed charge receivership’) or all the company’s assets (known as ‘administrative receivership’) to repay the money owed to them.
  4. Creditors’ Voluntary Liquidation (CVL): A CVL is a voluntary method of liquidation initiated by the directors when the company is insolvent. The process is more controlled than compulsory liquidation as it’s managed by a licensed insolvency practitioner appointed by the creditors.
  5. Informal Negotiations: Sometimes, it may be possible to negotiate informally with creditors to agree on payment terms, although such negotiations offer less protection to the company than formal insolvency procedures.
  6. Refinancing or Investment: If the business is viable, it might be possible to inject new capital into the company by means of refinancing or attracting new investment.

It’s essential for directors to seek professional advice if they fear their company may be insolvent. The sooner the issues are addressed, the more options will be available, and the better the chance of achieving a positive outcome.

Takeaways

  • Compulsory liquidation is severe and final: you should take professional help immediately.
  • The sooner you act, the more options you’ll have available
  • Your conduct as director will be investigated, and you could face the consequences if it’s discovered that you acted improperly.
  • Voluntary liquidation is preferable with more directorial control if the liquidation cannot be avoided.

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

FAQs

How long does the process of compulsory liquidation take?

The length of the process can vary depending on the size of the company and the complexity of its affairs, but it can take several months or even years to be completed.

It is possible to avoid compulsory liquidation by addressing the company’s financial difficulties before they become severe. This may include restructuring the business, seeking new investment, or negotiating with creditors to restructure the company’s debt.

Shareholders will only receive a distribution of the proceeds if there are any remaining funds after the creditors have been paid. This is unlikely as the priority of payment is to the creditors.

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