Compulsory Liquidation is the most serious situation a limited company can face, resulting in its forcible closure.
Read our full guide to the meaning and process below, covering cost, implications and timeline.
Compulsory Liquidation: Definition
Compulsory liquidation (or compulsory winding up) can be defined as when a company or limited liability partnership (LLP) that is unable to pay its debts is forced into liquidation 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.
How does a Company go into Compulsory Liquidation?
A winding up petition can be lodged by any creditor, director, a non-administrative receiver, or an assignee of a debt.
Grounds for winding up a limited company include:
- When a company cannot pay a debt of £750 or more
- If the court concludes that it is just and equitable that it be wound up
These final demand letters mean the case will be heard in the High Court, at what is known as a ‘winding up hearing.’
At these, a judge will decide whether the debt is credible.
It’s worth mentioning that HMRC are the Biggest Presenter of Winding up Petitions to Limited Companies
Their system of escalation is extremely effective, beginning with threatening letters and ending with a petition to wind up your company, effectively forcing your into liquidation if you can’t pay your debt.
HMRC are not merely interesting in recouping their money, but in some cases in sending a message to the wider public that their laws are enforceable. This means they sometimes make examples of people via winding up companies for reasons beyond economic sense.
The process of compulsory company liquidation accords to the rules set out in the Insolvency Act 1986 (IA 1986) and the The Insolvency (England and Wales) Rules 2016 (SI 2016/1024) (IR 2016).
- Statutory Demand – Before compulsory liquidation occurs, sometimes a statutory demand (which gives the company 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.
- Winding up Petition – 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.
- 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, it then becomes extremely difficult to secure credit.
- 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 down and put into compulsory liquidation.
- High Court Hearing Approves 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.
- 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 attributed to neglect on the part of the company directors.
- Appointment of Liquidator – Where there are assets to be realised, the official receiver’s role will be followed by a licensed insolvency practitioner (IP) to take over these duties.
- Statement of Affairs – After appointment, the liquidator will prepare the Statement of Affairs, which is a detailed document listing the companies assets and liabilities.
Can a Winding Up be Stopped?
Compulsory Liquidation can be stopped under the following specific circumstances:
- if the debt is paid in full
- if the debt is disputed (via an application for an injunction)
- if the debtor company agrees 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 arely are repeted adjournments sanctioned by the court and the timeframes of extension are generally weeks not months.
Adjournments won’t be considered at all if the presiding judge considers the debtors company to be insolvent and likely to remain that way.
How Much does a Compulsory Liquidation Cost?
Forcing a company into liquidation comes with the following typical costs:
- Submitting a Statutory Demand £200-£250
- Winding up Petition Application = £280
- Deposit to Official Receiver (covering their expenses during the winding up) = £1600
If the Court accepts the petition, it will arrange a date for the hearing. The company is given 14 days written notice of the hearing at least. 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 comes to an agreement 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 assets of the company 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 Will Compulsory Liquidation Mean for Directors?
Even after the company has been wound up, your duties and responsibilities as a company director do not stop.
For example, you may be required to assist the official receiver in the disposal of assets.
You absolutely must not use company assets for your benefit or pay employees and creditors. If you are a company employee as well as a director, you will be told how to claim any money owing to you.
You should be aware that any insolvency process is going to involve a directorial investigation, which is 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.
Moratorium against Legal Proceedings
As soon as a business enters compulsory liquidation, there is an instant statutory moratorium against any further legal proceedings by creditors. As per Section 130 Insolvency Act 1986, it is only via a specific court order that any further action might be considered.
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 choose to 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?
Once the judge has ruled upon the Winding up Order, every employee of the company will automatically lose their jobs. Liquidation means the company is being closed down and, before too long, it’s name will be struck off the register at Companies House meaning it ceases to exist.
Employees may be entitled to statutory redundancy pay. See our full article here on employee rights in insolvency.
To speak with one of the team to see how you can avoid compulsory liquidation call us on freephone: 08000 746 757