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Compulsory Liquidation
a Guide
Compulsory Liquidation is a sign that a creditor has given up trying to
recover money from the company or it indicates that a Crown or Government
agency winding up petition under the public interest has been served.
Clearly this is a very serious action for creditors to take (not least
because of the cost) and if the company is subject to this it can severely
curtail the ability to conduct business.
Read the guide and questions here but if you have a
very irrate creditor talking about winding up your company TAKE PROFESSIONAL
ADVICE NOW or email us.
In a compulsory liquidation what happens?
Creditors Petitions:
A creditor has pursued the debts due to it for a significant period and has
exhausted all other avenues to recover. Often deals to repay will have been
agreed but the debtor company has not stuck to the deals, has demonstrated
intractability or simply does not communicate with the creditor. They
instruct a solicitor or debt collector to collect the debt and all avenues
fail. The agent then discusses the cost of proceeding with an action to wind
the company up.
The costs of this action are not insubstantial and a creditor has to decide
whether the debtor is likely to pay up. A debt of over £750 must be
undisputed and the creditor must have notified the debtor of its intent to
collect the debt. Often this involved issuing a statutory demand first. If
the debtor fails to pay the statutory demand in 21 days and does not dispute
the debt, then the creditor may issue a winding up petition.
From solicitor to solicitor the costs vary but a typical cost of the action
will be £250-500 for a stat demand, £1,000-2,000 for a winding up petition
(includes court costs). Despite this for larger debts it is a very effective
way of collecting money when the creditor believes that there is sufficient
resource to pay it. Many larger companies use established debt collection
law firms to collect their debts this way.
The application for a petition will be granted where it can be proven to the
court’s satisfaction that the debt is undisputed, attempts to recover have
been undertaken and the debtor is not compliant. A petition will be issued
and court hearing date granted, usually the date is well in the future
because of court pressures. Once the petition is correctly served upon the
company it has a period to pay the debt or to defend the action. This is
costly as the action is always in a High Court. This requires a barrister to
attend and the costs of such defence are high. If the case is found the
company is wound up by the court.
WARNING! even if the debt is paid (always with full costs) the fact that a
petition is issued means that a winding up hearing (in the High Court) MUST
be held. Between the date of the payment and hearing it is possible (and
often happens) that another creditor learns of the petition and
"subsititutes" their debt for the paid debt. Thus they piggy back the action
in order to get ahead of other creditors and get paid.
15 days (or sometimes more) before the hearing the petition is "advertised"
in the London Gazette. Of course all high street banks and lenders monitor
this very carefully because if a customer is involved in such an action they
MUST freeze the bank account immediately - thus stopping any trading. The
purpose of this is stop assets being sold or other transactions that may
worsen the creditor’s position.
This mechanism is used most by the Inland Revenue and HM Customs & Excise.
Over 50% of all petitions are issued by the crown agencies. Why? Well the
Revenue and the VAT are "involuntary" creditors. Because you are trading
and employing people the debt to the crown ticks up. If you have tried to do
deals to repay outstanding PAYE and or VAT and still fail to make payments
the crown debt will be rising. So they decide to wind you up.
This way, either you will pay, enter a CVA or Administration or simply cease
trading.
If the Crown winds you up remember this, the liquidator is court appointed
and will investigate very carefully the actions of the officers of the
company. If it can be proven that you traded wrongfully, took credit without
reasonable prospect of repaying the debts, failed to submit accounts or a
number of other offences then it is possible you will face action.
Now the technical warning:
Under the Company Directors Disqualification Act 1986 you could be banned as
a director for up to 15 years. You could also face criminal proceedings
under the Social Security and Administration Act 1992 and the Criminal
Justice Act 1988. In English, this means if PAYE has been abused to the
betterment of the company and or its directors any such gains as were made
can be pursued from the personal estate of the director concerned.
Under the Income Tax (Employment) Regulations 1993 the revenue is entitled
to recover unpaid PAYE from directors where it can be proven that the
directors were aware of the wilful failure to operate the PAYE scheme (on
the directors remuneration) correctly.
Government Petitions:
If the crown (either tax agencies or the DTI) believes that a company is
contravening legislation such as the Trading Standards legislation or is
acting against the public or government interest, it is possible for the
company to be liquidated compulsorily. This is very serious action to take
and is not used very regularly. In such cases criminal and or
disqualification proceedings are quite common.
Company Directors Disqualification: remember the DTI/liquidator can press
for action, read this guide to see what the risks are.
Summary:
In either scenario it is vital that you take all reasonable steps to protect
the assets of the business, to conform with the liquidator’s wishes and to
act responsibly.
Remember the last option available is to allow the company to be
compulsorily liquidated, essentially this is to be avoided at all costs.
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