What is compulsory liquidation?
There are many reasons why a business may start to struggle financially. Unfortunately, if you don’t do anything about it, you may end up entering a compulsory liquidation. In this article, we’re answering the question, what is compulsory liquidation?
Compulsory liquidation occurs when a winding-up petition is issued against the company by one of its creditors. This type of liquidation is the least beneficial formal insolvency procedure and should be avoided at all costs if possible.
Once the winding-up petition has been issued and the debt remains unpaid, the court will issue a winding-up order and appoint a liquidator to begin the compulsory liquidation of the limited company.
What is a compulsory liquidation?
A compulsory liquidation will see the business cease to trade. The company assets will be sold off, with any proceeds (after costs) being distributed to the company’s creditors on a pro-rata basis. Employees will be made redundant, and once the formal insolvency process is complete, the company will be struck off the register and, therefore, cease to exist.
The company directors’ conduct will be carefully investigated to determine whether they acted in the company’s best interests and fulfilled their duties as directors, i.e., could they have done anything to prevent the company from becoming insolvent? Could they have taken steps to reduce the losses to the creditors?
If it is determined that the directors did not act in the best interests of the creditors or are guilty of ‘wrongful trading’, then they may face disqualification, personal liability or even prosecution.
In what circumstances would a compulsory liquidation be initiated?
A compulsory liquidation would be initiated by creditors of the company who are looking to recoup their debts. It is the most extreme action that a creditor can take to recover any monies that they are owed, and it usually only takes place once they have pursued all other available remedies.
Who can apply for a compulsory liquidation?
Any creditor of a company owed over £750 can apply to the courts for a winding-up petition. Another scenario is if it is deemed to be in the public interest for the company to cease trading.
What is the compulsory liquidation process?
The winding-up petition is issued
The first step of compulsory liquidation involves a creditor of the company applying to the court for a winding-up petition. The creditor must be owed a minimum of £750 and prove that they have already tried to recoup their debt through alternative measures, such as a statutory demand.
If the courts decide to approve the creditor’s application, then a winding-up petition is issued to the company, and a court hearing date will be scheduled.
The winding-up petition is advertised
Provided that the debt is not disputed and the situation is not resolved. The creditor who issued the petition must advertise it in the London Gazette. This must be done no less than seven business days after the petition is served and at least seven business days before the date of the hearing.
The rationale behind this step is to inform the banks and lenders of the company’s situation. This allows them to freeze any company bank accounts to prevent any further transactions and alert any other creditors who may wish to ‘tag onto’ the petition.
The winding-up order is issued
If there is still no resolution of the matter, and the company neither contest the filing of the petition or the amount owed to the creditor, then the courts will issue the winding-up order. This indicates the beginning of the compulsory liquidation procedure.
The Official Receiver is appointed
This is when the company’s directors will be relieved of all their responsibilities, and a liquidator will be appointed. At this point in the legal proceedings, trading will cease, company assets and premises will be secured, and all employees will be made redundant.
The liquidation process starts
The liquidator will begin to value, market and sell the company’s assets and handle all the creditors’ claims. Investigations will also be carried out concerning the company directors’ conduct in the time before the liquidation. Should the licensed insolvency practitioner find any evidence of wrongdoing, then these must be submitted to the insolvency service.
Dividend payments will be made
The licensed insolvency practitioner will then begin to make dividend payments to the company’s creditors, using the money that has been realised through the liquidation process, less any costs.
The company will be officially struck off the register
Once the company’s asset has been sold and the dividends distributed, the liquidation process will be completed, and the company will be struck off the Companies House register and cease to exist
What are the consequences of compulsory liquidation?
For a company that’s laden with debt and no realistic prospect of recovery or the means to pay for a Creditors’ Voluntary Liquidation, there may well be no other viable option than to allow the company to be wound up by the official receiver.
In most cases, compulsory liquidation has the following serious consequences, which should be carefully considered:
The winding up petition must be advertised in the London Gazette, so the company’s financial predicament will be public and available for all to see. If, as a director, you are considering applying for another directorship in the future, then this may well affect your reputation.
A compulsory liquidation is an expensive process, meaning that there is often very little or even no return at all available for the company’s creditors.
In the absence of the agreement of the petitioning creditor or the court’s leave, the compulsory liquidation process leaves the directors with very little control over their company. You might wonder, how long does liquidation take? It completely depends on your personal circumstances.
The directors’ conduct before the liquidation will be intensely examined. If there is any evidence of wrongful trading, it will be reported to the insolvency service.
