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Compulsory Liquidation Process: The Essential Guide

compulsory liquidation

by NickWood
Compulsory Liquidation

A compulsory liquidation petition is filed with the court by the petitioning creditor to begin the process. The creditor will frequently only file a winding-up petition and pay the court fee when they believe all possibilities have been exhausted and that the limited company cannot meet the financial obligations that the company owes. Therefore an insolvent company.

A company forced into compulsory liquidation by way of a winding-up order is referred to as compulsory liquidation. Any unsecured creditor can file a petition with the court about their debtor company if they believe the firm is unable to pay its obligations as they come due, even if their debt is more than £750.

Compulsory liquidation differs from voluntary liquidation – another insolvency procedure in that it is usually compelled rather than the directors adhering to their statutory duty to wind up a failing firm in an orderly fashion.

The liquidator is obligated under both procedures to sell company assets in order to repay as much money as possible to the company’s creditors. Voluntary liquidation, on the other hand, is typically far more flexible and may be utilized as a rescue technique with the assistance of licensed insolvency practitioners. But will look to repay creditors some percentage of company debts.

The following is a guide to the compulsory liquidation process, including advice for a company director who believes their firm is facing a winding-up order.


How is a company placed into compulsory liquidation?

A creditor must file a winding-up petition with the court to begin the required process. After exhausting all avenues and determining that the firm is unable to pay its obligations, they will generally simply submit the petition once they have concluded that all possibilities have been exhausted. They will ask the company to enter into compulsory liquidation while demonstrating that it has been unable to repay on multiple occasions.

The process of compulsory liquidation of a company is costly for creditors, making it a last resort. The court hearing will seal the winding-up petition and set a date for the commencement of the formal liquidation procedure, formally beginning the compulsory liquidation procedure. The petition will be delivered to your company, and shortly after published in The London Gazette, which is likely to result in your company’s bank account or bank accounts being frozen. If the debt on the petition is paid off, the winding-up petition may be abandoned; however, you will almost certainly have to pay fees as well.

A statutory demand letter will have been served on a firm before the winding-up petition is filed. If that’s the case, you’ll have 21 days to pay the company’s debts or 18 days to contest the legal action. As a director, you must act promptly in response to a  petition to preserve your company after a statutory demand has been issued

It’s seldom an option to get help from the administration since a court appointment would be expensive, but a company voluntary arrangement (CVA) may be accessible in the case of business rescue. A CVA is a formal insolvency process between the company and its creditors. It is imperative to seek expert advice.

Alternatively, if you prefer to take matters into your own hands, place the firm into liquidation before the petition is filed. As a result, the creditor will probably withdraw the case if there is an HMRC petition.

The most essential thing to remember about forced liquidation is that employment contracts are immediately and automatically terminated once a winding-up notice is issued. In addition, any sales of property, which might include money at the bank, between the issuance of the winding up petition and the appointed date are void unless validated by a validation order. As a result, any cash payments must either be reimbursed by the recipient or paid back by company directors. If you get a petition, you must act fast to avoid personal responsibility.


Appointment of the Official Receiver and their role

The winding-up order is then served on the company, followed by the appointment of an Official Receiver as liquidator. The directors’ powers are taken away at this stage, and the liquidator is put in charge of the company. They’ll start assessing, marketing, and selling the company’s assets right away. The aim of an Official Receiver, a civil servant who works for the court, is to return as much money to unsecured creditors as possible. Their primary responsibilities include looking into executive actions and taking disciplinary measures against them if appropriate.


Because the official receiver is not a qualified insolvency professional, they are generally unable to handle significant assets. As a result, they will often choose another insolvency practitioner from the rota or a special manager as occurred in the case of Carillion to assist with the process.


While the official receiver is in charge of all aspects of a business’s administration, an administrator takes on many of his responsibilities. This creates a pseudo-administrative approach that allows firms to trade while insolvent to locate a buyer. This is rarely done, and it is only done when there is a public interest factor involved. If creditors feel that particular investigations are necessary, they can nominate someone to act as a licensed insolvency practitioner. They will take over as liquidators if they are chosen. 



What does the term Compulsory Liquidation imply for a director?

In general, the directors’ powers end when a company is forced to liquidate. They are relieved of their responsibilities, and the Official Receiver takes over as corporate overseer, attempting to recoup funds for creditors. However, you will be obliged to assist the liquidator in producing a statement of the company’s assets as company directors.

All of your director’s responsibilities will come to an end when the company is forced into liquidation. You will be unable to handle the normal operations of the firm, and you must comply with the liquidator’s demands as soon as possible. Your employment contract with the business will be immediately ended if you are a director, and like the rest of your staff, you would be entitled to redundancy payments from the Redundancy Payments Service.


Compulsory Liquidation: The Outcome

The major consequence of forced liquidation is the company’s total dissolution. Unless they have been shown to act illegally or have given a personal guarantee, directors are typically not held personally responsible for any unpaid debts. The director may be required to make a repayment to the firm if the court finds that he or she was guilty of wrongful or fraudulent trading.


Options for Creditors Voluntary Liquidation

CVL is the term used to describe a company’s directors putting it into liquidation on their own accord. It is a legal procedure, carried out by a licensed insolvency practitioner, that may be extremely costly if you do not seek advice before your firm receives a petition.

The CVL is useful because it allows you to speak with your insolvency practice about any concerns that have arisen. Rather than being subject to the Official Receiver’s instructions, you may make arrangements for what a liquidation will entail for your company.

If you believe your firm is heading into compulsory liquidation, you should contact a business rescue expert to seek professional advice.

To go through alternatives for your company, get in touch with us at Company Doctor on Freephone 0800 169 1536




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