What is Compulsory Liquidation?

Shergroup

3 years ago

If your company doesn’t have enough cash and assets to cover its debts, it is considered insolvent. In this situation, you need to act in the interest of your creditors, rather than shareholders. You can voluntarily liquidate your company and stop all operations and sell the assets to overcome the liabilities. But if you don’t do it your creditors might go in for compulsory liquidation to close your company and sell off the assets to recover their debts.

In this article, we are going to study and understand the process of compulsory liquidation of a company, how it is done, the purpose behind it and last but not least is there any outcome of it.

What is Compulsory Liquidation?

Compulsory liquidation is an insolvency process that is initiated by the creditors. This takes place when the creditors have given up trying to recover their money from the company, so they issue a winding-up petition to the court for the official receiver to liquidate the company assets and for them to then recover their debt. If this occurs, the company will stop trading, the directors will lose control, and the company’s assets will be sold.

It is a serious move that can be costly to a firm, but it is possible to avoid compulsory liquidation if you respond quickly once your company is “given a winding-up petition.”

The procedure is started by the filing (or “presenting”) of a petition in court. A judge then decides at a court hearing whether it is appropriate to make a winding-up order. The most common reason for a winding-up order is that the company is insolvent. At the end of the liquidation, the company is dissolved.

When a petition is filed (or “presented”) in court, the process begins. After then, a judge decides whether or not to issue a winding-up order during a court hearing. The most common reason for a winding-up order is that the company is insolvent, a few other reasons could be |

a resolution of the company
the company is unable to pay its debts as they fall due
it is just and equitable that the company should be wound up

Inability to pay debts can be evidenced by failure to respond to a statutory demand or if it’s proved that the value of the company’s assets is less than the number of its liabilities.

How does a company go into compulsory liquidation?

A creditor must file a winding-up petition to start the process of forcing a company into compulsory liquidation. This is then served on the firm and published in The Gazette after being verified by a statement of truth. If the company does not object to the winding-up petition, the court will impose compulsory liquidation, which will be noted on the petition.

It’s worth noting that, as a result of COVID-19, even if the petition fits the COVID criteria outlined in the Corporate Insolvency and Governance Act 2020, a pre-advertisement hearing will be arranged to guarantee that advertisement is approved.

A creditor may have already filed for bankruptcy and obtained a judgment that remains unpaid. They may have also served the company with a statutory demand, giving the company 21 days to pay the amount. If such demand is ignored, insolvency proceedings may be initiated, leading to compulsory liquidation.

If a debt has been recognised as due but not paid, some creditors may believe they have sufficient grounds to file a winding-up petition. However, issuing when a debt is disputed is exceedingly dangerous. The petition will be dismissed if there is a disagreement “on serious grounds,” and the petitioner may be required to pay substantial costs.

Many creditors will use the process to force a firm to pay its debts, even if they do not want the company to go into liquidation. This, however, is a risk. Winding up a company is a collective action, and without knowing the company’s other creditors, a liquidation may result in no dividend to unsecured creditors, particularly after December 1, 2020, when the Crown’s favoured creditor status resumes.

Who usually forces companies into compulsory liquidation?

HMRC is the agency most likely to ask a court to order a company’s compulsory liquidation. Over 60% of petitions are filed by Crown agencies. What is the reason for this?

HMRC is an “involuntary” creditor. The debt to the Crown grows as a result of your trading and employment. If you have tried to work out payment plans to cover overdue PAYE and/or VAT but have not been successful, the Crown debt will continue to grow, and they may decide to close your business down. After that, the company will either pay, enter a CVA or administration, or simply discontinue operations.

What is the process and how long does it take?

Winding Up Petition | A creditor (which might be HMRC) issues a WUP against the company as the first stage towards compulsory liquidation, which is also known as a WUC. The petitioner must owe at least £750 in debt and must have waited at least 21 days for the debt to be settled. As a result of the government’s temporary measures, this figure has been raised to £10,000 for the period 1 October 2021 to 31 March 2022. Seven days must pass after a WUP is given to the debtor corporation before it is published in the Gazette. Following the advertisement, a firm’s bank accounts are usually frozen, making it impossible for the company to continue trading.

