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Understanding the liquidation process for insolvent companies


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Creditors’ Voluntary Liquidation (CVL): Step by Step

  1. A Creditor Issues a Statutory Payment Demand
  2. A Winding Up Petition is Issued 
  3. A Liquidation Order Granted
  4. The Company is Liquidated
  5. Post-Liquidation Investigation

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A 5 Step Guide to the Insolvent Liquidation Process

What happens when an insolvent company goes into liquidation? What does it mean for the directors and employees? Are there any risks involved?

Those are some of the concerns frequently posed by the managers, directors, and owners of businesses facing the possibility of compulsory liquidation. In this simple step-by-step guide to the insolvent liquidation process we'll answer those questions and more.

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Step 1 - A Creditor Issues a Statutory Payment Demand

If a creditor is unable to recover a debt of more than £750 they may issue a statutory payment demand notice, which gives your company 21 days to repay the requested amount. This figure has increased to £10,000 as per the Government's temporary measures which will apply for the period 1 October 2021 to 31 March 2022. Sometimes the creditor will skip this step and go directly to sending a winding up petition via their solicitors.

Step 2 – A Winding Up Petition is Issued

If you fail to comply with the payment request, or the creditor feels as though they have the right to wind up your insolvent company, they may send a winding up petition to the court, asking that the business be closed down and its assets sold to raise the funds needed to cover the debt.

The creditor has to pay a £1,190 court deposit, plus a fee of £300-£800, just to issue the winding up petition, so once this step is taken it becomes apparent that they're serious about recovering the debt and putting an end to your company. A copy of the winding up petition is served at the official business address of the company, and is advertised in the London gazette, at which time the bank may freeze the company's bank account.

If you act quickly, before the petition is advertised, you may be able to come to an agreement through a company voluntary arrangement (CVA), which could renegotiate payment terms and provide an opportunity for a complete recovery. We may be able to draft a formal CVA proposal and convince the creditor to back out of the winding up process.

Step 3 – A winding up order is granted

It is usually about 1 month after the winding up petition is issued the court will decide whether or not the company should be wound up. If a statutory payment demand or county court judgment (CCJ) was issued and your company failed to pay it then the court is almost definitely going to rule in favour of winding up.

Step 4 – The Company is Liquidated

During the liquidation the primary concern is selling as many of the company's assets as possible so that the proceeds can be used to repay its creditors and contributories. The sale of assets may be advertised in the open market or at auction and the liquidator will typically focus on achieving the highest price possible.

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Step 5 – Post-Liquidation Investigation

After the liquidation the liquidator will conduct an investigation to ascertain whether the directors were guilty of wrongful or fraudulent trading while the company was insolvent. Click here to find out more about avoiding such accusations during a compulsory liquidation.

If you're facing the possibility of a compulsory liquidation or have been receiving pressure from creditors and bill collectors, feel free to email us or call us today. We'll help you assess the situation and devise an optimal plan of action. Our extensive office network comprises 100 offices across the UK with a partner-led service offering immediate director advice and support.

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