Guide to Compulsory Liquidation for Creditors, Shareholders & Directors
Are you facing compulsory liquidation?
This article will explain what that means, as well as the process and consequences from three different perspectives.
What is Compulsory Liquidation?
When a creditor tires of trying to recoup their debt, their final option is the issuing of a Winding up Petition. This forces the situation into court where, should the debt not be paid within 7 days, a judge will enforce compulsory liquidation.
Compulsory liquidation means the business stops running, the directors are relieved of their duties and powers, and the business assets will be sold to repay creditors.
At the end of the process the company is struck off the register at Companies House.
What are the Grounds for Compulsory Winding up of a Company?
In order to file a winding up petition, the creditor must have first submitted a statutory demand letter offering 21 days to pay. The Winding up Petition itself gives 7 final days to pay, after which the case will appear before a Judge.
At this court hearing, the Judge will examine the evidence and, if he feels the debtor company cannot pay, rule a ‘Winding up Order’ which means the immediate compulsory liquidation of the company.
In the UK, HMRC is by far the biggest issuer of winding up orders.
From the arrival of the Winding up Petition to the beginning of the liquidation process, you should expect around 3 months.
It usually takes up to a year for the insolvency practitioner to liquidate the company.
Compulsory liquidation occurs when a company is wound up by a court order, usually as a result of a petition being presented to the court on the grounds that the company is unable to pay its debts.
The purpose of the liquidation is for a suitably qualified person (liquidator) to take control of the company and wind up its affairs in an orderly way and for the benefit of the company’s creditors.
Compulsory liquidation follows a winding up petition, usually made by a creditor, however, a company director, shareholder or the Secretary of State (amongst others) can also issue a winding up petition to close the company down.
The process often takes at 2 to 3 months to begin from the moment the Winding up Order is made. Once underway, the liquidation takes, on average, a year to complete though it may be longer for larger companies with complex assets.
Compulsory Liquidation Process from 3 Perspectives
Here is a quick guide to the compulsory liquidation of a company (winding up) process from the perspective of the three major stakeholders involved, the creditors, the shareholders and the company directors.
There are three different creditor types involved in the liquidation process:
- Secured creditors – A lender, usually a bank or an asset-based lender, who has a security, such as a charge or a mortgage, over some or all of the company’s assets to secure a debt.
- Preferential creditors – A special category of unsecured creditor which consists mainly of debts due to employees and the Redundancy Payments Service.
- Unsecured creditors – Creditors with no charge over company assets. This includes suppliers, customers, HMRC and contractors.
Once a winding up petition has been issued, a petitioning creditor may feel the company’s assets are at risk. In this case they can apply to the court to appoint a provisional liquidator to secure the company’s assets between the presentation of the petition and the hearing.
At the petitioning hearing, if the company is unable to settle its debts or oppose the petition then a winding up order will be made. At this point, the official receiver becomes the liquidator. The official receiver (OR) handles the early stages of the liquidation and will inform the company creditors that the company is being wound up. If the company has significant assets then an insolvency practitioner may be appointed instead of the OR to realise the company’s assets.
One of the liquidator’s first jobs is to write to all creditors to ask them to submit their claims. All claims must be submitted within the specified time period along with supporting evidence of the claim, such as invoices, correspondence etc. The liquidator will advise creditors when they have adjudicated their claim. A liquidator may also call a creditors’ meeting to inform creditors of the progress of the liquidation, to find out their wishes on a particular matter or seek approval of the liquidator’s fees.
The creditors’ claims will be paid once the assets of the company have been realised. A strict hierarchy exists for the repayment of creditors, with secured creditors paid first, then preferential creditors, with any remaining money paid to unsecured creditors in the form of a dividend.
The liquidator will call a final meeting of creditors and present his receipts and payments account, together with a report showing how the liquidation has been conducted.
Role of the Shareholders in Liquidating a Company
Although it is unusual, it is possible for a shareholder to liquidate (wind up) a limited company. A shareholder can petition to wind up their company on the grounds that the company is unable to pay its debts, or that it is ‘just and equitable’ that the company is wound up.
75% (by value of shares) of shareholders must agree to the winding-up to pass a ‘special resolution for winding-up’. After they have applied, shareholders must:
- Deliver (‘serve’) a copy of the petition to the company
- Provide a certificate of service to the court confirming that the petition has been served on the company.
The shareholders do not have any duties during the company liquidation unless they are also directors of the company. In terms of their financial liability for the company’s debts, shareholders may be asked to pay the liquidator for any shares that have not paid in full for the benefit of the company’s creditors.
Directors Role in Compulsory Liquidation
Once the liquidation begins any legal action against the company is stayed and no new legal proceedings may be brought against the company without leave of the court. At this point an official receiver will be appointed to settle the company’s debts and investigate why the company became insolvent. The liquidator takes complete control of the company and its assets and the directors are legally obliged to cooperate with the official receiver.
Cooperating with the official receiver
During this time there are strict rules which govern what directors can and can’t do. For example, as well as cooperating with the official receiver, they are also forbidden from using company assets for their benefit or to pay creditors. Do so and they risk being accused of wrongful trading.
To gather the necessary information, the official receiver will send the directors a questionnaire to complete and ask them to attend an interview. Failure to cooperate and they could be prosecuted, be disqualified as a director and may have to answer questions in court. At the interview the directors must:
- Give the official receiver the completed questionnaire
- Hand over all the company accounts, records and paperwork in their possession
- Give full details of the company’s assets and liabilities
- Tell the official receiver if somebody else is holding assets or trading records
Wrongful Trading and Personal Liability
If the official receiver’s investigation finds that the directors are guilty of wrongful or fraudulent trading and mismanagement of the insolvent company they may face further consequences. This includes:
- Being made personally liable for company debts
- Disqualification as a director and of all future appointments as a director
- A fine
The directors may also have to help the official receiver sell the company’s assets during the liquidation. If any personal guarantees are in place then these may have to be paid if the company cannot satisfy the debt. If there are overdrawn directors’ loan accounts they will also have to be repaid. Call Sue Collins now on 0208 444 2000 to discuss your circumstances or email: firstname.lastname@example.org.