What is Compulsory Liquidation & Compulsory Winding Up?
Compulsory Liquidation Explained
As its name suggests, compulsory liquidation is quite different to voluntary liquidation and involves a company or limited liability partnership (LLP) that is unable to pay its debts and is in the process of being forced into liquidation (wound up) by the court. This is usually initiated by creditors. Commonly called ‘winding up’, it 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. Creditors that are owed more than £750 can present petitions to wind up a company or LLP, and by far and away the biggest presenter of winding up petitions in the UK is HMRC. Compulsory liquidation differs from voluntary liquidation and is usually frowned upon – it should not be the chosen route to close a company.
A Typical Compulsory Winding Up Process:
- Before compulsory liquidation occurs, sometimes a statutory demand (which gives the directors 21 days to pay in full or negotiate a settlement) can be issued. If the debt is still unpaid after 21 days, it is at this stage that the creditors will usually apply for winding up petition to be heard at court.
- The petition process itself can be quite arduous – as soon as seven days after issue, the compulsory liquidation of your company can be advertised in the London, Belfast or Edinburgh Gazette. The impact on the business can be devastating as the bank account will be closed immediately without notice. Additionally, because all finance houses have access to this information, it then becomes extremely difficult to secure credit.
- Any other creditor can use the same petition for their debt, so even if the original debt is paid, it doesn’t mean the petition will go away. While it is sometimes possible to convince a creditor to settle the petition you will be expected to pay legal costs.
- Winding up petition that has been heard and approved at court becomes a winding up order. At this stage, the company is closed down and put into compulsory liquidation.
- Approval of liquidation at the high court is followed by an interview with the official receiver. It is their duty to get the best return for the creditors and to investigate the directors on the running of the company.
- The official receiver will usually examine the annual accounts of at least the past three years, as well as management accounts, invoices and other relevant paperwork to determine whether the company’s demise could be attributed to neglect on the part of the directors.
The risks of compulsory liquidation depend on how the directors have run the company so there can be various issues that are exposed as a result of this process. If the directors are found to be guilty of wrongful or fraudulent trading and mismanagement of the insolvent company they can further face consequences. For example:
- Being made personally liable for company debts;
- Disqualification as a director and of all future appointments as a director;
- A fine.
In the worst cases, directors could be charged with a fine and imprisonment. To speak with one of the team to see how you can avoid compulsory liquidation call us on freephone: 08000 746 757.