Compulsory liquidation is generally the least favourable insolvency process and best avoided if possible. If your company has been threatened with the issue of a winding up petition, the process of having your company wound up by your creditors has begun. Compulsory liquidation sees the business cease to trade, company assets being sold involuntarily with any proceeds (after costs) distributed to creditors, staff being made redundant and the company ultimately being struck off the register.
What is Compulsory Liquidation?
Compulsory liquidation is the most serious insolvency procedure that an insolvent company may find itself in. It occurs when a winding up petition is issued against the company (usually by a creditor of the company) and a winding up order is issued by the courts, who then appoint a liquidator (either an ‘official receiver’ or insolvency practitioner) to begin the involuntary liquidation of the company. Liquidation will involve the company ceasing to trade, followed by assets of the company being sold off in order to make payments to creditors on a pro-rata basis. Employees will also be made redundant, and the company will cease to exist once the process is complete. The conduct of the directors will also be thoroughly scrutinised in order to ascertain if they have fulfilled their obligations as a director and whether they could have taken steps to minimise losses to creditors or prevented the company becoming insolvent. If it is decided that the directors did not act in the best interests of creditors, or may be guilty of ‘wrongful trading’ then evidence will be gathered and passed on to the insolvency service who may seek to disqualify or prosecute the director(s) in question.
Why would Compulsory Liquidation be Instigated?
A compulsory liquidation is instigated by creditors who are looking to recover their debts. Compulsory liquidation comes as the final stage of a winding up petition. This is the most serious action a creditor can take to recover their debts and usually comes after they have exhausted all other means of recovery action. Any creditor who is owed more than £750 can apply to the courts for a winding up petition. A company may also be wound up involuntarily if it has been found to be acting unlawfully and it is deemed to be in the public interest for it to cease trading.
What are the Consequences of Compulsory Liquidation?
For a heavily indebted company with no assets in order to pay for a creditors voluntary liquidation and no prospects of recovery, it may indeed be a viable option to just allow the official receiver to deal with the winding up of the company in order to remove creditor pressure. However, in the majority of instances, compulsory liquidation bears the following consequences:
- The high costs associated with compulsory liquidation mean that there is often little or no return to creditors.
- The fact that a winding up petition has been issued will be advertised in the London Gazette which means it will become a matter of public knowledge. This could potentially tarnish a directors’ business reputation if they intend to apply for another directors position in the future.
- Once the compulsory liquidation process begins, there will be very little action that directors can take without either court approval or agreement of the petitioning creditor. Leaving the situation largely out of their control.
- The conduct of the directors will be thoroughly scrutinised and any evidence of wrongful trading will be reported to the insolvency service. If found guilty, directors can be disqualified from being present on any board of Directors for up to 15 years under the 1986 Company Directors Disqualification Act.
- Any criminal wrong doing will also be reported which may lead to directors being prosecuted.
A limited company is classed as its own separate entity, so any debts picked up by the company will not result in the directors being liable. There are, two scenarios which would see a director being held personally responsible for company debt. For example if, during the liquidator’s investigation they find the any sign of wrongful trading or director misconduct. Alternatively, if any directors have signed a personal guarantee, once the company is liquidated, they will be held personally liable
The Process of Compulsory Liquidation
- A Winding up Petition is Issued
- A creditor submits an application to the court for a winding up petition, along with proof that they have already attempted to retrieve their debt through alternative avenues, such as the issue of a statutory demand, to no avail. The creditor must be owed at least £750 and there can be no dispute surrounding the debt. If the courts approve the application, then the winding up petition is issued on to the company and a date for a hearing is scheduled.
- The Petition is Advertised
- If the debt is not disputed and situation is not resolved the creditor must advertise the petition in the London Gazette not less than seven business days after service of the petition, and not less than seven business days before the hearing. This will inform banks and lenders of a company’s situation and will cause them to freeze a company account in order to prevent incoming and outgoing transactions. The advertisement may also prompt additional creditors to adopt or ‘piggyback’ on the petition.
- The Winding up Order is Issued
- If the company still fails to resolve its dispute with its creditors and they neither contest the amount owed nor the filing of the winding up petition, then the courts shall issue a ‘winding up order’, which will mark the start of the compulsory liquidation process.
- The Official Receiver is Appointed
- At this point, all company directors will be relieved of their responsibilities including their powers for the day to day running of the company and an official receiver or an insolvency practitioner will be appointed as liquidator. Cessation of trade will ensue, company assets and premises will be secured and all staff will be made redundant. Staff will receive instruction on how to claim for their unpaid wages, holiday pay and any other monies they may be due.
- Liquidation will begin
- The liquidator will then begin the process of valuing, marketing and selling the 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 will begin
- Using the money realised through the liquidation process (less any costs), the liquidator will make dividend payments to company creditors.
- The Company will be struck off
- Following the sale of assets and distribution of dividends, the liquidation will conclude and the company will be struck off the register at Companies House, resulting in the company no longer existing as a corporate entity.
What can be done if faced with Compulsory Liquidation?
Once the winding up order has been given by the courts and the liquidator has been appointed there is unfortunately very little that can be done to save the company. The liquidator will proceed to sell the company’s assets and ultimately the company will cease to exist. This is why if a creditor has threatened to issue a winding up petition or if one has already been issued, then the need for urgent action cannot be overstated assuming directors wish to rescue the company.
If the compulsory liquidation process has not yet begun then a number of company rescue options can be explored, but the options available depend largely on how early directors seek advice and whether or not a winding up petition has already been issued.
If a winding up petition has not been issued and a company has multiple creditors, then a company voluntary arrangement could provide a viable means of rescuing an insolvent company. A company voluntary arrangement would allow a company to repay creditors an affordable amount over a period of time whilst continuing to trade. If, however, it is only really tax arrears with HMRC that a company is struggling with, then a time to pay arrangement might be a more appropriate and effective way to repay liabilities and ensuring a continuation of trade. In the instance that the liabilities of the company are too great for a company voluntary arrangement or a time to pay arrangement to be effective, then a creditors voluntary liquidation may be the best way forward. A creditors voluntary liquidation would still involve the sale of company assets to make payments to creditors, but has several advantages over compulsory liquidation. It also provides the opportunity in some cases to allow directors to purchase back company assets at market value and resume trading as a different corporate entity.
If a director has received a winding up petition it is vitally important that they seek advice as soon as possible, in order to review their options before the situation deteriorates beyond salvage. If a winding up petition has already been issued, then the options for company rescue are drastically reduced as it signifies that creditors have grown impatient of attempting to retrieve their due monies. Although a rescue solution is still possible it often involves much more negotiation with creditors in order to get a rescue proposal approved.
How we can help
If you are worried that your business is close to being put into compulsory liquidation, or you have received a winding up petition, it’s vitally important to get in touch as soon as possible. If tackled quickly we can help you find the best outcome for your business. We offer a fast and efficient