What is Compulsory Liquidation?

Compulsory liquidation, also known as involuntary liquidation or winding up, is the legal process by which a company is forced to close and sell off its assets to pay off its debts.

This process is initiated by a winding-up petition and is overseen by a court-appointed liquidator.

This article aims to provide a comprehensive overview of the causes, process, and impact of compulsory liquidation.

We will explore why a company may be forced into liquidation, the steps involved in the process, and the effects on shareholders, creditors, employees, suppliers, customers and the company’s reputation. We will also look at ways to avoid compulsory liquidation and the possible recommendations for companies facing financial difficulties.

If you are a company director, taking early action if your company may be insolvent may avoid compulsory winding up and enable the preferable option of voluntary liquidation.

Get in contact with our insolvency practitioners today to find out how we can help you potentially avoid compulsory liquidation. Read our full guide to the meaning and process below, covering cost, implications and timeline.

What is Compulsory Liquidation?

Compulsory liquidation (or compulsory winding up) is an insolvency procedure in which a company or partnership is forced into liquidation by a court order (winding up order).

Compulsory liquidation is usually initiated by creditors via a winding-up petition in the High Court.

Less commonly, it can be initiated by directors, shareholders or:

• an Official Receiver (an officer of the High Court)
• administrative receiver
• an administrator
• a supervisor of a company voluntary arrangement
• the Financial Services Authority
• the chief clerk of the Crown Court
• 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 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)

What’s the Process?

The process of compulsory liquidation is  set out in the Insolvency Act 1986 (IA 1986), and The Insolvency (England and Wales) Rules 2016 

(1) Statutory Demand is Issued – Before compulsory liquidation occurs, a statutory demand will be needed if the creditor does not already have a court judgment for the debt. The creditor can issue a winding-up petition if the debt is still unpaid after 21 days.

(2) Winding up Petition is served – The court will then set a date for a hearing to decide whether the petition should be turned into a Winding Up Order. The petition will also be advertised in the London, Belfast or Edinburgh Gazette.

(3) Bank Accounts are Frozen – 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, securing credit becomes extremely difficult.

» MORE Read our full article on My Company Bank Account is Frozen

(4) Winding up Order – A Winding up petition that has been heard and approved at court becomes a winding up order. At this stage, the company is closed and forced into compulsory liquidation.

(5) Official Receiver – 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 wholly or partly attributed to legal wrongdoing on the part of the company directors.

(6) Appointment of Liquidator – Where assets are realised, the official receiver’s role will be followed by a licensed insolvency practitioner (IP) to take over these duties.

(7) Statement of Affairs – After the appointment, the liquidator will prepare a detailed document listing the company’s assets and liabilities.

The process of compulsory liquidation can be a complex and time-consuming one, but it is a necessary step in ensuring that the company’s creditors are paid and that the company’s assets are distributed fairly.

The length of the process can vary depending on the size of the company and the complexity of its affairs.

The Role of the Liquidator

The liquidator’s role in compulsory liquidation is to obtain the best return possible for creditors while formally closing the limited company.

Following the winding-up order, the court will appoint an Official Receiver as provisional liquidator. A privately appointed insolvency practitioner will take over if the creditors wish. They are responsible for finding and selling assets at fair market value and paying creditors.

The liquidator’s fees will be paid as an expense of the winding up, second only to secured creditors with a fixed charge in order of priority.

The liquidator is also responsible for investigating directors’ actions to ensure no misfeasance has occurred, which may have lessened the returns to company creditors.

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?

Compulsory liquidation comes with the following typical costs for the petitioning creditor:

• Submitting a Statutory Demand £200-£250
• Winding up Petition Application = £302
• Deposit to Official Receiver (covering their expenses during the winding up) = £2600

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.

If the Court accepts the petition, it will arrange a date for the hearing. The company is given at least 14 days’ written notice of the hearing. Once a date has been set for the hearing, directors have seven days to act, or the petition will be advertised. The business can be saved if it pays its debt or agrees with the creditor. In this case, the Court will dismiss the petition.

If there is no change and the company fails to raise funds to pay its debts, the Court will issue a winding-up order, and the company will be liquidated. The effects of the winding-up order are severe. Once a business enters liquidation, it must stop trading, all staff are made redundant, and the company’s assets are sold to repay creditors. As part of the process, the company’s directors lose control of the company and the sale of its assets.

What’s the Impact of Compulsory Liquidation on Directors?

Even after the company has been wound up, your duties and responsibilities as a company director do not stop.

For example, directors may be required to assist the official receiver in the disposal of assets.

If you are a company employee and a director, you will be told how to claim any money owed to you.

You should be aware that any insolvency process will involve a directorial investigation, where the insolvency practitioner checks for the possibility of misfeasance. This may mean wrongful or fraudulent trading but is essentially there to ensure the law was followed.

Where misfeasance is discovered, penalties include being held partially or fully liable for the business debt and, in some cases, directors disqualification.

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

A disgruntled creditor typically serves a statutory demand, giving the company 21 days to pay. If the company fails to hit the deadline and pay its debt, the creditor can petition the Court for a winding-up hearing. It takes a few weeks to get the hearing date.

In most cases, HMRC is the petitioner. However, any unhappy creditor who is owed £750 or more and can prove that the company cannot pay can petition the Court for a winding-up hearing.

The creditor must also advertise the petition in The Gazette as part of the process, which could alert other creditors to the fact that the company is struggling to pay its debts and spur them into taking action. It will also alert banks to the situation.

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 in insolvency and will be paid from the sale of company 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 

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

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