Compulsory Liquidation
Author
Shaun Barton | Company Closure Expert
Compulsory Liquidation
As the name suggests, compulsory liquidation is something which is forced upon a company, sometimes against its will. Unlike a Creditors’ Voluntary Liquidation – where a director makes the decision to liquidate their company – a compulsory liquidation is ordered by the courts, often at the request of one of the company’s creditors.
Understanding the winding up petition
The compulsory liquidation process begins with a Winding Up Petition, served against the company by one or more of its creditors. A winding up petition typically follows a lengthy yet unsuccessful attempt by creditors to collect they are owed by the company.
In many instances, a Statutory Demand will have been served against the company prior to the winding up petition, although this is not always the case. Regardless of whether a statutory demand was served or not, it is unlikely that notice of a winding up petition came out of the blue; asking the court to wind up a company is an extremely serious – and expensive – step for a creditor to take so this is usually only done once all other avenues of debt collection have been exhausted.
What happens once a winding up petition has been served?
When a winding up petition is served on a company, this will be advertised in the London Gazette after seven working days. This advertisement will be picked up by the banks who will move to freeze the company’s accounts, rendering continuing to trade almost impossible. You should be aware that any transferring of cash or assets out of the company following the winding up petition will be classed as a post-petition disposition, and any transactions of this nature will be overturned if the company subsequently enters liquidation.
Defending or settling the winding up petition
Once a company has been presented with a Winding Up Petition, there is a short window for companies to either defend or settle the petition against it; failure to do this will see the courts issue a Winding Up Order which will begin the process of the company being forcibly closed and placed into compulsory liquidation.
A company can defend the petition if they dispute either the amount owed or the existence of the debt altogether. If the company accepts they owe the money being claimed, they can have the petition set aside by either paying the debt in full, or else entering into a payment plan with the creditor in exchange for them withdrawing the petition.
If the winding up petition is ignored, the courts will view this as proof that the company is unable to pay its debts and is consequently insolvent; the court will then grant the winding up order in order to allow for the company’s assets to be realized and creditors repaid as far as possible.
The role of the Official Receiver
Unlike with a Creditors’ Voluntary Liquidation, the directors of the insolvent company have no say as to who is appointed to act as liquidator of the company once the compulsory liquidation process commences. Instead, the court will appoint an Official Receiver to take control of the company and begin the process of liquidating any available assets.
The Official Receiver also has an obligation to investigate the conduct of the directors in the time leading up to the company becoming insolvent. Directors can face disqualification and even be made personally liable for company debts if misconduct or wrongful trading can be shown.
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