Winding Up Order | The WUP will be heard by a Judge after another seven days, after which the next step will be decided. When the court determines that the company should be liquidated, a Winding Up Order is issued, and an Official Receiver is appointed. Trade must halt at this moment, but this will likely have occurred before the WUP’s issuance.

Official Receiver Appointed | The Official Receiver – often known as a liquidator – will take control of the firm once appointed, meaning the present directors will no longer have any influence over the day-to-day operations. In some situations, the directors may be forced to provide information on customers, shares, or other assets to the Official Receiver.

Company Assets Are Sold | The company’s assets, which could include stock, vehicles, property, or machinery, will be liquidated by the Official Receiver. The liquidator will ring-fence all revenues from asset sales, as well as any cash in the company’s bank account, in order to discharge the company’s debts as quickly as feasible.

Dissolution of Company | Following the asset sale, the firm will be officially closed, and its name will be deleted from the Companies House record. The business will cease to exist. Unless the director has provided a personal guarantee, any outstanding obligations will be essentially written off at this stage. The personal guarantee will crystallise in this case, and the director will be personally liable for any debt secured in this way.

What is the role of the liquidator?

The Official Receiver automatically becomes the liquidator once a winding-up order is issued. A private practitioner, who must be a licenced Insolvency Practitioner, can be appointed liquidator if the majority of the creditors agree.

The liquidator’s job is to protect and preserve the company’s assets, collect debts, and gather money (including bringing claims) to pay off the company’s debts in line with a court order.

How much does compulsory liquidation cost?

Compulsory liquidation is an expensive process |

The court fee for presenting a winding-up petition is currently £400-£800
The filing fee is £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 processor 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 of money. However, that is a decision that needs to be made by creditors and their advisers on a case-by-case basis.

What does compulsory liquidation mean for creditors?

The company will not be able to pay any creditors after a winding-up order is issued, and creditors will be requested to give proofs of debt, as well as documentation and specifics of their debts, which will form the foundation of any payment that is eventually paid. In most circumstances, the liquidator will recover as much money as possible, but for most unsecured creditors, any payment will be a small percentage of the total amount.

If creditors have any information that could assist the liquidation in realising assets for the benefit of creditors, they are encouraged to approach the liquidator with it.

What does compulsory liquidation mean for employees?

If the firm has not already been closed by the owners, it will most likely be closed after a winding-up order and the appointment of a liquidator. Employees are typically laid off and are entitled to statutory redundancy payments, which should be paid from the company’s assets if it can do so; if not, employees can file a claim with the Redundancy Payment Service.

In rare situations, the old business’s owners may request that staff transfer to a new company that they have established in preparation for the winding-up order being issued. By law, their employment transfers to the new company if they operate in basically the same industry. Employees who find themselves in this scenario should seek legal guidance.

What does compulsory liquidation mean for company directors?

The directors no longer have control of the firm once a winding-up order has been issued. They have a responsibility to work with the liquidation and supply all books and records that the liquidator may need in order to comprehend the company’s financial situation, assets, and liabilities.

The liquidator will examine the directors’ actions in the years leading up to the filing of the winding-up petition, and if the liquidator believes that the directors acted in a way that benefited them but harmed creditors or the company as a whole, the directors’ actions may be reviewed, and claims for breach of their duties may be filed against them, 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 that can be sold for the benefit of the creditors generally.

Can compulsory liquidation be stopped?

Compulsory liquidation can only be stopped if |

the debt of the petitioning creditor is disputed (by an application for injunctive relief)
the debt of the petitioning creditor is paid in full
the company agrees to terms with the petitioning creditor and no other creditors come forward to take over the conduct of the winding-up petition

A company can petition the court for more time to pay its creditor, and if it can show that it has a fair chance of completing a payment in a short amount of time (typically weeks rather than months), the court may grant an adjournment, especially if the creditor agrees.

Except under the most extreme of circumstances, the court is unlikely to agree to multiple adjournments. If a court does not believe that providing adjournments will assist the creditors or the firm itself, a winding-up order will be issued.

Summing-up

Please contact one of our business solutions consultants for free confidential guidance on liquidating a private company and assistance with your current circumstances. You can schedule a call back through our contact page at a time that is convenient for you, or you can live chat with us through our website. We like taking care of your business and solving a client’s problem with our efficient and expert business solutions at Shergroup.