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A Guide To The Process Of Compulsory Liquidation

2nd November, 2022
Keith Steven

Written ByKeith Steven

Managing Director


07879 555349

Keith is the author of the content on this comprehensive rescue, turnaround and insolvency website. He has expert knowledge on the company voluntary arrangement (CVA) mechanism

Keith Steven
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  • What is Compulsory Liquidation?
  • How does a company go into compulsory liquidation?
  • Who usually forces companies into compulsory liquidation?
  • What is the process?
  • How long does the process take?
  • As a creditor, how much does it cost to put a company into Compulsory Liquidation?
  • What are the consequences of Compulsory Liquidation on Directors?
  • Can the process be stopped?
  • What is the difference between Compulsory Liquidation and Voluntary Liquidation?

What is Compulsory Liquidation?

Compulsory liquidation is when a creditor forces the process of liquidation on a company. When a company ends up in compulsory liquidation it is usually a sign that a creditor has given up trying to recover money from the company, or it indicates that a Crown or Government agency has wound up the company, using a winding up petition under the public interest.

If this happens, the company stops trading, directors lose control and the company assets are sold.

It is a serious action and can be detrimental to a business, however, it IS possible to stop compulsory liquidation, so long that you act fast in response to your company being “served a winding-up petition”.

Call us on 0800 970 0539. We can give you the professional advice needed.

 

How does a company go into compulsory liquidation?

  • A creditor issuing a winding-up petition
  • Being wound up by the Crown or Government agency if doing so is in the public interest. i.e. due to criminal behaviour.

A creditor issuing a petition

Compulsory liquidation happens when creditors have exhausted all other avenues to recover their money. Deals to repay may have been agreed between both parties, but the debtor company has failed to follow the agreement, demonstrated intractability or lacks clear communication. So a Winding up petition (WUP) is served to compulsory liquidate the company.

For WUP to be served, creditors must be owed at least £750. The sum must have been unpaid for at least 21 days (this stated and submitted by a statutory demand letter).

Being wound up in the public interest

This happens when the Crown or other agencies believe a company is contravening legislation or acting against the public interest. This action is rare, but when it occurs, criminal and/or disqualification proceedings are common. In some cases, the DBEIS/liquidator can press for action.

Who usually forces companies into compulsory liquidation?

HMRC is most likely to ask a court to put a company into compulsory liquidation. Crown agencies issue over 60% of petitions. Why is that?

HMRC is an “involuntary” creditor. Because you are trading and employing people, the debt to the Crown increases. 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 your company up. The company will then either pay, enter a CVA or administration or simply cease trading.

What is the process?

  1. A Statutory demand letter is sent to the debtor to give 21 days for the company to pay the debt.
  2. A Winding up petition is issued if the debt is not paid in those 21 days. This period gives the company an extra seven days for the debt to be paid. (Be aware that WUPs are advertised in the London Gazette – though in some cases this can be avoided. Contact us today to stop an advertised petition.)
  3. Winding up order served by Court if the debt is not paid in the extra seven days.
  4. Official Receiver (OR) (Liquidator or Licensed Insolvency Practitioner) appointed to to put the company into compulsory liquidation, the directors’ power and responsibilities cease. The director’s role in this process is to work with the OR, assisting if and when needed.
  5. Remaining company assets are sold and distributed, with the money made from doing so used to repay the debts. It is up to the OR to get the best return for creditors and act in their best interests
  6. Company is dissolved and struck off the register: it ceases to exist.

How long does the process take?

 

Compulsory liquidation often takes up to a year to complete. The process of issuing of the petition and when the Official Receiver is appointed can happen quickly. But the actual compulsory liquidation process itself can take time.

As a creditor, how much does it cost to put a company into Compulsory Liquidation?

To force a company into liquidation the costs are  high, so a creditor must decide whether it is worth it.

The typical cost of the action will be £250-£500 for a statutory demand, and £1,000-£2,000 for a winding-up petition (including Court costs). Despite this, it is a very effective way of collecting more substantial debts when the creditor believes that there are sufficient resources to pay it. Many larger companies use established debt collection firms to collect their debts this way.

 

What are the consequences of Compulsory Liquidation on Directors?

  • The Official Receiver has the role of investigating the actions of the officers and directors of the company thoroughly. If it is proven that you traded wrongfully, took credit without reasonable prospect of repaying the debts, and failed to submit accounts or several other offences, then you may face action
  • Loss of power, duties and control of the company
  • The potential closure of the business if you can’t repay the debts.

Can the process be stopped?

Yes, However, you must ensure you act fast once a winding up petition has been served.

Following the winding up petition you can choose from the following options:

  • Pay the debt which will dismiss the petition
  • Seek an adjournment and explore the possibility of a CVA

If you act too late and the winding up petition is heard by the Court and issued, then there is no more that can be done.

What is the difference between Compulsory Liquidation and Voluntary Liquidation?

