Compulsory Liquidation

As the name suggests, a compulsory liquidation is one where one or more of the company’s (or LLP’s) creditors issue a winding-up petition to effectively force a company (or LLP) into liquidation as part of a court process.

Grounds for the winding up order (as set out in Section 122(1) of the Insolvency Act 1986) include:

  • The company is insolvent in that it is unable to pay its debts as and when they fall due
  • The Court concludes that it is just and equitable that the company be wound up

This process is usually initiated by creditors, often HM Revenue & Customs. The most common reason for the issue of a winding up order is that the company is insolvent.

Has COVID-19 affected this insolvency process?

The Corporate Insolvency and Governance Act 2020 imposed temporary restrictions for the period 01 March to 30 September 2020. As a result, compulsory liquidations have all but disappeared. It is not clear whether these restrictions will be extended beyond 30 September 2020.

How can we help?

As a company director, you may be aware of mounting creditor pressure, perhaps the receipt of a statutory demand or the threat that a creditor might issue a winding up petition. It is vital that action is taken quickly and efficiently. Furthermore, it is imperative that you seek independent and expert guidance as soon as possible. If you are unsure on the best way forward, you can arrange a free consultation with our IP in the strictest confidence. We are happy to help and can meet either at our offices or at a location that is convenient for you.

Regardless of the size of your business, our primary focus is providing directors with full details of the options available to them. These may include various insolvency options or the rescue of the company. Once we fully understand the problem, we will offer practical and constructive advice tailored to your specific circumstances. In most cases, hard and difficult decisions will need to be made. We are committed to providing you with all the information you need and to be always available to answer any questions you may have.

Please see our article regarding the potential benefits of directors taking matters into their own hands by placing the company into creditors’ voluntary liquidation rather than waiting for the Court to issue a winding up order.

As a director of a potentially insolvent company, what should I do?

It is vital that you take advice from a qualified insolvency practitioner as soon as possible who will be able to talk you through the options available to the company. The longer you delay taking such advice, the more likely that the options available to you as a director will reduce or narrow. Once it becomes apparent that a company cannot be rescued and is no longer financially viable, it is often better for all stakeholders that any insolvency process commences as soon as possible.

A licensed IP will advise of possible actions that can be taken to remain compliant in your duties as a director of an insolvent company. Many directors choose to take independent legal advice because failure to act could place them in a situation where an action for wrongful trading or misfeasance may be commenced against them. This could potentially put a director’s personal assets at risk.

When does the liquidation commence?

The commencement of the liquidation process is the date of the signed and sealed winding up order issued by the court.

Who is appointed liquidator?

When a winding up order is made, the Official Receiver (“OR”) is initially appointed Liquidator. However, the company’s creditors (most common) and contributories may appoint a registered IP (or more than one) to be appointed Liquidator(s). In the case of more than one IP so being appointed, the Liquidators will act jointly. In addition, where there are assets to be realised, the OR will often be followed by a licensed IP who will be appointed Liquidator.

How will employees be affected?

All employees of a company will automatically lose their jobs when a winding up order is made. If employees are owed wages, holiday pay accrued but not taken, redundancy pay and pay in lieu of notice, they can make a claim to the Redundancy Payments Office (“RPO”). Subject to fulfilling relevant criteria, the RPO will make payments to employees and will apply relevant statutory limits. No such payments can be made until a winding up order has been made.

How will the compulsory liquidation affect me as a director of the company?

When a company goes into compulsory liquidation, the directors’ powers cease and they are automatically dismissed from office. However, you will still be required to cooperate with the Official Receiver (together with any other liquidator subsequently appointed) as part of the liquidation process.

As a director of the company, you will usually be asked to attend the Official Receiver’s office for an interview. Prior to this interview, you will also be asked to complete a questionnaire. The OR will ask for the following:

  • All company books and records that you have in your possession
  • A statement of the company’s assets and liabilities
  • Details of any other person that holds company records or assets

What if I have provided personal guarantees?

If you have signed a personal guarantee (or “PG”) with a lender, the debt will not be written off as part of the compulsory liquidation process. The responsibility for paying any outstanding amount of this borrowing will remain with you personally. You must be very careful not to treat such a creditor preferentially.

What are some of the key stages in a compulsory liquidation process?

Whilst most often a process utilised by HM Revenue & Customs, this is also available to other creditors. If you are a creditor considering this process, we would recommend that you take legal advice. Some of the key stages may include:

  • Statutory demand (often issued by one of the company’s or LLP’s creditors)
  • Issue of a winding-up petition by a creditor owed more than £750
  • Freezing of company bank accounts without notice which will make it extremely difficult to secure credit from any lender as all have common access to this information
  • Court hearing in which a judge approves a winding-up order
  • Official Receiver is appointed Liquidator
  • Preparation of Statement of Affairs (with cooperation from directors) detailing all the company’s assets and liabilities
  • A licensed IP may subsequently be appointed Liquidator by either creditors or contributories or under the Official Receiver’s “rota system”

Who can issue a winding up petition against a company?

Provided owed more than £750:

  • Any creditor (most commonly HM Revenue & Customs)
  • A director of the company
  • If a debt has been assigned, the assignee
  • A non-administrative receiver

How long is this process likely to take?

If a statutory demand is issued, the company’s directors will be given 21 days to settle the debt in full or to negotiate a settlement if a proportion of the amount owed is disputed.

If a statutory demand has been validly “served”, the creditor will subsequently apply for a winding up petition to be heard in court once the above time has expired. The seriousness of this petition cannot be underestimated by the directors of the company as this will be advertised on public record in The London Gazette as soon as 7 days after issue. Typically, there is several weeks between service of the winding up petition and the hearing in court.

Provided directors provide the required information quickly to their preferred choice of IP, the creditors’ voluntary liquidation process is much quicker than the compulsory liquidation route.

What is the Liquidator’s role?

In a compulsory liquidation, a Liquidator is an officer of the Court but still has wide reaching powers set out in statutory insolvency legislation. Work undertaken includes, but is not limited to the following:

  • Realise all company assets including ascertaining whether there are any claims that may be brought against third parties for the benefit of creditors
  • Liaison with creditors regarding progress of the liquidation and whether there is any prospect of a distribution to any class of creditor
  • Dealing with employee claims (if any)
  • Agreement of creditors’ claims (where sufficient funds for a distribution)

When happens when the compulsory liquidation process is complete?

On completion, the company’s name will be struck off the register at Companies House.

What are the benefits of directors acting voluntarily?

Creditors’ Voluntary Liquidation
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