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A Guide To The Process Of Compulsory Liquidation

Written by Keith Steven Managing Director 1 April 2022

Compulsory Liquidation - A Worried Directors Guide

What is Compulsory Liquidation? 

Compulsory liquidation is when a creditor forces the process of liquidation on a company. It tends to happen once creditors have given up trying to recover money from the company, so they issue a winding up petition to the court for the official receiver to liquidate the company assets and for them to then recover their debt. 

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 occurs 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?

Be aware that HMRC is the 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 and how long does it take?

  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.

Compulsory liquidation has a varying time limit, but often takes upto a year. 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. The sale of assets can take time before the process is completed. While this is going on, the employees will be awaiting any outstanding payments, as will creditors. Take this in mind when choosing to use this process. Generally, a Voluntary liquidation process is a much faster process so you can get one with your life.

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

To force a company into liquidation the costs are quite high, so a creditor must decide on the benefit - is it likely the debtor will pay up?

The costs vary, but a 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 is sufficient resource 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?

We are pleased to tell you that yes you can stop, reverse and avoid this process! However, to do so, 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
  • Use an alternative insolvency mechanism; CVL or 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?

Simply as mentioned above a liquidation that is compulsory is started by a creditor that goes to the court and asks that the company be wound up as it is insolvent.  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 Liquidaton

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.

Category: Winding up petition

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Keith Steven

The Author

Author of this page is Keith Steven who is the Managing Director of KSA Group Insolvency Practitioners

"KSA Group which owns this site, will help you fix problems in your business. We won't charge for any initial advice or face to face meetings. We speak in English. We will save you money and your precious time.  You can come to any of our offices

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