What is compulsory liquidation?
Compulsory liquidation is a formal insolvency process and the winding up and closure of a company, forced by the courts. It is a process that’s usually initiated by a creditor after filing a winding-up petition. It is generally the least favourable insolvency process for a company, and is best avoided if possible.
Why would my company be forced into liquidation
Your company can be forced into compulsory liquidation when one of your company’s creditors issues a winding-up petition and a winding-up order is made by the courts. It is the most serious action a creditor can take to recover their debts and usually comes after other debt recovery options have been exhausted.
Any creditor owed more than £750 can apply for a winding-up petition. A company may also be wound up if it is found to be acting unlawfully and it is deemed in the public interest for it to cease trading.
The courts appoint a liquidator; either an ‘official receiver’ or an insolvency practitioner (IP), to liquidate the company.
What is the compulsory liquidation process?
- A Winding-up Petition is Issued.
- A winding-up petition is issued
- If your company owes a creditor more than £750, they can issue a winding-up petition.
- The petition is advertised
- A winding-up petition is advertised in the London Gazette not less than seven business days after it is served, and not less than seven business days before the hearing. This informs banks and lenders of your company’s situation and cause them to freeze your company’s account to prevent incoming and outgoing transactions. This advertisement can prompt additional creditors to adopt or ‘piggyback’ on the petition.
- The winding-up order is made
- If you can’t resolve the dispute with your company’s creditors and you don’t contest the petition or the amount owed, the courts issue a ‘winding-up order’, starting the compulsory liquidation process.
- The official receiver is appointed
- At this point, you’re relieved of your directorial responsibilities, including power over the day-to-day running of the company, and the official receiver or an insolvency practitioner is appointed as liquidator. The company ceases trading, with company assets and premises secured, and all staff made redundant. They will receive instruction on how to claim for their unpaid wages, holiday pay, and any other monies they may be due.
- Liquidation begins
- The liquidator will then begin the process of valuing, marketing, and selling your company’s assets as well as handling claims made by all creditors. They will also carry out investigations into the conduct of all directors who held office in the period prior to the company entering liquidation and submit any findings of wrongdoing to The Insolvency Service.
- Any dividend payments begin
- Using the money realised through the liquidation process (less any costs), the liquidator will make dividend payments to company creditors.
- The company is dissolved
- Following the sale of assets and distribution of dividends, the liquidation will conclude, and your company will be struck off the register at Companies House, no longer existing as a corporate entity.
What are the consequences of compulsory liquidation?
Entering compulsory liquidation could have several implications for your company and you as a director. During the process:
- All trading stops
The company ceases to trade, with its assets sold to make payments to creditors on a pro rata basis. The company ceases to exist once the process is complete. - Employee redundancy
Employees are made redundant and are entitled to claim through the Redundancy Payments Service. - Director’s conduct investigated
Your directorial conduct is investigated to determine if you have fulfilled your obligations and acted in the best interest of your company and its creditors. If the IP uncovers evidence that you didn’t act in the creditors’ best interests or have acted in a way that could indicate ‘wrongful trading’, this will be passed on to The Insolvency Service. If found guilty, you could face disqualification from being a director for up to 15 years. Any evidence of criminal wrongdoing will also be reported, which may lead to prosecution. - Minimal return for creditors
Compulsory liquidation often leaves little or no return to creditors. - Reputational damage
The petition is public knowledge and advertised in the London Gazette, potentially affecting your future reputation. - Little control for directors
Once the process begins, the situation is largely out of your control, and there is very little you can do without court approval or agreement of the petitioning creditor.
Speak to us if you’re concerned that your company’s creditors may try to force it into compulsory liquidation. We can assess your situation and advise you on the best route forward.
Will I be personally liable for my company’s debts in compulsory liquidation?
