What Is Compulsory Liquidation?
Compulsory liquidation is where a court forces a company to close so that its assets can be sold to repay its debts to creditors.
In this guide, we’ll explain how the compulsory liquidation process works, the dangers it presents to directors, and what you can do about it.
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What Is the Compulsory Liquidation Process?
If a creditor wants to force your company into liquidation, they must apply to the court with what is known as a winding-up petition. Eventually – once enough notice has been given – the court will issue a winding-up order. This results in your company’s immediate closure.
The business’ assets are then sold, and the Official Receiver begins their investigation into the director’s conduct.
You can learn more about the compulsory liquidation process by exploring the tabs below:
1. Statutory Demand Is Issued
Before any proceedings can begin, a statutory demand must be issued by the creditor. This is a formal demand for payment which contains detailed information about the amount owed. The company will have 21 days to respond to this agreement; they can either pay the amount in full or propose a repayment plan.
2. Winding Up Petition Is Issued
If no satisfactory response is received to the statutory demand, the creditor can then petition the court to wind up the company. This petition will be publicly advertised in The Gazette, alerting any other creditors.
3. Company Bank Accounts Frozen
Once a winding-up petition is advertised in The Gazette, banks will become aware of the situation. They will freeze any company accounts to prevent wrongful insolvent trading. This will have huge operational consequences for a business.
4. Winding Up Order Is Made
Between 6 to 8 weeks after a winding-up petition has been made, the court will make a final verdict. If the court agrees with the petition, a winding-up order will be made, resulting in the company’s immediate closure.
5. Liquidator Takes Control of the Company
Once the winding-up order has been made, the company will be placed into compulsory liquidation. This results in control of the company and its assets being removed from its directors, and handed over to the Official Receiver (or an appointed liquidator.)
6. Statement of Affairs Published
The liquidator will begin proceedings by sending out a Statement of Affairs to all concerned parties. The document will contain a rundown of all the business’s assets and liabilities.
7. Assets Are Realised
The liquidator will sell all company assets, including stock, property, and equipment. They will also retrieve any debts that are owed to the debtor’s company for the benefit of the creditor. The company is then shut down.
What Are the Risks of Compulsory Liquidation?
When a company is forced into liquidation, control of the business is handed over to a government official known as the Official Receiver. They’re responsible for selling its assets and investigating the conduct of directors.
During their investigation, they’ll be looking to see if:
- The company has been trading while insolvent
- Directors have paid themselves an unreasonable salary
- Assets have been sold at an undervalue
- Directors have hidden company assets
- Bounce Back Loan fraud has been committed
If you’re found to be responsible for any of these practices, you can be charged with misfeasance or wrongful trading. These are civil charges which carry a range of penalties:
- You can be made personally liable for company debts
- You can receive large fines
- You can be disqualified from acting as a director for up to 15 years
How Can I Stop a Compulsory Liquidation?
If a creditor has served you with a statutory demand or issued a winding-up petition, it’s natural to be worried. If they’re successful in their efforts, you’ll lose your business, and you may find yourself facing tricky legal issues.
Thankfully, there are a few ways to put a stop to the compulsory liquidation process. Which option is appropriate for you depends on your business and its situation.
Although it might seem obvious, paying off the debt is still worth a mention.
Creditors can issue a winding-up petition against your business when they’re owed just £750. If your company has assets to sell and you can afford to pay off the debt, it will save you a lot of unnecessary risk and hassle.
Remember, you don’t actually have to pay off the full amount. You simply need to pay off enough to get the debt below the £750 minimum threshold. For example, if you owed £1500, you could pay £760 so that the remaining debt is left at £740. This would prevent a winding-up order from going ahead.
If you cannot afford to repay the debt but you believe that the creditor’s claim is genuinely illegitimate, you can dispute the amount in question.
You may challenge a winding-up petition because:
- The amount of debt is incorrect
- There is genuine doubt over whether the debt is legitimate
You’ll need to dispute the claim at least 5 days before the petition’s court hearing. Ideally, you’ll dispute the debt within 7 days of the petition being made – after this point, it will be publicly advertised in The Gazette, and your company bank accounts will be frozen.
You must have a genuine reason for disputing the debt. You can’t just dispute the debt because you don’t want to pay it.
This may be tricky, but trying to agree on terms with your creditor is definitely worth a shot.