As mentioned above a liquidation that is compulsory is started by a creditor that goes to the court.  In the case of a Voluntary Liquidation the directors sensibly realise that the company is insolvent and that they should act to start the process themselves.  The directors seek to appoint a liquidator, who has to be a licensed insolvency practitioner, to prepare a statement of affairs setting out the position and then  he/she will ask the creditors if they approve his/her appointment.  This can be done at a creditors meeting or by what is called deemed consent.  The process’  full name is creditors voluntary liquidation as ultimately it is always the creditors that have to approve and vote.  They can appoint their own liquidators if they want to ( this is rare).

Advantages of Compulsory Liquidation

Not much except that it doesn’t cost you anything.

Disadvantages

  • Can take up to a year to complete instead of a month
  • Employees won’t get compensation until the process is complete
  • The Official Receiver will have the resources to look more closely at your conduct as a director and claim from you if necessary.
  • Generally a bit of an unpleasant experience.
  • It doesn’t look as good as a voluntary liquidation if you decide to start again and want to raise finance.

Contact our team of expert advisors today to discuss your options: 0800 970 0539.

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What Is A Winding Up Petition By HMRC or Other Creditor

A winding up petition is a legal notice put forward to the court by a creditor. The creditor petitions to the court if they are owed more than £750 and it has not been paid for more than 21 days. The application, in effect, asks the court to liquidate the company as they believe the company is insolvent.

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What Is A Winding Up Petition By HMRC or Other Creditor
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Notice of Intention To Appoint Administrators

A notice of intention to appoint administrators is when the company files a document to the court to outline that it intends to go into administration if a solution cannot be found to its immediate financial problems. It can be used as part of the pre-pack administration process as well as used to restructure a failing business to avoid its liquidation.

Read
Notice of Intention To Appoint Administrators
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What Does Going Into Administration Mean?

Going into administration is when a company becomes insolvent and is put under the control of Licensed Insolvency Practitioners.  The directors and the secured lenders can appoint administrators through a court process in order to protect the company and their position as much as possible. Going Into Administration - A Simple Guide Administration is a very powerful process for gaining control when a company has serious cashflow problems, is insolvent and facing serious threats from creditors. The Court may appoint a licensed insolvency practitioner as administrator. This places a moratorium around the company and stops all legal actions.The administration must have a purpose and the Government encourages the use of company rescue mechanisms after administration. The 3 purposes (or objectives) of Administration Rescuing the company as a going concern. (Note: this purpose is to rescue the Company as opposed to rescuing the business undertaken by the Company.)Company rescue as a going concern – this is usually a  company voluntary arrangement. The company enters protective administration and is then restructured before entering into a CVA. The CVA would set out proposals for repayment of debts to secured, preferential and unsecured creditors. When the company has its CVA approved by creditors, then the administration process comes to an end after 28 days. Achieving a better result for the company's creditors This is as a whole than would be likely if the company was to be wound up (liquidation) See the differences between Administration and Liquidation.  This better result is usually obtained by selling the BUSINESS as a going concern to one or more buyers. The company and the debts are “left behind”. The better result may include securing transfer or employees under TUPE, as well as selling goodwill, intellectual property and assets. Controlling and then selling property/debtors. This is called realising assets. Then the administrator makes a distribution to one or more secured or preferential creditors, in order of creditors priority. Usually the business ceases trading and employees are made redundant.Only if the first two options are deemed unattainable, can the administrator use this third option.Under the administration option, it is possible for the company and its directors (or a creditor like the bank) to apply to the court to put the company into administration through a streamlined process.However, the law requires that any finance provider (like a bank or lender), with the appropriate security, is contacted and the aims of the administration be discussed and approved. The finance provider must have a fixed and floating charge (usually under a debenture) and the charge holder will need to give permission for the process to go ahead. Five days clear notice is required.  Be aware, though, that a secured lender can appoint administrators over a company without notice if it thinks its money is at risk.  So communication with the secured lender is essential.  

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What Does Going Into Administration Mean?

What is Receivership?

in What is …? What is receivership?

