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What is compulsory liquidation? A guide to understanding the process for company directors

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Reviewed: 16th May 2019

Compulsory liquidation is a formal insolvency procedure which results in a company being forcibly shutdown. The compulsory liquidation process is typically initiated by disgruntled or otherwise outstanding creditors of a limited company through a court order known as a Winding Up Petition (WUP). A WUP notifies a company that a petition has been lodged to bring about the closure of the business and the liquidation of its assets.

What is the process of compulsory liquidation?

  • Winding Up Petition - The first step of compulsory liquidation is for a creditor (which may be HMRC) to issue a WUP against the company. The petitioner must be owed a minimum of £750 and have waited at least 21 days for the debt to have been repaid. Once a WUP has been issued to the debtor company, seven days must pass before this is advertised in the Gazette. Following the advertisement, a company will typically find that their bank accounts will be frozen leaving the company unable to continue to trade.
  • Winding Up Order - After a further seven days the WUP will be heard by a Judge who will then decide the next step. Once the court is satisfied that the company should be liquidated, they will issue a Winding Up Order and an Official Receiver will then be appointed. Trade must stop at this point, although it is likely this will have already happened upon the WUP being issued.
  • Official Receiver Appointed – Upon being appointed, the Official Receiver – sometimes known as a liquidator – will take over control of the company, meaning the existing directors will cease to have any influence over the day to day running of the business. In certain cases the directors may be required to assist the Official Receiver by providing information on customers, stock, or other assets.
  • Company Assets Are Sold - The Official Receiver will begin the process of liquidating the company’s assets which may include stock, vehicles, property, or machinery. All proceeds from the sale of assets, along with any cash held in the company’s bank account, will be ring fenced by the liquidator in order to repay the company’s debts as far as possible.
  • Dissolution of Company - Following the sale of assets, the company will be officially shutdown and its name removed from the register at Companies House. The company will no longer exist. Any debts which remain outstanding at this point will be essentially written off unless the director has provided a personal guarantee. In this instance the personal guarantee will crystallise and the director will become personally responsible for any debt secured in this way.

What is the difference between compulsory and voluntary liquidation?

Although both compulsory liquidation and voluntary liquidation result in the company being closed, there are a number of benefits to a director in opting to voluntarily place their company into liquidation rather than go through a court-ordered liquidation.

With voluntary liquidation, which is done through a formal insolvency process known as a Creditors’ Voluntary Liquidation (CVL), the insolvent company’s directors are able to retain an element of control over the process. They are able to select their own choice of insolvency practitioner to handle the shutdown of the company and are more in control of the timings related to the closure.  With compulsory liquidation, however, the whole thing is dictated by the courts and taken out of the company’s hand completely.

An additional benefit of deciding to go down the route of voluntary liquidation is that it reflects far better on the directors of the company than if compulsory liquidation is forced upon it. Voluntary liquidation demonstrates that the directors were aware of the financial problems facing the company and took action to stop the situation escalating and potentially worsening the position of their creditors further. Compulsory liquidation on the other hand, indicates that the company’s directors were unaware of its financial distress, or were aware but chose to trade on for as long as possible regardless.

Following the liquidation of the company, whether voluntary or compulsory, the directors’ conduct will be assessed. Should there be evidence that the company’s insolvency was ignored leading to creditors’ positions being subsequently worsened, further action may be taken against the directors personally.

How long does compulsory liquidation take?

While the time between a WUP being issued and the Official Receiver being appointed can move at a rapid pace, the actual timeline of the compulsory liquidation process itself can be much lengthier than it would be for a CVL. Not only does this prolong the situation for you as director, but it also has knock-on effects for any employees you may have. Opting for voluntary liquidation allows your staff to receive any redundancy they may be entitled to in a timely manner; with a compulsory liquidation it is not uncommon for employees to have to wait up to a year to receive the redundancy they are owed. As a company director you may also be eligible for redundancy so long as you have at least two years’ service with the company and have been on the payroll.

Who can start the process of compulsory liquidation?

Unlike voluntary liquidation which is typically initiated by the company’s directors or other shareholders, compulsory liquidation is a process which is typically started by a frustrated creditor and ordered to happen by the court. Any creditor who is owed at least £750, which has gone unpaid for a minimum of 21 days, can petition for your company to be wound up.  However, it is unlikely that a creditor will begin the winding up process after waiting just 21 days for payment. Instead it is often a very lengthy journey to get to the compulsory liquidation stage and it is likely the creditor will try a variety of other less serious methods of collection before resorting to a WUP. These collection methods can range from informal negotiations, through to a County Court Judgment (CCJ), or issuing a statutory demand.

Why would a creditor want my company to be liquidated?

Compulsory liquidation is the final and most serious step a creditor can take against a company which has failed to pay the money it owes. Deciding to wind a company up is not usually done out of spite, but rather as a last ditch attempt to get the debt paid.

If a creditor has been chasing a debt for a considerable length of time, they may feel the compulsory liquidation of the company gives them their best chance of receiving some of the money they are owed following the sale of assets. Of course this will only be possible if there are sufficient assets or funds in the company to allow for a distribution to be made.

How much does compulsory liquidation cost and who pays?

Issuing a WUP to force a company into compulsory liquidation is expensive; it costs in the region of £400-£800 to issue the petition itself, as well as an additional £1,600 for a court deposit, plus a filing fee of £280. These costs must initially be borne by the petitioning company. The petitioner will be hoping to be able to recoup these costs once the insolvent company’s assets are eventually sold by the liquidator should the WUP result in the company being placed into compulsory liquidation.

This is why a third party is only likely to attempt to force your business into compulsory liquidation if they have reason to believe your company has sufficient assets to cover the cost of the winding up and also the debt they are chasing. If your company does not have sufficient assets to reimburse the WUP costs then the petitioner will be left with the bill for your company’s liquidation.

A petitioning company or individual does not have any priority over the distribution of assets following the compulsory liquidation of the company except for the petition costs themselves. The order of distribution will still follow the standard hierarchy set out by law. This hierarchy places unsecured creditors (such as suppliers, credit cards and unsecured loans, and customers) at the bottom of the pile, meaning an unsecured creditor is only likely to petition for the compulsory liquidation of your company if they are sure you have assets of a significant value. 

Can compulsory liquidation be stopped?

Once a WUP has been lodged against a company there is a very small window of time where this can be challenged and alternative arrangements put in place. Unless the company is in the position to be able to pay the petitioning debt and have the petition dismissed, the most likely option at this stage is an alternative insolvency procedure such as a CVL or a Company Voluntary Arrangement (CVA). This is often preferable to compulsory liquidation even if the end result - the closure of the company - is the same.

Once a WUP has been heard by the court and a winding up order issued, there is nothing that can be done to prevent the company being forcibly wound up.

What does compulsory liquidation mean for directors?

Once your company has been liquidated it ceases to exist legally, and therefore you will no longer be able to trade. As part of the liquidation process, the Official Receiver will investigate your conduct during your time as director in order to establish whether any fraudulent activity has taken place, or whether you deliberately or knowingly caused the company to become insolvent. If it can be proven that you have acted unlawfully then you could be held personally responsible for the company’s debts or even face disqualification from acting as a director in the future.

In reality, this is extremely rare, and in most cases you will be free to set up another limited company and begin trading through that entity instead if this is what you wish.

If you and your company are being threatened with compulsory liquidation, you should make it a priority to seek expert advice as a matter of urgency, preferably before a WUP is issued. Real Business Rescue has over 70 offices up and down the country meaning you are never far away from expert help and advice. To arrange a free initial consultation with an insolvency expert call our team today on 0800 644 6080.

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