What is Compulsory Liquidation for a Limited Company

Compulsory liquidation, also known as compulsory winding-up, is a legal process in the United Kingdom that involves the forced closure of a company by a court order due to its inability to pay debts.

It is typically initiated by one or more creditors who file a petition with the court to liquidate the company’s assets and recover their dues.

Once a winding-up order is granted, the company’s affairs are taken over by insolvency practitioners or the official receiver who are appointed to sell off the company’s assets and distribute the proceeds to creditors according to the legal hierarchy of claims.

The seriousness of compulsory liquidation of a business for directors cannot be overstated. Directors may face personal liability for the company’s debts if they are found to have acted wrongfully or negligently, leading to the company’s insolvency.

Additionally, directors may be disqualified from acting as directors of other companies for a specified period of time. The liquidator has broad powers to investigate the company’s affairs, including the conduct of its directors, and may take legal action to recover assets or hold directors accountable for any breaches of their duties.

For the company is a definitive step towards dissolution, resulting in the termination of its operations and the sale of its assets to repay creditors. It can have significant consequences for employees, shareholders, and other stakeholders.

How does a Company go into Compulsory Liquidation?

A company can go into compulsory liquidation if a creditor or group of creditors files a winding-up petition with the court. The court will then examine the evidence and determine whether the company is insolvent and whether it is appropriate to order the company’s liquidation.

After the petitioner files the winding-up petition, they must serve a copy on the company and publish notice of the petition in the London Gazette.

Subsequently, a hearing will take place in court, where the company will have a chance to contest the petition. At the hearing, the judge will assess the evidence and may issue a winding-up order, dismiss the petition, or adjourn the proceedings.

The outcome of the hearing could have significant implications for the company’s future, making it crucial for them to seek legal advice and prepare a robust defence.

What are the Grounds for Compulsory Liquidation

There are several reasons for compulsory liquidation

• When a business cannot pay obligations totaling at least £750
• If the court decides it is just and equitable, it should be dissolved.
• When the limited company suspends operations for a full year or does not start up its business within a year after incorporation
• Consists of no more than two shareholders (unless it is a private business limited by shares or guarantee);

What is the Compulsory Liquidation Process?

The compulsory liquidation process goes through the following steps:

• Winding Up Petition – The first step is for a creditor (which may be HMRC) to issue a WUP against the company. The petitioner must be owed a minimum of £750 and have waited at least 21 days for the debt to have been repaid. Once a WUP has been issued to the debtor company, seven days must pass before this is advertised in the Gazette. Following the advertisement, a company will typically find that their bank accounts will be frozen leaving the company unable to continue to trade.
• Winding Up Order – The WUP will be heard by a judge after an additional seven days, who will then decide the next course of action. The court will issue a Winding Up Order and appoint an Official Receiver after determining that the firm should be liquidated. Trade must halt at this moment, but it’s likely that it did when the WUP was first issued.
• Official Receiver Appointed – Upon being appointed, the Official Receiver – sometimes known as a liquidator – will take over control of the company, meaning the existing directors will cease to have any influence over the day to day running of the business. In certain cases the directors may be required to assist the Official Receiver by providing information on customers, stock, or other assets.
• Company Assets Are Sold – The Official Receiver will begin the process of liquidating the company’s assets which may include stock, vehicles, property, or machinery. All proceeds from the sale of assets, along with any cash held in the company’s bank account, will be ring fenced by the liquidator in order to repay the company’s debts as far as possible.
• Dissolution of Company – The company will be formally shut down and have its name deleted from the Companies House record after the sale of its assets. The business will be dissolved. Unless the director has given a personal guarantee, any obligations that are still owed at this stage are virtually written off. In this case, the personal guarantee will take effect, making the director personally liable for any debts that are secured in this way.
  

Can You Appeal or Stop a Compulsory Liquidation?

The following specific situations can result in Compulsory Liquidation being halted at the winding up petition stage:

• If the debt is fully repaid
• If there is a dispute with the debt
• If the creditor and the debtor company reach an agreement, the petition for winding up the business is withdrawn.

If enough time is given, the debtor corporation may in some circumstances satisfy the court that it will pay, and the court may then grant an adjournment. The court very seldom approves multiple adjournments, and the time periods for extensions are often weeks rather than months.

It is far more difficult to do so if the winding up order has already been issued, but there are two ways to go about it:

• Through a request to’stay’ the liquidation process. Any corporate shareholder, the designated liquidator, the official receiver, or a creditor may submit this.
• Any party has the right to request the revocation of the winding up order within seven days of its issuance. It would need to be proven that the court’s decision was made without all the necessary information.

What does compulsory liquidation mean for a creditor of the company?

Unsecured creditors’ claims are satisfied pari passu. Unsecured creditors will typically receive their dividends pro rata at the conclusion of the liquidation (and may also receive an interim dividend, prior to the conclusion of the liquidation) if there are money available to pay them. The dividend given to unsecured creditors will frequently be as little as a few pennies in the pound or even nothing at all.

With some exceptions, a creditor who receives the benefit of security is entitled to receive payment from the sale proceeds of the secured assets. How are assets distributed to creditors in corporate insolvency procedures? is a practise note with more information.

The liquidator will be invited to get information about each creditor’s claim (its proof of debt). In the liquidation, “proving” a claim is the act of submitting it. After reviewing each proof of debt, the liquidator will decide whether to accept a claim in full or in part.

