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What Is Compulsory Liquidation?

Written by John A Waller, Director. Reviewed November 25th,2022.

Compulsory liquidation: an involuntary insolvency process of a limited company or partnerships,. It begins with a winding up order by a creditor presented at a high court detailing sums of money the creditor claims the debtor owes. Once approved, the court then appoints the official receiver as liquidator of the company.

Impact ON The Directors?

Importantly, the issuing of a winding up order when publicised means the company’s bank account risks being frozen and closed, causing major issues for ongoing trade.

Once creditors issue a winding up petition to a debtor company. The recipient receives 21 days to either dispute or pay. If the debtor does nothing, the petitioner may apply to the high court to liquidate the company. The Judge directs the appointment of the official receiver. Once appointed, the official ensures the selling of company assets and distributes them to creditors.

A compulsory liquidation: an involuntary insolvency procedure differs from a creditors voluntary liquidation, which remains voluntary.

So remember, if your limited company possesses excessive debt and cannot pay creditors, an aggrieved creditor may issue a legal demand (Stat Demand). Statutory needs exist and severe and signify insolvency issues.

Failure to respond to or defend the claim allows the creditor to file a liquidation petition against your company. Any inability to defend, however, leads to your company being liquidated. involuntarily For help on what to do when you receive a winding-up petition? Please read ‘Dealing with a winding-up petition.’

However, issuing a winding-up petition on your company requires a creditor with a debt of £750 or more.

Compulsory liquidation & a Winding Up petition remains not a preferred option for directors. Directors opt for either an Administration or a Company Voluntary Arrangement.

This process of liquidation involves a limited company, then wound up through the courts. The courts then appoint the Official Receivers as preliminary liquidators.

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

When Will It Cease?

How long does this process take?

The period in which the process takes place depends on each case (e.g. the asset type and complexity of liquidation). However, once the process completes, the company dissolves and is removed from the register at companies house and ceases to exist.

When Can A Company Compulsory Wound Up?

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

The Official Receiver (OR)

The Official Receiver remains a civil servant and official of the High Court to close companies. They investigate how the then-directors previously operated the company. They look for signs of wrongful or fraudulent trading.

The insolvency disqualification unit then receives the report for review. If the director’s conduct report shows that individuals have acted incorrectly. Then they may face fines and director disqualification.

The directors may be required to assist the official receiver in his duties to wind up the company. However, the existing directors lose control of the company and the company’s bank account immediately.

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

Why consider a Compulsory Liquidation?

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

Is your company being liquidated due to COVID-19? Please then read: ‘Covid-19 made my company insolvent.

Distinction Between Voluntary And Compulsory Liquiation?

Creditors’ voluntary liquidation – your company cannot pay its debts, and you involve your creditors when liquidating it.

Compulsory liquidation – applies to a limited company that cannot pay its debts, and you apply to the courts to liquidate it.

What Does The Liquidator Do?

The liquidator ensures company assets are sold. Once concluded, they then distribute the proceeds to their creditors and any retained surplus to persons entitled. (section 143(1), Insolvency Act 1986).
The liquidator remains authorised to initiate legal action on behalf of the company and to pay 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 June 25th 2020, the Corporate Insolvency and Governance Bill received royal assent. Designed to ease statutory responsibilities for certain companies where the COVID-19 pandemic engulfed them, causing their duties to be challenging or unmanageable. The Bill offers contingency measures that apply during the COVID-19 pandemic to stop winding up petitions. The Bill contains retrospective powers. For further reading, please view ‘winding up petitions and coronavirus’.

The existing restrictions remain partially lifted for petitions issued between October 1st 2021, and March 31st 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.

How does it impact a Company Director?

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

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

What does compulsory liquidation mean for employees of the company?

For employees, the compulsory liquidation means the end of the employees, as the company remains closed.

Employees become creditors of the company in insolvency and paid from the sale of company assets for wage arrears, holiday pay or other benefits. Employees may be entitled to redundancy pay. Further explanation of employee rights may be found at our Employee guide to insolvency.

Liquidators report on the conduct of the former directors.

Under Section 7A, Company Directors Disqualification Act 1986, the liquidator must submit a confidential report to the UK Secretary of State on the conduct of the company’s former directors. The information 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.

If the liquidator finds evidence of misfeasance by the directors, they then pinpoint who:

  • remained in control of wrongful or fraudulent trading.
  • did this affect the debts of wrongful fraudulent trading?

Who then pays the liquidator?

Payment of liquidator fees for the liquidation remains a liquidation cost. So they remain 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 in rules 18.16 to 18.20 of the IR 2016

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