If found guilty, a director can be disqualified from holding a directorship for up to 15 years. Furthermore, if any criminal wrongdoing is exposed, then this will also be reported and may even lead to the director being prosecuted.
Can a director be held personally liable for the company’s debts?
By way of the limited liability structure, a limited company is classed as a separate legal entity, so a director will not be held personally liable for any company debts.
However, there are a number of situations where a director could be personally responsible for the company’s debts. Firstly, if the liquidator uncovers any indications of wrongful or fraudulent trading, and secondly if a director has signed any personal guarantees against a company debt or if there are overdrawn director’s loan accounts.
My company is facing compulsory liquidation. What are my options?
If a creditor has warned that they intend to issue a winding-up petition against your company, or if one has already been issued, then this mustn’t be ignored.
If the compulsory liquidation process has not yet begun, then there are several rescue options that we can explore, but the avenues available depend on how early you seek advice and whether the winding-up petition has already been issued. Find out more about liquidation vs administration.
The winding-up petition has already been issued
If the winding-up petition has landed on your desk, it’s critical you take advice today, do not delay.
The winding-up petition has not yet been issued
If the winding-up petition has not yet been issued and the company has numerous creditors, then a Company Voluntary Arrangement (CVA) may well be an option to rescue your insolvent company. A CVA allows a company to repay its creditors over a period of time at an affordable amount. The company can also continue to trade.
If it is purely tax arrears with HMRC that a company is struggling with, then a more appropriate and effective course of action could well be a time-to-pay arrangement. Again, the company can continue trading.
If the company’s liabilities are too significant for a CVA or a Time to Pay (TTP) arrangement, then a Creditors’ Voluntary Liquidation (CVL) may well be an option. This could still involve the sale of the company’s assets to pay the creditors, but there are several advantages compared to compulsory liquidation.
In some cases, a creditor’s voluntary liquidation also allows a company director to buy back some of the company’s assets at market value and even resume trading as a different corporate entity. Find out more about liquidation and company closure.
Another method, which is usually not available for most directors, is to use any leftover funds to repay creditors. If at all possible, it is best to avoid compulsory liquidation.
Compulsory liquidation cost
A typical compulsory liquidation for a small company with minimal creditors costs £4,000 plus VAT. Entering a compulsory liquidation means that you will have less control over the timeframe of your liquidation proceedings.
It’s always a good idea to chat with your insolvency practitioner and ensure that they have covered all costs before you sign up with them. You should have everything your company owes in writing before appointing them to deal with your compulsory liquidation.
What next for compulsory liquidation?
If your business is facing compulsory liquidation or you have received a winding-up order, it’s vitally important to seek advice as soon as possible. If confronted quickly, the experts at 1st Business Rescue can help you to review all the options and find the best outcome for your business.
Compulsory Liquidation FAQs
How does compulsory liquidation differ from voluntary liquidation?
Unlike voluntary liquidation, compulsory liquidation is forced upon businesses by creditors. Creditors will try for a while to get the money they are owed from you. If they continue to be unsuccessful, they will order a winding-up petition. This means you’ll be given a court date by which you should pay back the money owed.
Failing to repay the money by this date will result in compulsory liquidation.
Who can initiate compulsory liquidation?
Any creditor that is owed money from your company can initiate a compulsory liquidation using a winding-up order.
Can a company continue to trade during compulsory liquidation?
No, as soon as you enter any form of liquidation, your business activities must end. Trading while insolvent is referred to as wrongful trading and can have serious consequences for you as the director.
Is there a possibility of rescuing a company from compulsory liquidation?
By the time you reach compulsory liquidation, it’s usually too late to rescue the company. If you want to avoid compulsory liquidation, you need to be seeking advice much earlier. The earlier you seek advice on insolvency, the more favourable the outcome will be for you.
How long does the compulsory liquidation process usually take?
A compulsory liquidation process can take anywhere from a few months to a year. In some cases, the process can take over a year. Directors often have less control over the timeframe when entering a compulsory liquidation. If you make the decision to enter a creditor’s voluntary liquidation instead of waiting, you will have more control over the situation.
I'm Chris Worden, Managing Director at 1st Business Rescue. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle.
I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.
I am proud to say that we are one of the only 5-star corporate insolvency companies on Trustpilot with hundreds of 5-star reviews, and we publish videos weekly on our YouTube channel. Our channel is designed to educate UK directors about insolvency and debt advice. Check it out here:
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