Understanding Receivership: Receivership, also known as administrative receivership, is a legally sanctioned procedure where an entity, typically a lender like a bank, appoints a receiver. The primary role of this receiver is to "receive" and liquidate the company's assets, if necessary, to repay the lender. This process is particularly beneficial to creditors as it aids in the recovery of defaulted funds, potentially preventing the company from facing liquidation The introduction of a receivership simplifies the lender's task of securing owed funds in cases of borrower default.Receivership should not be confused with administration and a receiver can only be appointed by a holder of a qualifying floating charge created before September 2003. Changes to this procedure were brought in by The Enterprise Act 2002 which promoted company rescue and saving struggling businesses. Why would a company go into receivership?The company requires finance for its activities and borrows from a bank (or other secured lender). In consideration for providing the loan, the bank requires security. Normally the company will sign a debenture with a fixed and floating charge. This offers the bank security over the assets of the company. If the terms of the agreement are breached or the company does not conform to the bank's wishes, the charge holder can:Appoint investigating accountants to ascertain how secure or not the bank's debt is and determine the best route forward (not always receivership). Demand formal repayment of the loans without notice. Appoint a receiver to administer and receive the company's assets.The receiver has a duty to collect the bank's debts only,they are not generally concerned with the other unsecured creditors or shareholders' exposure.Receivership - A typical appointment Having borrowed against a business plan that has not worked, a company finds that it is suffering cashflow problems. In an effort to survive, the company reports its problems to the bank and the bank asks for more information on the problems the company faces. Struggling with the problems of firefighting, the directors find it difficult to produce the information. Often the accountancy and reporting systems are not robust and a lot of time is needed to work out where the company is going, what the depth of the problems is and the necessary reporting to the bank is delayed.As time goes by, the company's overdraft is constantly at its limit, because monies don't come in fast enough from customers. Clearly this should set alarm bells ringing at the company - it most certainly does at the bank. They call this ceiling borrowing, and take it as a sign that the directors are losing control.  When this happens the bank will review the account and will typically take some or all of the following steps: What the Bank will doThe bank will ask for a reduction in its exposure. It will ask for increased security from the directors or shareholders. Usually this takes the form of personal guarantees to support the security that the company has given through the debenture. It may ask for new capital to be introduced by the shareholders. Problem is though, occasionally, this only has the effect of reducing the bank exposure as the bank takes this cash to reduce the borrowing. It can ask for a new business plan from the directors, along with regular reporting. It may ask for the company to consider receivables finance (factoring) to remove its borrowing and move to a factor. Often the bank's own factoring company. If they are still not satisfied that the directors are in control and if the bank is concerned about its exposure it will ask for investigating accountants (or reporting accountants) to look at the business. Normally this is a large firm of accountants who send an insolvency practitioner (IP) into the business to ascertain:Is the business viable? Is the company stable? Does it have a long term future if the present difficulties can be overcome? Is the bank's exposure sufficiently covered in the event of a failure? In this report the IP calculates what the assets of the business are worth on a going-concern basis and in a forced sale scenario (or closure basis). Investigating accountants often recommend that the bank sticks with the business, but that the bank should limit any further borrowing to the fully secured variety - in other words the directors must secure it personally against property for example. If the IP thinks that the company is in serious risk of failure and that the banks may lose money in that event, he/she will usually recommend to the bank that they appoint a receiver or administrator. Usually the bank (bizarrely) requires the directors to "request the bank to appoint a receiver". This is face-saving, and designed to deflect criticism from the bank to the directors.At Company Rescue, we believe that it is wrong that the insolvency practitioner that carries out the investigation could also be the receiver - We think it is essential that his/her role as investigating accountant is limited to just that. However, fortunately most banks now agree that this is not a good approach. Once they are appointed what is the receiver's role and powers?A receiver will quickly ascertain what the prospects for business are and decide whether to sell some or all of the assets, the business as a whole, or to continue to trade whilst a better deal can be achieved. Because of the rules and case law, he may wish to get rid of the assets and staff as soon as possible. (They will have to adopt employment contracts 14 days after the appointment). They may remove directors and employees without impunity. They ultimately decides the way forward and will (often) not take advice from the directors. They must pay the preferential debts (employees claims for arrears of pay and holiday pay) first from any floating charge collections. If a deal is to be done with directors the receiver must first advertise the business and its assets for sale. They must conform to the tight rules and regulations governing receivership and report to the DBEIS. A receiver must investigate the conduct of the directors of the business and file a report with the DBEIS.Disadvantages of Receivership The company is rarely saved in its existing form. Its assets will be subject to "meltdown" ( most people know that in receivership or liquidation assets are sold at a knock down price), often jobs and economic activity are lost.The directors will typically lose their employment and any monies the company is due to them, and the company may cease to trade. In addition the director's conduct is investigated.From the creditors' perspective, it is unlikely that any unsecured creditors will receive any of their money back and often they lose a valuable customer. Clearly the cost of receivership can be very high and the bank has to underwrite the receiver's costs. Advantages of Receivership The bank can take control where directors have maybe lost control. The receiver also has power to act to save the business quickly. The bank can ensure that its exposure is (at least) not increased and hopefully recover all of its money. For directors, the advantages are that it mitigates the risk of wrongful trading and may crystallise a very difficult position allowing them to get on with their lives.Preferential creditors may see their debts repaid by the receiver.Still got questions? Click here for Receivership FAQs. If there are still unanswered questions contact us by email or call 08009700539.If your business is in trouble and the relationship with the bank is breaking down, we suggest that you look carefully at the guides in this site. Receivership may be an option. Work out the viability of the business - can you trim costs? Work out the problems, set out the position and have a meeting of directors. Decide if the business can continue but needs to be restructured or if just not viable then consider administration or if the company's lenders have a debenture pre-dating 2003 then receivership.Please call us on 020 7887 2667 (London) or 08009700539 to talk to an expert turnaround advisor if you would like to talk through your company's options.

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What is Receivership?

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