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).
Be aware that winding up petitions cannot be granted if the debt is due to the trading conditions brought on by the Coronavirus pandemic. This temporary measure to delay compulsory liquidations was to last until 31st December 2020 but it has now been extended to 31st March 2021 - It is unlikely to be extended again.
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?
- A Statutory demand letter is sent to the debtor to give 21 days for the company to pay the debt.
- 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.)
- Winding up order served by Court if the debt is not paid in the extra seven days.
- 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.
- 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
- Company is dissolved and struck off the register: it ceases to exist.
How long does the process take?
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 hight, 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.
Contact our team of expert advisors today to discuss your options: 0800 970 0539.
Worried about poor cashflow? Covid-19?, How to pay wages on pay day? For expert advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide includes updates due to Covid-19 For instance there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.
Author of this page is Keith Steven who is the Managing Director of KSA Group Insolvency Practitioners