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What Is A Compulsory Liquidation?

Written by John A Waller,Director. Reviewed December 6th,2021

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

When a creditor applies to the court to liquidate the company, once appointed, the official realises the company’s assets and distributes 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 against your company. Failure to defend will however 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 with a debt of £750 or more owed.

Compulsory liquidation & a Winding Up petition is then not a preferred option for directors. Directors opt for 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 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.

When can a company compulsory wound up?

The Companies Act, 2013 has provisions that deal with a compulsory winding up leading to compulsory liquidation. To do so, a limited company passes special resolution authorising the company to be wound up by the Court or Tribunal. 

The Official Receiver (OR)

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

The Insolvency Disqualification Unit then receives the report for review. If it is found in the directors conduct report that individuals have acted incorrectly. Then they may face fines and director disqualification.

For a comparison of 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 lead to 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 COVID-19? Please then read: ‘Covid19 has caused my company to be insolvent‘.

What does the liquidator do?

The liquidator realises the assets of the company into cash. Once concluded, they then distribute the proceeds to its creditors and any retain surplus to persons entitled. (section 143(1), Insolvency Act 1986).
The  liquidator is empowered to initiate legal action on behalf of the company, along with paying debts. ( Schedule 4 to the Insolvency Act 1986).

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’.

The existing restrictions remain partially lifted for petitions issued between 1 October 2021 and 31 March 2022. Restrictions on winding-up petitions remain for debt under £10,000 and debt in respect of commercial tenancies unpaid due to an economic effect of the Coronavirus. A new threshold of £10,000 for winding-up petitions for other debt takes precedence over the £750 point for statutory demands.

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 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 any relevant conduct to the Secretary of State’s decision to apply for a disqualification order or accept a disqualification undertaking from each director.

Who then pays the liquidator?

Payment of liquidator fees in compulsory liquidation remains paid as a liquidation cost. So they are therefore paid out of the company’s assets once secured creditors holding fixed charge security remain paid, but in priority to preferential creditors and creditors with no security or floating charge security over assets of the company. 

The rules relating to paying liquidators’ fees remain set out in rules 18.16 to 18.20 of the IR 2016

What Is A Compulsory Liquidation: when will it cease?

The period in which compulsory liquidation is carried out depends on each case (e.g. the asset type and complexity of liquidation). However, once the process completes, the company dissolves and is then removed from the company’s house, register.

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