A limited company is its own separate entity, so you won’t be liable for the company’s debts. However, you could be held personally responsible for company debt if:
- Personal Guarantees (PG)
A Personal Guarantee is a legal commitment made by you to a third party, such as a lender, supplier, or landlord, securing a form of funding for your company by using personal assets and finances as security. If your company fails to repay its debt, your guarantee will become enforceable by a third party. If you’re concerned about personal guarantee liability, in some cases, lenders may be open to negotiation. - Trading Whilst Insolvent
If your company continues trading despite you knowing that it is insolvent and unable to meet its liabilities and obligations, leading to a further loss for creditors, it is considered to be trading whilst insolvent. This can result in personal liability for those further losses incurred by creditors. By seeking advice early, we can help you understand your solvent position and you can protect yourself early, ensuring that you are acting in your creditors’ best interests. - Overdrawn Director’s Loan Account (DLA)
If you have borrowed money from the company which has not been repaid, and as a result, you have an indebted (overdrawn) Director’s Loan Account when your company enters liquidation, you may be required to repay the outstanding balance using your own personal funds. We will work with you to find the most suitable solution if you have an overdrawn DLA. - Bounce Back Loan (BBL) misuse
You can be held personally liable for misusing a BBL. This can involve obtaining loans through false information, using funds for unauthorised purposes, or engaging in activities that don’t align with the loan’s terms. If you’re unsure about if you have misused a BBL, or have concerns about personal liability, we can provide free advice including how this can be addressed.
Can compulsory liquidation be stopped?
It’s unlikely compulsory liquidation can be stopped once a liquidator is appointed Once the courts issue a winding-up order and a liquidator is appointed, there is very little that can be done to save the company and to stop the process. The liquidator will sell the company’s assets and ultimately, the company ceases to exist.
How we can help you avoid compulsory liquidation
If your company is struggling with financial distress and winding-up action has been threatened, but the compulsory liquidation process hasn’t commenced, any threats to issue a winding-up petition should therefore be taken seriously.
Speak to us; our highly experienced initial advisers will provide free, impartial, confidential advice with no obligation, and our licensed insolvency practitioners can carry out a number of insolvency processes to help your company.
- Repay your company debts in a payment plan via a Company Voluntary Arrangement (CVA)
A CVA is a payment plan between a company and its creditors that allows you to restructure your company’s unsecured debts, while continuing to trade, by making affordable monthly payments over a fixed period. We start by assessing your company’s financial position, determining a realistic repayment amount. These terms are then proposed to your creditors and if approved, your company enters the repayment plan. When in place, all interest and charges are dropped and creditors in the arrangement cannot take further legal action. The process lasts for up to 5 years and on successful completion, any remaining unsecured debt in the arrangement is written off.
- Restructure your company through administration
Administration is an insolvency procedure for companies. Entering the procedure, your company will be in a temporary state of protection by a moratorium that halts creditor action, including legal proceedings, giving your company the breathing space to continue trading. We will act as administrator and our primary purpose is to rescue your company as a going concern, attempting to restructure and turn it into a leaner, more profitable organisation. If rescuing the company isn’t a viable option we will also look at the most appropriate exit strategies from administration, whether that be a potential sale of the business, assets, the whole company, or transitioning to an alternative insolvency procedure.
- Close your company down via a Creditors Voluntary Liquidation (CVL)
A CVL is a liquidation procedure for companies that are insolvent. The process will formally close and liquidate your company, ceasing its trading operations, realising any assets, and removing the threat of creditor legal action. If your company has employees, they can claim for redundancy and other statutory entitlements through the government’s Redundancy Payment Service (RPS). The process is final and irreversible. Once completed, your company’s unsecured debt will be written off and the company is dissolved, allowing you, the director, to move on.
- Close your company down and start again via a pre-pack liquidation
A pre-pack liquidation is a type of CVL where the sale of your company’s assets is arranged before liquidation, allowing business operations to continue seamlessly under the purchasing company. The company name may be reused, and employees can transfer under TUPE. Contracts and essential agreements can also be included as part of a sale, ensuring minimal disruption to your business operations. This process eliminates the unsecured debts of your previous company, providing a fresh start free from previous unsecured liabilities.
How to get in touch with us: The next steps
- Speak with our initial advisers
Make contact with our team, via phone, filling in a form, or online chat. We will assess your circumstances and, if suitable, arrange a free consultation with a consultant to discuss your company’s situation. - Initial assessment
During the consultation, we will advise if an insolvency procedure is the most appropriate route forward or whether alternative solutions better suit your company’s problems. - Formally engage with Wilson Field
If there is an appropriate insolvency solution, we will confirm the necessary steps to start the procedure and will issue you with the relevant documentation for you to formally engage us.
In summary
Compulsory liquidation is the forced liquidation of your company by the courts, initiated by your creditors. The process is initiated via a winding-up petition and means you have no control over your company’s future. If a winding-up petition has been used against your company, speak to us as soon as possible, and we can help advise you on the best available solutions for your company.
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