When you receive a statutory demand or a winding-up petition, you should contact your creditor to explain your situation so that you can agree on a repayment plan. Ideally, they’ll agree to your offer and stop court proceedings.
The earlier you attempt to do this, the better. Most creditors only pursue liquidation as a last resort when they’re unable to get what they’re owed, and they’re not receiving any updates on the situation. If they’ve had to issue a petition – and spend money filing it – they might not be very sympathetic to your situation.
If you’re unable to pay the debt or come to terms with your creditor, it’s time to start thinking about a formal insolvency solution.
Insolvency procedures are designed to help businesses in a variety of scenarios. They can help a business achieve a successful turnaround or assist a director in upholding their legal duties to creditors.
Compulsory liquidation is a forced insolvency procedure initiated by the court. You can maintain better control of your situation by entering into an alternative insolvency solution of your own choosing.
What Are the Alternatives to Compulsory Liquidation?
If your company is insolvent, you need to consider pursuing a formal insolvency solution.
Allowing your company to be forced into compulsory liquidation invites scrutiny into directorial conduct, often resulting in civil charges which can leave you personally responsible for company debts.
You can explore the tabs below to find out more about the procedures available to you.
A Company Voluntary Arrangement is an insolvency solution which allows you to deal with your company’s debts while avoiding liquidation.
It functions as a repayment plan, carrying a range of benefits:
- Stretches out repayments over 3-5 years
- Significantly reduces monthly overheads
- Freezes interest on debt
- Protects company from compulsory liquidation
A CVA protects your business from closure so long as you keep up with your agreed-upon monthly repayments. You make one payment a month, which your insolvency practitioner divides up between your creditors.
You’ll need the backing of 75% of your creditors – by value – in order to enter into a CVA. Our experienced team will help you create a proposal that is affordable for you and attractive to your creditors.
Although it might not appear to be much of an alternative, placing your company into a Creditors’ Voluntary Liquidation – rather than allowing it to be forced into compulsory liquidation – is a much better option.
As the most common form of company closure in the UK, a CVL offers many advantages:
Control of the company is voluntarily handed over to a liquidator who sells its assets to repay creditors. The remaining debts are then written off.
The primary advantage of a CVL is that it allows you to uphold your legal duties to creditors, safeguarding you from misfeasance charges. This significantly reduces your chances of being made personally liable for company debts or getting disqualified from acting as a director.
Administration places control of your company into the hands of an administrator, who restructures the business in order to improve its cash flow and return it to profitability.
The process offers a range of benefits:
- Grants the business much-needed breathing room
- Fresh pair of eyes can identify and eliminate problems
- Can reverse insolvency
Your appointed administrator will always seek to save the business before resorting to either selling or liquidating the company.
While it doesn’t offer the same guarantees as other insolvency procedures, administration does not require the support of your creditors. Many businesses use administration to achieve the stability needed to enter into a CVA.
Speak to an Expert
If your company is facing the threat of compulsory liquidation, it’s vital you act quickly.
Ignoring the problem can result in you personally facing significant legal and financial problems down the line.
Our expert insolvency practitioners can assess your situation and advise you on how to move forward, whether that be an informal agreement with your creditors or a formal solution like a Company Voluntary Arrangement or Creditors’ Voluntary Liquidation.
Get in touch to book a free, no-obligation consultation today.
FAQs
How Long Can a Director Be Disqualified?
If found responsible for misconduct, a director may be disqualified from anywhere between 2 and 15 years.
How Long Does the Compulsory Liquidation Process Take?
How long a compulsory liquidation takes depends on the scale of the business and the complexity of its affairs.
From the issuing of the winding-up petition and the beginning of the liquidation, it is usually around 3 months. For the complete liquidation of the company, however, it can take several years.
How Much Does Compulsory Liquidation Cost?
Forcing a company into liquidation costs creditors a lot of money. Issuing a winding-up petition costs £400-£800. They’ll also have to pay a £1600 court deposit and a filing fee of £280.
This is why creditors will typically only force a company into liquidation when they know a company has some value. Otherwise, they’ll be left with an unresolved debt and expensive court liquidation fees.
However, this doesn’t mean that directors with little to no assets have nothing to worry about. HMRC is well known for forcing companies into liquidation – even when they have no assets – to set an example for others.
