What is compulsory liquidation?

what is meant by compulsory liquidationA compulsory liquidation as the name suggests involves a company or limited liability partnership (LLP) that is unable to pay its debts and is in the process of being forced into liquidation (wound up) by the court.

Compulsory liquidation (Wound Up Compulsory) is a formal insolvency procedure which results in a company being forcibly shutdown. The compulsory liquidation process is typically initiated by disgruntled or otherwise outstanding creditors of a limited company through a court order known as a Winding Up Petition (WUP).

A WUP notifies a company that a petition has been lodged to bring about the closure of the business and the liquidation of its assets.

This is usually initiated by creditors. Commonly called ‘winding up’, it is usually the last resort of a frustrated creditor to get paid, either by forcing the directors to act or gaining access to the company’s assets

Why Would a Company be Forcibly Liquidated?

Winding up petitions can be lodged by any creditor, director, a non-administrative receiver, or an assignee of a debt.

Grounds for winding up a limited company include:

  • When a company cannot pay a debt of £750 or more
  • If the court concludes that it is just and equitable that it be wound up

These final demand letters mean the case will be heard in the High Court, at what is known as a ‘winding up hearing in the high court.’

At these, a judge will decide whether the debt is credible.

HMRC are the Biggest Presenter of Winding up Petitions to Limited Companies in the UK

Their system of escalation is extremely effective, beginning with threatening letters and ending with a petition to wind up your company, effectively forcing your into liquidation if you can’t pay your debt.

HMRC are not merely interesting in recouping their money, they have shown that the use of a WUP against companies is to show the public that their laws are enforceable and hold directors to account. This means they sometimes make examples of people via winding up companies for reasons beyond economic sense.

What is the process of compulsory liquidation?

  • Winding Up Petition – The first step of compulsory liquidation, which is sometimes referred to as a WUC, 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 – After a further seven days the WUP will be heard by a Judge who will then decide the next step. Once the court is satisfied that the company should be liquidated, they will issue a Winding Up Order and an Official Receiver will then be appointed. Trade must stop at this point, although it is likely this will have already happened upon the WUP being 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 – Following the sale of assets, the company will be officially shutdown and its name removed from the register at Companies House. The company will no longer exist. Any debts which remain outstanding at this point will be essentially written off unless the director has provided a personal guarantee. In this instance the personal guarantee will crystallise and the director will become personally responsible for any debt secured in this way.

How does a company go into compulsory liquidation?

In order to commence the process to put a company into compulsory liquidation, a creditor must issue a winding up petition. This is verified by a statement of truth and is then served on the company and advertised in The Gazette. Once advertised any of the companies lenders or banks will freeze the businesses facilities, advertisement also allows any other creditors to support the winding up petition. If the company does not oppose the winding up petition, the compulsory liquidation occurs when the court makes an order at the hearing and is shown on the petition.

It’s important to note that as a result of COVID-19 additional processes are required so that even if the petition meets the COVID criteria set under the Corporate Insolvency and Governance Act 2020 a pre-advertisement hearing will be scheduled to ensure advertisement should be permitted.

A creditor may already have issued proceedings and obtained a judgment which remains unpaid. They may also have served a statutory demand upon the company, giving the company 21 days in which to pay the debt. If that demand is ignored winding up proceedings can begin, which can result in compulsory liquidation.

Some creditors may feel that they have enough grounds to present a winding up petition if their debt has been acknowledged as due but simply remains unpaid. However, it is extremely risky to issue where a debt is disputed. If there is a dispute “on substantial grounds” the petition will be dismissed, and the petitioner may have to pay substantial costs.

Many creditors may not actually want to put the company into liquidation but will simply use the process as a way of forcing a company to pay its debts. However, this is a gamble. Winding up is a collective procedure and without knowing the company’s other creditors a liquidation may produce no dividend to unsecured creditors, especially post-1 December 2020 when the Crown’s preferential creditor status returns.

Compulsory vs Voluntary Liquidation

There are distinct benefits to choosing creditors voluntary liquidation before being forced into a compulsory procedure by angry creditors. Voluntary liquidation gives directors more control over the choice of insolvency practitioner and the timings.

Creditors Voluntary Liquidation, as the process is correctly known, puts an immediate stop to creditor demands, while demonstrating that directors are acting responsibly and taking action. HMRC are by far the largest issuer of winding up petitions in the UK, and hence the primary reason many companies end up in liquidation. Many of these could have been avoided has directors taken earlier action.

What is a Compulsory Winding up Order?

After seven days, the winding up petition is heard by the court. During the court hearing the judge will weigh up whether the creditor has valid grounds and, if he concludes in their favour, will rule that the petition become a Winding up Order.

A winding up order is a legal mandate forcing a limited company into liquidation. Once a Winding up Order has come into effect, the directors powers cease, the business assets will be liquidated and the company will cease to exist as a legal entity, after being struck off the register at Companies House.

A winding up order is essentially the catalyst for the liquidation process to begin.

What should a company do if it receives a winding up petition?

A winding up petition should be taken very seriously by a company. One of the main reasons for this is that the petition will be advertised in The Gazette where it will be seen by banks, financial institutions and other lenders, all of whom are likely to close down the company’s bank account as soon as they become aware of a pending petition.

