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 your company is going to be forcibly closed down the Court.
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.
Why Does a Company Go into Compulsory Liquidation?
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 a final seven days to pay, after which the case will appear before a High Court Judge.
At this court hearing, the High Court 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.
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, puts an immediate stop to creditor demands, while demonstrating that directors are acting responsibly and taking action.
HMRC are by far the largest issuer of winding up petitions in the UK, and hence the primary reason many companies end up in liquidation. Many of these could have been avoided has directors taken earlier action.
Process
Below is a very condensed version of the compulsory liquidation process.
- Winding up Petition – Creditor (often HMRC) sends this legally binding final demand letter. If it is not paid, the judge rules upon the case in court. Company bank accounts are frozen by banks as soon as the Petition 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 – In some cases, since the OR is not a licensed insolvency practitioner, they may appoint one to assist. Equally, creditors may wish to appoint their own insolvency practitioner who will replace the OR.
- Liquidator will perform a directorial investigation, with the goal of establishing whether there was directorial misfeasance (i.e. wrongful or fraulent trading) in the period preceding insolvency. Any findings will be submitted to the Insolvency Service.
- 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 completed, the company is struck off the register at Companies House, meaning it no longer exists.
How Long Does Compulsory Liquidation Take?
From the arrival of the Winding up Petition to the beginning of the liquidation procedure, you should expect around 3 months.
It usually takes up to a year for the insolvency practitioner to liquidate the company.
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 struck off 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 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.
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. 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.
(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.
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.
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 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.