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A guide to the process of Compulsory Liquidation

Written by Keith Steven Managing Director 4 June 2020

Compulsory Liquidation - A Worried Directors Guide

How does a company go into Compulsory Liquidation? 

A company ends up in compulsory liquidation, when a creditor forces the process of liquidation on them.  The creditor has given up trying to recover money from the company and so issues a winding up petition to the Court for the Official Receiver to liquidate the assets of the company. Alternatively, a company can be wound up by the Crown or Government agency if in the public interest.  i.e due to criminal behaviour.

Compulsory Liquidation is a very serious action for creditors to take, not least because of the cost, but if a company is subject to this process it can severely curtail the ability to conduct business.

But be reassured... 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.

Who can start the process?

As briefly touched on above, this process can start either by creditors or by the Government.

Creditor's petitions:

This is when a creditor has pursued the debts due to it for a significant period and has exhausted all other avenues to recover their money. Deals to repay have often 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, but all avenues fail. The agent then discusses the cost of proceeding with an action to wind the company up; issuing what is known as a winding up petition. 

For creditors to take such action they must be owed at least £750, which has gone unpaid for at least a period of 21 days.

Be aware that winding up petitions cannot be granted if the debt is due to the trading conditions brought on by the Coronavirus pandemic.

Government petitions:

If the Crown (either tax agencies or the DBEIS) 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 often. In such cases criminal and/or disqualification proceedings are common.

Company Directors Disqualification:

In some cases, the DBEIS/liquidator can press for action. Read this guide to see what the risks are.

What are the costs of Compulsory Liquidation?

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 £5000 (from 1st October 2015) must be undisputed and the creditor must have notified the debtor of its intent to collect the debt. This often involves 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.

The costs vary between solicitors 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 larger debts when the creditor believes that there is sufficient enough resource to pay it. Many larger companies use established debt collection law firms to collect their debts this way.

And when is an application granted for a petition?

The application for a petition will be granted in cases 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 (this being far in advance due to court pressures). Once the petition is correctly served upon the company it has a period to either pay the debt or to defend the action. This is expensive, as the action is always in a High Court and requires a barrister to attend. If the case is found in favour of the petitioner then the Court will issue a winding up order.                                                                                                       
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 "substitutes" their debt for the paid debt. Thus "piggy-backing" the action in order to get ahead of other creditors and get paid.

How are petitions advertised?

A minimum of 15 days before the hearing, the petition can be "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 (usually) MUST freeze the bank account immediately - thus stopping any trading. The purpose of this is to stop assets being sold, or other transactions, that may worsen the creditors position being carried out. This is to stop disposition of assets under s127 Insolvency Act 1986.

How long does the process take?

This process has a varying time limit. The first process of the issuing of the petition and the official receiver being appointed can happen quickly. But the actual compulsory liquidation process can take time. The sale of assets is not so straightforward and this is needed for the company to be dissolved and the process to be complete. Whilst this is going on, the employees will be awaiting any payment, as will creditors. Take this in mind when choosing to use this process. Some would say a Voluntary liquidation process would be better recommended to save up some costs and time.

This mechanism is used mostly by HM Revenue & Customs. Over 60% of all petitions are issued by the Crown agencies. Why?

Well, the reason for this is that HMRC 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 your company up. The company will then either pay, enter a CVA or administration or simply cease trading.

If the Crown winds your company up remember this, the Official Reciever is appointed by the court and will investigate the actions of the officers of the company very carefully. If it can be proven that you traded wrongfully, took credit without reasonable prospect of repaying the debts, and failed to submit accounts or a number of other offences, then it is possible you will face action.

Also note that it is possible to prevent the advertisement of the petition in the London Gazette. Contact us for options. 

What is the impact of Compulsory Liquidation on Directors?

There are a few impacts on directors from this process:

  • Under the Company Directors Disqualification Act 1986, you could be banned as a director for up to 15 years
  • You could 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 can be pursued from the personal estate of the director concerned)
  • Under the Income Tax (Employment) Regulations Act 1993, HMRC are 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 director's remuneration) correctly

And can the process be stopped?

We are pleased to tell you that can stop 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 being served you can choose from the following options:

  • Pay the debt which will dismiss the peitition
  • 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 which can be done to stop your company from being involuntarily wound up. 

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

Categories: Liquidation, Complete Guide to Creditors Voluntary Liquidation CVL

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Please note that the guide was written pre Covid-19 and there are some likely changes to insolvency rules regarding wrongful trading.  Please see this page here.​​​​​​​

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