Is your company facing compulsory liquidation?
This article will explain what that means, as well as the process and consequences.
What is Compulsory Liquidation?
Compulsory liquidation means the court has ordered your company to be wound up. Its business stops, its assets are sold, and the proceeds are shared among its creditors.
When a creditor tires of trying to recoup their debt, their final option is the issuing of a Winding up Petition. That starts a court process, and it is urgent. It does not, however, give the company a further seven days to pay. The petition is served, the court fixes a hearing date, and what happens next depends on the documents served and the court’s own timetable, so take specialist advice straight away.
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 dissolved and removed from the register at Companies House. That is not the same as a voluntary strike-off, which is a separate procedure for companies that are not being wound up.
Why Does a Company Go into Compulsory Liquidation?
A creditor petitioning to wind up a company has to show that the company is unable to pay its debts. A statutory demand is the most common way of doing that: if a demand for a debt exceeding £750 goes unpaid for 21 days, the company is deemed unable to pay under section 123 of the Insolvency Act 1986. It is not the only route, and it is not a precondition for every petition. A judgment on which execution has been returned unsatisfied will also do, and the court can be satisfied on other evidence that the company cannot pay its debts as they fall due or that its liabilities exceed its assets.
The petition itself does not give the company a further seven days to pay. It is served on the company and a hearing date is set by the court. The petitioner may advertise the petition in the Gazette from seven business days after service, and that advertisement usually leads to the company’s bank accounts being frozen, which is why acting before it matters. Petitions against larger companies are heard in the High Court; smaller companies are dealt with in a county court hearing centre with insolvency jurisdiction.
At the hearing the judge considers the evidence. The court can make a winding-up order, dismiss the petition, or adjourn it, for example where the company is disputing the debt or is close to agreeing terms. If a winding-up order is made the company goes into compulsory liquidation and the Official Receiver is appointed.
HMRC is one of the most significant petitioning creditors in company winding-up proceedings in England and Wales. The winding-up order itself is made by the court, not by the petitioning creditor.
Voluntary vs. Compulsory Liquidation
There are distinct benefits to choosing creditors voluntary liquidation before being forced into a compulsory procedure by angry creditors.
Voluntary liquidation gives directors more control over the choice of insolvency practitioner and the timings.
Creditors’ Voluntary Liquidation, as the process is correctly known, does not create an automatic moratorium in the way administration does. What it does is hand the company’s affairs to a licensed insolvency practitioner, which in practice ends the company’s dealings with creditors and directs their claims to the liquidator. It also shows that the directors acted rather than waited, which matters when conduct is later reviewed.
HMRC is one of the most significant petitioning creditors in the UK, and unpaid tax is a common route into compulsory liquidation. Many of those petitions could have been avoided had the directors acted earlier.
Process
Below is a very condensed version of the compulsory liquidation process.
- Winding up Petition – the creditor, often HMRC, presents a petition to court asking for the company to be wound up, and then serves it on the company. It is an application to court, not a letter and not a statutory demand. A hearing date is set. The petitioner may advertise the petition in the Gazette no earlier than seven business days after service, and banks generally freeze the company’s accounts once it is advertised.
- Winding Up Order – If the judge rules upon the Order, the Official Receiver is appointed to commence the liquidation.
- Directors Responsibilities Cease – Once the OR has been appointed, directors responsibilities cease, although you may be required to assist the Official Receiver with information.
- A Liquidator May be Appointed – the Official Receiver is not a licensed insolvency practitioner, and a practitioner may be appointed in their place. That happens through the statutory routes, principally a creditors’ decision procedure or an appointment by the Secretary of State. The company and its directors do not choose the liquidator.
- Conduct is investigated – the office-holder reviews the directors’ conduct in the period before the liquidation and reports to the Insolvency Service. Misfeasance, wrongful trading and fraudulent trading are three separate claims with three separate tests, not different names for the same thing.
- Assets are Sold – The chief job of the OR is to bring the best returns for creditors. As such, all assets are sold and the monies distributed by order of preference.
- Company is Dissolved – once the liquidation is complete the company is dissolved and removed from the register at Companies House, and it no longer exists.
