What is Compulsory Liquidation?
Compulsory liquidation is a court-ordered process which occurs following the making of a Winding Up Order on an insolvent company. As the name suggests, compulsory liquidation is something which is forced upon an insolvent company by its creditors, typically after they have exhausted all efforts to recover the money they are owed by alternative means.
While being forced into compulsory liquidation can be a shock, it is unlikely to come completely out of the blue. Issuing a Winding Up Petition against a company comes with a significant cost to the petitioning creditor and it is therefore usually only seen as a last resort when all other options have failed to yield payment from the company in question.
A creditor can petition the courts to wind up a company that owes them at least £750 and can prove the company is not able to repay what they owe. Inability to repay can be proven by serving a Statutory Demand, which is a formal request for the money owed, on the company. If the Statutory Demand is not complied with in 21 days, this will be seen as adequate proof that the company cannot pay the debt owed.
In many cases it is HMRC who initiate winding up proceedings against a company, however, any creditor which meets the criteria can force an insolvent company into liquidation using this process.
If the situation has escalated to the point where compulsory liquidation has been ordered by the court, there is very little the director can do at this point except to be cooperative with the liquidator who has been appointed to handle the liquidation process.
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The Compulsory Liquidation Process
- Winding Up Petition issued – The first step of compulsory liquidation is when a creditor serves a Winding Up Petition against the indebted company. A creditor must be owed at least £750 by the indebted company. A Winding Up Petition can be contested if the petitioned company dispute the debt being claimed, or alternatively the Winding Up Petition can be withdrawn by the petitioning creditor if an agreement regarding repayment of the debt can be agreed between both parties. After a period of 7 days, the Petition will be advertised in the Gazette and company bank accounts will typically be frozen at this point. Should the Winding Up Petition go unanswered, or a mutually agreeable resolution cannot be reached, a judge will consider the Petition in court.
- Winding Up Order made – A Winding Up Order will be made by the court following the serving of a Winding Up Petition if the judge determines that the company is insolvent and liquidation is the most appropriate course of action; this can be in as little as 7 days following the Winding Up Petition. This issuing of the Winding Up Order commences the compulsory liquidation of the insolvent company.
- Liquidator appointed – Immediately following the Winding Up Order being made, a liquidator will be appointed. Control of the insolvent company will pass to the liquidator who will be tasked with resolving the outstanding affairs of the company, however, in many instances, the directors will be asked to assist by providing information on creditors, assets, and any ongoing contentious issues.
- Liquidation of assets and repayment of creditors – All assets belonging to the company will be identified by the liquidator who will then go about selling (or ‘liquidating’) these for the benefit of outstanding creditors. Any funds raised from this process will go towards repaying as many of the company’s liabilities as possible, according to a hierarchy as set out in the Insolvency Act 1986. Any debt which remains with the insolvent company after this point will be wiped out as part of the liquidation process, unless these have been personally guaranteed.
- Liquidators reporting duties and closure of company – As part of the compulsory liquidation process, the liquidator is required to investigate the conduct of the directors of the insolvent company and how assets have been managed during the time leading up to the company becoming insolvent. any conduct which the liquidator believes makes the director(s) unfit to be concerned in the management of another company must be reported. The liquidator will submit a final report to creditors and the company will then be struck off the Companies House register.
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