This is disastrous for a struggling company as it may find itself unable to access funds which it was relying on to pay staff and priority creditors. In such cases the company may have no option other than to accept the winding up order and accept that it will go into compulsory liquidation.

The alternative is for the company to try to pay off the creditor who has presented the winding up petition using third party funds in the hope that the petition can be withdrawn at the court hearing. However, this is not guaranteed as the company may have other creditors who become aware of the petition and may support the existing petition and be substituted in taking carriage of the petition. The original petitioner can only withdraw the original petition pre-advertisement and if it can verify there are no supporting creditors.

So far as the creditors are concerned, it is essential that any payment comes to them from third party funds, as if the company subsequently goes into liquidation any payments made to them by the company may be clawed back by the liquidator. This is because they may be seen as a void payment (if the petition is taken over by another creditor) or possibly as amounting to a preference, which is when the company chooses to pay one creditor rather than others – creditors are generally considered equal and the order of who gets paid first when a company goes into liquidation is something which is legally set out in the Insolvency Act 1986.

Appointing the Official Receiver and their role

After the court issues the winding-up order, an Official Receiver is appointed as liquidator. At this point, the directors powers cease to allow the liquidator control of the company. They will immediately begin the process of valuing, marketing and selling the company assets. The primary objective of the Official Receiver, a civil servant and officer of the court, is to repay as much as possible to the creditors. Their main function is to investigate the directors’ conduct and take disqualification action against them where appropriate.

As the official receiver is not a licensed insolvency practitioner, they are generally unable to deal with complex asset realisations. They will generally therefore appoint another insolvency practitioner from the rota, or special manager as they have done in the cases of Carillion and British Steel, to assist with the process. This can create a pseudo administration process, allowing companies to trade whilst in liquidation to find a buyer. This is rarely done and only when it is in the public interest to do so. Creditors can also nominate an insolvency practitioner if they feel particular investigations need to be carried out. If appointed, they will replace the official receiver as liquidator.

Cooperating with the official receiver

During this time there are strict rules which govern what directors can and can’t do. For example, as well as cooperating with the official receiver, they are also forbidden from using company assets for their benefit or to pay creditors. Do so and they risk being accused of wrongful trading.

To gather the necessary information, the official receiver will send the directors a questionnaire to complete and ask them to attend an interview. Failure to cooperate and they could be prosecuted, be disqualified as a director and may have to answer questions in court. At the interview the directors must:

  • Give the official receiver the completed questionnaire
  • Hand over all the company accounts, records and paperwork in their possession
  • Give full details of the company’s assets and liabilities
  • Tell the official receiver if somebody else is holding assets or trading records

What does the Compulsory Liquidation process mean for a director?

In general, with the compulsory liquidation of a company, the directors powers cease. They are dismissed, and the Official Receiver takes over the overseeing of the company, recouping money for the creditors. However, as a director, you will be required to assist the liquidator in providing a statement of the company’s assets.

Once the liquidation begins any legal action against the company is stayed and no new legal proceedings may be brought against the company without leave of the court. At this point an official receiver will be appointed to settle the company’s debts and investigate why the company became insolvent.  The liquidator takes complete control of the company and its assets and the directors are legally obliged to cooperate with the official receiver.

All of your powers as a director will cease upon compulsory liquidation. You will not be able to manage the day-to-day responsibilities of the business and you must attend on the liquidator as and when reasonably required to do so. If as a director you have a contract of employment with the company, this is automatically terminated and like the rest of your employees, you would claim any employment entitlements from the Redundancy Payments Service.

The liquidator will look at the conduct of the directors over the years leading up to the presentation of the winding up petition and if the liquidator believes that the directors have acted in a way which benefits them but which disadvantaged creditors, or the company generally, then they may find that their conduct is reviewed and that claims may be made against them for breach of their duties and claims, such as:

  • the reimbursement of directors’ loans
  • the repayment of monies taken out of the company as dividends
  • payments which appear to be irregular and have benefited either the directors or their families
  • preferential payments
  • transactions at undervalue

This may include the directors having to return to the company cars which have been paid for by the company and other assets of value which can be sold for the benefit of the creditors generally.

How much does compulsory liquidation cost?

Compulsory liquidation is an expensive process:

  • The court fee for presenting a winding up petition is currently £280.
  • A creditor needs to pay a deposit to the Official Receiver of £1,600, which is intended to cover the costs and expenses of the Official Receiver immediately following a winding up of the company.
  • A winding up petition should be personally served on the company at its registered office as should a statutory demand which is often the first step in the winding up process, which will incur process server’s fees and a fee for advertising the winding up petition in The Gazette.
  • If a creditor instructs a solicitor to issue the petition and deal with the court process then this is likely to add a few thousand pounds to the costs, especially if the company seeks to defend the process or wants to engage in negotiation about time to pay.

The expense of a winding up petition means that most creditors will not consider it unless the debt owed is for a significant sum on money. However, that is a decision which needs to be made by creditors and their advisers on a case by case basis.

Can the process be stopped?

 Yes a compulsory liquidation can be stopped, reverse and avoid this process! However, to do so, you must ensure you act fast once a winding up petition has been served. 

Following the winding up petition you can choose from the following options:

  • Pay the debt which will dismiss the petition
  • Use an alternative insolvency mechanism; CVL or CVA

If you act too late and the winding up petition is heard by the Court and issued, then there is no more that can be done. Give us a call today so we can talk about your options.

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