How Long Does Compulsory Liquidation Take?
There is no fixed timetable. A straightforward petition may reach its first hearing within a couple of months, but hearings are adjourned regularly, and a disputed or opposed petition can run considerably longer. Court listing, service and the conduct of the parties all affect it.
How long the liquidation itself takes depends on what has to be realised and what has to be investigated. A small case with few assets may be closed within a year. Cases involving litigation, asset recovery or complex claims take longer.
Can Compulsory Liquidation Stopped or Reversed?
While a winding up petition can be stopped, if the right conditions apply, an actual liquidation means the legal conclusion of a company, and the sale of its assets. Once completed it will cease to exist, and will be dissolved and removed from the register at Companies House.
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.
(1) Creditors
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 category that is paid ahead of floating charge holders and unsecured creditors. Ordinary preferential claims are mainly employees’ arrears of wages for the four months before the liquidation, capped at £800 each, and accrued holiday pay, which is not capped. The Redundancy Payments Service takes over those claims where it has paid the employee. Since 1 December 2020 HMRC has also been a secondary preferential creditor for VAT, PAYE, employee National Insurance and Construction Industry Scheme deductions, ranking behind the ordinary preferential claims.
- Unsecured creditors – creditors with no security over company assets and no preferential status. This includes suppliers, customers and contractors, employees’ claims above the preferential limits, including redundancy pay and statutory notice pay, and the part of HMRC’s claim that is not secondary preferential, such as corporation tax and employer National Insurance.
As creditors you will be contacted by the insolvency practitioner running the case to apprise you of what’s happening, and the expected timeline.
There are unlikely to be ‘in person’ meetings you need to attend, except in specific circumstances. Instead, proposals and notices are sent via electronic means.
As creditors, you have the right to form a ‘liquidation committee’, meaning a group of between 3 and 5 members who will oversee the liquidation, should you choose.
Such a group can monitor fees, plus request updates and meetings with the presiding insolvency practitioners.
(2) The Liquidator
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. Where the liquidator needs a decision from creditors, for example approval of their fees, that decision is normally taken by a decision procedure such as correspondence or electronic voting, or by deemed consent where the rules allow it. A physical meeting is held only where enough creditors request one under the Insolvency Rules 2016.
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.
Final meetings of creditors were abolished by the Insolvency Rules 2016. At the end of the case the liquidator sends creditors a final report, including a receipts and payments account and an explanation of how the liquidation has been conducted, together with a notice about their release. Creditors can object to the release within the period the notice sets out.
(3) Shareholders
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.
These are two different routes and should not be confused. A shareholder can petition the court directly as a contributory, subject to the conditions in section 124 of the Insolvency Act 1986, and no resolution of the members is needed for that. Separately, the members can pass a special resolution that the company be wound up by the court, which needs at least 75 per cent of the votes cast on the resolution. Where a shareholder petitions, they 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.
What does Compulsory Liquidation mean for a Director of the Company?
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.
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 must not deal with company assets, whether for their own benefit or to pay a chosen creditor. Doing so is not wrongful trading, which is about continuing to trade before the liquidation. It is a misapplication of assets that now belong to the liquidation, and it can lead to a misfeasance claim and, in some cases, to an offence under the Insolvency Act 1986.
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 raises concerns about the directors’ conduct, what can follow depends on what is established. These are distinct regimes with different tests, different decision-makers and different outcomes, and it is worth keeping them apart:
- Wrongful trading – a civil claim by the liquidator under section 214 of the Insolvency Act 1986. If it succeeds the court may order the director to contribute to the company’s assets. There is no fine and no finding of guilt.
- Fraudulent trading – requires actual intent to defraud. It has a civil form under section 213, and a separate criminal offence under section 993 of the Companies Act 2006 which can carry a fine and a prison sentence on conviction.
- Misfeasance or breach of duty – a civil claim to recover money or property misapplied by a director.
- Director disqualification – pursued separately by the Insolvency Service, for a period of up to 15 years.
- Personal liability notices and personal guarantees – separate routes again, which can leave a director owing money personally without any misconduct being alleged at all.
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.