Understanding Compulsory Liquidation

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 limited company or LLP, and by far and away the biggest presenter of winding up petitions in the UK is HMRC. Whilst compulsory liquidation is set aside from voluntary liquidation, it is usually frowned upon and it should not be the chosen route to close a  limited company.

Compulsory Liquidation of a CompanyWhat’s the 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.

What are the Costs of Compulsory Liquidation?

There are a number of costs during liquidation, including the fees of the liquidator (insolvency practitioner) which will come out of money recouped from the realisation of company assets. The overall costs vary widely depending on the size of the company being wound up, and the complexity of the situation.

What are your Responsibilities as a Company Director?

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.

What Information do you have to Provide?

As a company director, you will usually be asked to attend the official receiver’s office on a convenient date for an interview – which you can read more about here.

You will be asked to complete a questionnaire before the interview, called the PIQ(C), and take that with you. You will also be asked to:

  • Hand over all the company records, books and paperwork you have in your possession;
  • Provide full and accurate details of the company’s assets and liabilities;
  • Inform the official receiver if someone else is in possession of trading records or holding company assets.

Does Compulsory Liquidation offer a Moratorium?

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 are the Risks?

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.

Can a Creditor Start a Compulsory Liquidation?

The short answer to this is yes: only creditors can force companies into compulsory liquidation. Whether a particular creditor will be able to bring a winding up petition and so start a compulsory liquidation will depend on if it fulfils certain criteria.

What are the Creditor’s Timelines?

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 is the Court’s Timeframe?

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.

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

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