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.
Once a winding-up order is made, the directors lose their management powers to the liquidator. Directors still have legal duties: they must give the official receiver a statement of affairs if asked for one, and must provide information and attend interviews when reasonably required.
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 written demand in the prescribed form for a debt of more than £750 is left at the company’s registered office, and within 21 days the company does not pay it, secure it or agree terms for it to the creditor’s reasonable satisfaction, 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. Unless the court directs otherwise, the petitioner must advertise the petition in the Gazette no earlier than seven business days after service and no later than seven business days before the hearing. That advertisement usually leads to the company’s bank accounts being frozen, which is why acting before it matters. The High Court can wind up any company registered in England and Wales. Where the company’s paid-up share capital is £120,000 or less, the petition can instead go to a county court hearing centre with insolvency jurisdiction, unless the place that has longest been its registered office over the previous six months is in the London insolvency district, in which case it must start in the High Court.
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 England and Wales, 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. Unless the court directs otherwise, the petitioner must advertise the petition in the Gazette no earlier than seven business days after service and no later than seven business days before the hearing. 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’ Duties To The Official Receiver – Once the OR has been appointed, directors lose control of the company, but their duties do not simply end there. Section 235 of the Insolvency Act 1986 requires current and former officers to give the Official Receiver whatever information about the company they reasonably require and to attend on them when asked, and failing to do so without reasonable excuse is a criminal offence.
- 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, a winding-up order is much harder to undo. An application can be made to the court to rescind it within five business days after the date on which the order was made (rule 12.59 of the Insolvency Rules 2016). The order can also be appealed, and the official receiver, a creditor, a contributory or the liquidator can ask the court for a stay of the winding up under section 147 of the Insolvency Act 1986. These routes are difficult and time-critical, so take advice at once. If none succeeds, the liquidation runs to its end: the assets are sold, and the company is 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, student loan deductions 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 can decide to form a ‘liquidation committee’, meaning a group of between 3 and 5 members who oversee the liquidation. The committee can act only once an insolvency practitioner has replaced the official receiver as liquidator. While the official receiver is liquidator, its functions rest with the Secretary of State.
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 cannot pay the debt or show that it is genuinely disputed, the court will usually make a winding up order, although it can still adjourn or dismiss the petition. At this point, the official receiver normally becomes the liquidator. The exception is where the order follows an administration or is made while a CVA supervisor is in office, when the court may appoint the former administrator or supervisor instead. 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. Each creditor submits a proof of debt that gives details of the documents supporting the claim, such as invoices or correspondence, and the liquidator can ask to see those documents. Submit it by any last date the liquidator gives: a late proof cannot disturb a dividend already paid, though it can share in later ones. 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 must be held if enough creditors request one: at least 10% in value, 10% in number or 10 creditors (section 246ZE of the Insolvency Act 1986).
The creditors’ claims are paid from what the company’s assets realise, and only so far as those realisations go. The order of payment is not the simple secured-then-unsecured queue it is sometimes described as. Assets subject to a fixed charge go to that lender first. From the rest of the estate, the costs of the liquidation are paid, then preferential creditors — who under section 175 of the Insolvency Act 1986 rank ahead of anyone holding a floating charge, not behind them. Where the floating charge was created on or after 15 September 2003, a prescribed part of the floating-charge realisations is then normally ring-fenced for unsecured creditors before the floating-charge holder takes what remains. That does not happen if the sum is small and the cost of sharing it out would be disproportionate, or if the court disapplies it. Only after that is a dividend paid to unsecured creditors generally.
Final meetings of creditors were abolished from 6 April 2017 by the Small Business, Enterprise and Employment Act 2015. Where an insolvency practitioner is liquidator, at the end of the case they send creditors a final account showing how the liquidation has been conducted and how the company’s property has been disposed of, together with a notice about their release. Creditors can object to the release within eight weeks of the notice, or later if a creditor has asked for information or applied to court. Where the official receiver is still liquidator, creditors instead receive notice that the case is closing with a summary of receipts and payments, and the Secretary of State decides when the official receiver is released.
(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 at a meeting or, for a written resolution, members holding at least 75 per cent of the total voting rights of eligible members. 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.
Being a shareholder does not in itself create any duties in the liquidation. A shareholder who is or has been a director or other officer, or who helped form the company or worked for it in the year before the liquidation, can be required to co-operate with the official receiver and the liquidator. 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 court makes a winding-up order, the official receiver normally becomes the company’s liquidator, takes control of its affairs and investigates why it became insolvent. From that point any legal action against the company is stayed and no new legal proceedings may be brought against it without leave of the court. The same bar applies, without leave of the court, from the moment a provisional liquidator is appointed (section 130(2) of the Insolvency Act 1986). Before an order is made or a provisional liquidator is appointed there is no automatic stay, although the company, a creditor or a contributory (usually a shareholder) can apply to the court for one (section 126). 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 can, under section 235 of the Insolvency Act 1986, reasonably require the company’s officers to give information and to attend an interview at times it reasonably requires. It will often send a questionnaire to complete first. Failure to cooperate and they could be prosecuted, be disqualified as a director and may have to answer questions in court. Those the official receiver questions 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. A personal guarantee can leave a director owing money personally without any misconduct being alleged at all. HMRC can serve a personal liability notice for unpaid National Insurance only where it considers the failure was due to that director’s fraud or neglect.
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.