Compulsory Liquidation is the most serious situation a limited company can face, resulting in its forcible closure by creditors.
The main reason most company directors seek to avoid compulsory liquidation is the process requires one or more creditors to spend considerable money issuing a winding up petition, which can mean they are more hostile to company directors
Compulsory liquidation often makes an already stressful time for directors worse with the worry that any liquidator chosen by creditors in a compulsory liquidation may look very carefully at every action taken by the directors in the lead up to insolvency.
If you are a company director, taking early action if your company may be insolvent can avoid compulsory liquidation and enable the often 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 our full guide to the meaning and process below, covering cost, implications and timeline.
Grounds for 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
A Winding Up petition will be heard in the High Court. HMRC are the biggest presenter of Winding up Petitions against limited companies.
HMRC are not only interesting in recovering money, but also in sending a message that failure to pay tax will be pursued vigorously.
The process of compulsory company liquidation is set out in the Insolvency Act 1986 (IA 1986) and The Insolvency (England and Wales) Rules 2016
- Statutory Demand – Before compulsory liquidation occurs, a statutory demand (which gives the company directors 21 days to pay in full or negotiate a settlement) will be needed if the creditor does not already have a court judgment for the debt. If the debt is still unpaid after 21 days after service of the statutory demand, the creditor can then issue a winding up petition.
- Winding up Petition is issued and 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.
- 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.
- 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.
- 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 company’s assets and liabilities.
Can Compulsory Liquidation be Stopped?
Compulsory Liquidation can be stopped under the following specific circumstances:
- if the debt is paid in full
- if the debt is disputed
- 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 rarely are repeated adjournments sanctioned by the court and the timeframes of extension are generally weeks not months.
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.
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.
To speak with one of the team to see how you can avoid compulsory liquidation call us on freephone: 0333 270 0449