What does Compulsory Liquidation mean?
Compulsory liquidation is a legal insolvency process granted by a court order. When a creditor has exhausted all efforts to recover the money owed to them, they can file a Winding Up Petition (WUP) with the courts to wind up and liquidate an insolvent company, initiating the company liquidation process.
Immediately after the issuance of the winding-up order by the courts, the appointment of the Official Receiver or, in Scotland, a Liquidator will take place, and the company will then start the process of compulsory liquidation.
What are the steps involved in the Compulsory Liquidation Process in the UK?
Winding Up Petition (WUP)
The compulsory liquidation process starts when a creditor (such as HMRC) issues a WUP (Winding-Up Petition) against the company. It is important to note that compulsory liquidation is also known as a WUC (Winding-Up Court / Winding-Up Order). The petitioner must have a minimum of £750 debt. Notice of the petition is advertised in the London or Edinburgh Gazette, and after advertising, a company’s bank accounts are often frozen, preventing it from continuing to trade.
Winding Up Order / Winding-Up Court (WUC)
A hearing date will be arranged, and once the court is satisfied that the company is insolvent and unable to pay its debts, it will issue a Winding Up Order and appoint an Official Receiver or Liquidator.
Official Receiver Appointed
When appointed, the Official Receiver will take control of the company and directors will no longer have any control over its day-to-day operations. During this stage of the liquidation, directors may be asked to assist the Official Receiver by providing information about customers, stock, or other company assets.
The Assets of the Company Are Sold
During the process of liquidation, the company’s assets, which may include stock, vehicles, property, or machinery, are sold. Both the profits from the sale of assets and any cash that is held in the bank account of the company will be ring-fenced by the liquidator.
Company Insolvency and Dissolution
The company will be dissolved from the register at Companies House after the Liquidation has been concluded. If the director has not issued a personal guarantee to secure any of the company’s financing, then any debts that are still outstanding at this stage will be written off. If the director has a personal guarantee for any debt, the Winding Up Order will crystallise on appointment, and the holder of the guarantee will seek repayment proposals or commence repayment action.
Difference between Compulsory Liquidation and Voluntary Liquidation
During the process of voluntary liquidation, which is carried out using a formal insolvency procedure known as a Creditors’ Voluntary Liquidation (CVL), the directors of the insolvent company are allowed to maintain a certain level of control over the procedure. They have the power to choose the insolvency practitioner that they want to handle the closure of the company, and they have a greater degree of control over the timelines that are associated with the closure. In the case of compulsory liquidation, on the other hand, the entire process is controlled by the court and is completely removed from the director’s control.
A review of the directors’ conduct will be carried out once the company has been liquidated, regardless of whether the liquidation was voluntary or appointed by the court. If there is evidence that the insolvency of the company was ignored, which resulted in the creditors’ positions becoming worse, action may be taken against the directors personally to make them accountable for some or all of the damages that were suffered.
Who has the authority to start the compulsory liquidation process?
In contrast to voluntary liquidation, which is often initiated by the company’s directors or other shareholders, compulsory liquidation is a process initiated by a creditor and ordered by the court.
Any creditor who is owed at least £750 and has proven the debt may petition for the winding up of the company.
Instead, it is usually a very lengthy process to arrive at the point of compulsory liquidation, and it is quite probable that the creditor will use a range of different collection tactics that are less serious before resorting to a WUP. A County Court Judgement (CCJ) or the issuance of a statutory demand are two examples of the several collection options that are available. Informal negotiations are another option.
Why would a creditor want a limited company to be liquidated?
When a company has failed to pay the money that it owes, the final and most severe action that a creditor can take against the company is to force the company to go through the process of compulsory liquidation. In most cases, closing down a company is not done out of spite; rather, it is done as a last-ditch effort to get the debt paid off.
It is possible that a creditor who has been collecting a debt for a long period of time may believe that the compulsory liquidation of the company provides them with the best opportunity to get a portion of the money that they are eligible to receive. The only way that this will be possible is, of course, if the company possesses a significant amount of assets or funds to enable a distribution to be made to creditors.
Who is responsible for paying the costs associated with compulsory liquidation?
The cost of issuing a WUP to force a company to go through involuntary liquidation is expensive. These fees will be covered initially by the petitioning creditor; however, the petitioner hopes to recover these costs if the company’s assets are sufficient to enable a distribution.
This is why a third party will only attempt to force the company into compulsory liquidation if they believe the company has enough assets to cover the costs of the winding up as well as the debt they are collecting. If the company does not have enough assets to cover the WUP charges, the petitioner will have to pay a proportion of the cost for the company’s liquidation.
All realisations are distributed in accordance with legislation, and ordinary creditors are, at times, one of the last to receive a distribution after the costs of the liquidation have been met and higher-ranking creditors have been paid.
Can a limited company’s compulsory liquidation be stopped?
After a WUP has been filed against a company, there is a very short window of time during which the WUP can be defended and alternative arrangements can be put into place. An alternative insolvency procedure, such as a company Voluntary Arrangement (CVA), unless the company is in a position to be able to pay the debt and have the petition dismissed.
Pros and Cons of Compulsory Liquidation
Pros
Eliminating Financial Obligations and Simplifying the Path to a Fresh Start: If you execute your fiduciary duties as a director after you become aware that the company is insolvent, then it is unlikely that you would be held personally accountable for the debts of the company (unless you personally guarantee the debts), this would allow you to pursue new opportunities.
Putting an End to the Pressures Coming from the Creditors: Once the process of compulsory liquidation has begun, you will no longer be required to deal with phone calls from creditors and debt collectors. The letters and emails that demand payments or threaten to put you out of business will no longer be sent to you
Cons
Possibility of being held personally accountable for company debts: The Official Receiver or a Liquidator is required to investigate to determine whether or not the directors of the insolvent company engaged in fraudulent or unlawful trading, specifically during the period while the company was known to be insolvent. If you are found guilty of this, you may be personally accountable for the company’s debts.
As a director of a limited company, you are legally required to protect the interests of your creditors if you become aware that the company is insolvent. By taking the initiative to start the liquidation process by instructing a CVL, you reduce the risk of future criticism.
Directors should make it a priority to seek the advice of an expert as soon as possible, certainly before a petition to wind up the company is issued, if the company is faced with being unable to pay its debts. Because McLaren Insolvency Practitioners has offices located all over the country, you are never too far away from getting professional assistance and guidance. Please contact us as soon as possible to schedule a free initial consultation with an insolvency specialist.