Legal actions taken against the firm or its assets are automatically stayed (section 130, IA 1986). A creditor must first ask the court for approval before bringing or pursuing legal action against the corporation. Only claims of a proprietary nature are typically permitted to proceed; if all that is sought is monetary relief, it is highly doubtful that the creditor will be given permission. The enforcement of a security interest or the forfeiture of a lease are not covered by the stay (Rules 7.48, 18.3, 18.8, and 18.14, IR 2016) Creditors have a right to obtain information from the liquidator regarding the status of the liquidation.

In order to assist the liquidator in carrying out their duties, they may also organise a liquidation committee with at least two other creditors (section 141, IA 1986; rule 17.3, IR 2016). Liquidation committees in liquidation proceedings are covered in the practise note.

What does compulsory liquidation mean for an employee of the company?

A winding-up order automatically terminates every employee of a corporation. An employee who is automatically terminated may be eligible for a redundancy payout and may also be able to pursue damages for wrongful termination.

Practise notes, Overview of the Employment Aspects of Insolvency, and Claiming Against an Insolvent Employer are all good places to start for more information.

What does the Compulsory Liquidation process mean for a director?

The compulsory liquidation process means that directors will no longer have any powers to act. Their duty then will be to report to the liquidator or the Official Receiver who has been appointed to oversee the closure process of the company.

This marked transition underscores the profound shift in their roles and responsibilities. Directors, who once held the reins of the company, must now navigate a challenging path that focuses on ensuring the orderly wind-down of the business, the equitable distribution of assets to creditors, and compliance with legal requirements.

It is a pivotal moment where their commitment to transparency and cooperation with the appointed professionals becomes paramount, as they work in tandem to bring the company’s affairs to a close while adhering to regulatory frameworks.

What can creditors do if they think the liquidator is doing a bad job?

Anyone who has been wronged by the liquidator’s actions or decisions may petition the court for remedy under section 168(5) of the IA 1986. In Re Edengate Homes (Butley Hall) Ltd (In Liquidation) [2022], the applicant’s interests must be consistent with those of its fellow class of creditors, debtors, or other parties who have been wronged.

The key authorities are succinctly summarised in EWCA Civ 626. (In that instance, a creditor lacked standing to contest the liquidator’s assignment of a claim against it to a litigation funder because the creditor’s interest in filing the application was to reduce its liability for the claim, in contrast to other creditors’ interests in maximising liability.)

Despite the fact that the application’s result was fact-based, for a helpful exposition of section 168(5) see Allen v. Counsel General for Wales & Others [2022] Legal update: Official Receiver’s order to stop operating as an electrical supplier was successfully contested in court (EWHC 647 (Ch) [Re Baglan Operations Ltd]).

Any proof of debt may be subject to the liquidator’s decision, which may be appealed by the contributing or the creditor. Rule 15.35 of the IR 2016 should be used to question the valuation of a proof of debt for voting purposes, and rule 14.9 of the IR 2016 should be used to challenge the valuation of a proof of debt for dividend purposes; the court will apply the relevant time constraints to do so severely.

Appeal against valuation determination on proof of debt in an administration produced under erroneous rule and out of time; extension refused (High Court) has further details regarding the case, which included an administration. Additionally, creditors may be entitled to contest the amount of the liquidator’s compensation in accordance with IR 2016 regulations 18.28 and 18.34.

(Section 172, IA 1986 and Legal update, Replacing a liquidator must be in the best interests of a compulsory liquidation.) In exceptional circumstances and if it is in the interests of the liquidation, a liquidator may be replaced by a court order or a resolution of the company’s creditors.

In accordance with Section 212 of the IA 1986, creditors may also pursue liquidators for misfeasance; however, if the liquidator has secured their release, the court’s approval is necessary. For more information, see Pagden v. Fry (Re Core CVT Plc and Others) [2022] EWHC 632 (Ch) and Legal update, Test to bring misfeasance claims against former liquidators satisfied (High Court). See Practise Note, Misfeasance Claims in Corporate Insolvency: Overview, for more general information.

Compulsory liquidation explained

Frequently asked questions

What is a compulsory liquidation?

A compulsory liquidation is when a creditor has asked a court to order the company to stop trading and be liquidated ('wound up'). This is known as 'compulsory liquidation'.

What happens when a company goes into compulsory liquidation?

When a company goes into compulsory liquidation, you will no longer have control of the company's business, assets and property. Most of your powers as director will cease and, in general, you are no longer entitled to act for or on behalf of the company (directors still keep some very limited powers, for example, appeal of the order).

What are the reasons for compulsory liquidation?

The most common reason for compulsory liquidation is when a company is unable to pay its debts. Other grounds for winding up a company can include a company's members passing a special resolution to wind up the company, the expiry of the company's period of duration, and the company's inability to carry out its stated objectives. Additionally, the court may order compulsory liquidation if it is in the public interest or if there has been misconduct by the company's directors or officers.

Conclusion

To sum up, compulsory liquidation is a legal procedure described in Section 124 of the Insolvency Act used to shut down and liquidate a company when it is unable to pay its debts. A court-appointed liquidator is in charge of the process, which is typically started by the creditors themselves. The assets of the firm must be gathered and sold, and the revenues must be distributed to the creditors in accordance with the legal priority.

This is the responsibility of the liquidator. However, it is vital to ensure that creditors are adequately compensated and that the company’s assets are dispersed in a fair and orderly way in accordance with the Act. Compulsory liquidation can be a difficult and drawn-out procedure.