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Understanding the Compulsory Liquidation Process

Reviewed: 11th January 2013

If you are the director of an insolvent company, be aware of the fact that any unsecured creditor may petition the Court to force you into what is called compulsory liquidation which is a part of the winding up process. This procedure differs from voluntary liquidation because the company is ordered to liquidate its assets under the direction of an appointed liquidator, who is either appointed by the Court or the creditors, whereas a voluntary liquidation involves the company directors making the resolution to enter liquidation voluntarily. In every liquidation process, whether voluntary or compulsory, the goal is to sell all assets and repay as many creditors as possible.

How Does Compulsory Liquidation Begin?

First, a creditor must present a petition to the Court and request that the court order the company to enter into compulsory liquidation. Financial institutions and lenders may take this route to recover funds owed to them if they feel that it is unlikely the debts will be repaid in due course. For the liquidation application to be approved the creditor must be able to illustrate, or the court must be able to observe, that the business has been unable to make repayments on a regular basis and that the most just and equitable outcome for all parties would be to wind up the company. However, if the court finds that the petitioning party is unreasonably refraining from alternative measures then the liquidation application could be dismissed although this is very unlikely. 

What Happens after a Compulsory Liquidation Order Is in Effect?

Once the court rules to wind up the business they will appoint one or more liquidators, and an Official Receiver, who will begin the process of valuing, marketing, and selling the company’s assets. However, in a separate creditors’ meeting the creditors may decide to nominate another individual to act as the liquidator, and may also assign a supervisory liquidation committee of their own. As a business owner/director the only thing you can do once the procedure is underway is seek the guidance of an insolvency practitioner to mitigate the potential negative outcomes of compulsory liquidation.

What Are the Possible Outcomes of Compulsory Liquidation?

In all cases, the end result of liquidation is the complete dissolution of the company – it ceases to exist as a corporate entity. Generally speaking, the directors of a limited company are not held personally liable for the debts of the dissolved business; however, if the court believes that one or more of the directors were guilty of wrongful trading while the company was insolvent, they may order that person to make a payment to the company. After the liquidation the liquidator is required to investigate and ascertain whether the directors of the insolvent company fulfilled their directors’ duties while trading insolvent. By entering into voluntary liquidation or administration with the help of a licensed insolvency practitioner instead of waiting to be wound up by creditors and the court, you can be confident that your company is taking the best course of action, and with the administration route you may even be able to recover and begin operating in a state of solvency again. Real Business Rescue provide director advice online, over the phone, or in-person at one of our 75 UK offices or a place of your convenience.

If you’re worried about the possibility of a lender, bank, or HMRC sending your company into compulsory liquidation, feel free to call us today on 0800 644 6080 for a free consultation with one of our experienced turnaround specialists. We’ll work with you to assess the situation and examine potential alternatives that may allow you to avoid winding up altogether. 

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