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What Is A Compulsory Liquidation?

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Written by:

John A Waller

Director

Reviewed: June 8th 2021

What Is A Compulsory Liquidation?

What Is A Compulsory Liquidation and how will it impact on the directors?

When a creditor applies to the court to liquidate the company, the company’s assets are realised and distributed to creditors.

When your limited company has excessive debt and therefore can’t pay creditors, an aggrieved creditor may issue a statutory demand (Stat demand). Statutory demands are serious and signify insolvency issues.

Not replying or defending the claim then allows the creditor to file a winding-up petition, therefore, against your company. Failing to defend will, however, then lead to your company being compulsory liquidated. For help on what to do when you receive a winding-up petition? Please read ‘Dealing with a winding-up petition’

However, to issue a winding-up petition on your company requires a creditor having a debt of £750 or more owed.

Compulsory liquidation & a Winding Up petition is then not a preferred option for directors. Directors opt for the appointment of either an Administrator or a Company Voluntary Arrangement.

Compulsory Liquidation involves a limited company, then wound up through the courts. The courts then appoint the Official Receivers acting as preliminary liquidator.

However, unlike a Creditors Voluntary Liquidation. A compulsory liquidation then commences once a creditor initiates the process, usually by issuing a Winding-up Petition.

The Official Receiver (OR)

The Official Receiver are civil servants and officers of the High Court. The Official Receiver closes down companies wound-up. They investigate how the then directors previously operated the company.

The Insolvency Disqualification Unit then receives the report for review.

For a comparison on how your company’s position may therefore be dealt with, please read: Liquidator vs Official Receiver, the differences.

Why commence then, a Compulsory Liquidation?

Defaulting on payment may then cause a winding-up petition followed by a Statutory Demand or Judgement by a court. The petition by this point has then been presented to the court, and subject to the evidence presented proves the company is unable to settle its debts. Then a Winding-up Order issued.

If your company is being liquidated due to COVID19? Please then read: ‘Covid19 has caused my company to be insolvent‘.

Effects of Coronavirus Covid-19 then on Winding-Up Orders:

Constraints then presenting a Winding-Up order during the Covid-19

On 25th June 2020, the Corporate Insolvency and Governance Bill received royal assent. Designed then ease statutory responsibilities for certain companies, where the COVID-19 pandemic has caused their responsibilities challenging or unmanageable. The bill offers contingency measures that apply during the COVID-19 pandemic, to stop winding-up petitions. The Bill has retrospective powers. For further reading, please view ‘winding up petitions and coronavirus’.

Compulsory liquidation and the impact on a company director?

Once a limited company enters liquidation, the directors lose office along with any power. (Measures Brothers, Ltd v Measures [1910] 2 Ch 248).

However, the former director may be required to assist the liquidator in the compulsory liquidation and provide a statement of affairs for the company (section 131 of the insolvency act 1986).

Liquidators report on the conduct of the former directors

The liquidator is required, as per section 7A, Company Directors Disqualification Act 1986, to submit a confidential report to the UK Secretary of State on the conduct of the company’s former directors. The report must include however any relevant conduct to the Secretary of State’s decision to apply for a disqualification order or accept a disqualification undertaking from each director.

When will a Compulsory Liquidation cease?

The period a compulsory liquidation then will therefore take depends on each individual case (e.g. the asset type involved and the complexity of the liquidation). However, once the process completes, the company dissolves and is then removed from the company’s house, register.

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