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A Compulsory Liquidation is a process whereby a company is wound up through the courts and the Official Receiver is subsequently appointed Liquidator.
Unlike in a Creditors’ Voluntary Liquidation when directors’ resolve to convene meetings of shareholders and creditors to wind the company up, a Compulsory Liquidation is usually initiated when a creditor commences the winding up process by issuing a Winding up Petition.
What is a winding up petition?
The winding up petition may have arisen as a result of the non-payment of either goods or services and perhaps promises from the company that payment will be made. Cheques might have bounced or alternatively a winding up petition has been used as a mechanism to settle a dispute.
A winding up petition has in most circumstances been preceded by a Statutory Demand or court judgement. Both are prescribed forms served on the insolvent company and set out the grounds on which a winding-up-order is being sought. The petition will have been presented in court and if sufficient evidence is provided to demonstrate that a company cannot pay its debts, a Winding up Order will be made.
Why might a Company be served a Winding up Petition?
A company may be served a winding up petition for the following reasons:
HM Revenue and Customs may have issued a winding up petition as either Corporation tax, VAT, CIS or PAYE is still outstanding.
A Time to Pay Agreement might have been breached with HM Revenue and Customs. Internally, HMRC will have referred the case to the Debt Management Team who in turn will have issued a winding up petition following non-compliance.
A trade creditor might be owed money from the company. Cheques might have bounced; directors’ may have made promises regarding outstanding payments; or there is a legal dispute. As a consequence, the creditor may have had no choice but to issue a winding up petition.
Shareholders might have a disagreement and in order to resolve issues in a fair and equitable way, one of the shareholders might have issued a winding up petition against the company in order for a Liquidator to be appointed.
A former employee may have won a tribunal award claim against the company for unfair dismissal. However, the company is unable to settle the award and in order to enforce payment; the former employee might issue a winding up petition against the company.
A company may be wound up by the Secretary of State on the grounds that the winding up is in the interest of the public. For example, carousel fraud or non-compliance issues with the Financial Conduct Authority may result in the company automatically being wound up by the court.
What is the process for compulsory liquidation?
The various stages of the process are highlighted below:
Stage 1- Statutory Demand
The requisite for a creditor to issue a statutory demand against a company is that the creditor will be owed more than £750.
Stage 2 – Winding up Petition
If neither an agreement has been reached to settle the debt nor the demand is set aside, a winding up petition will then be served on the company.
Stage 3 – Court Hearing
The Judge will consider the evidence brought before the court to assess whether a winding up order shall be made. The court will either:-
Stage 4 – Official Receiver
Once the Company is in Compulsory Liquidation the Official Receiver is appointed initially as the liquidator to the company. The Official Receiver has a period of 12 weeks in which to make a decision in convening a meeting of the company’s creditors.
Stage 4 – Appointment of Liquidator
The Liquidator on appointment will initially deal with the formalities of appointment e.g. notifying Companies House; advertising in the London Gazette; and sending notices to creditors’.
Stage 5- Finalisation
Once all assets have been realised and funds distributed to creditors, the Liquidator will obtain release from office by convening a final meeting of the creditors and sending a Final Progress Report to Creditors.