A Compulsory Liquidation is a process whereby a company is wound up through the courts and the Official Receiver is subsequently appointed Liquidator.
Unlike a Creditors’ Voluntary Liquidation, where the shareholders resolve to wind the company up and the creditors then decide on the liquidator through a decision procedure rather than a physical meeting, a Compulsory Liquidation is usually initiated when a creditor commences the winding-up process by issuing a Winding-up Petition.
What are the Grounds for Initiating Compulsory Liquidation?
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. A statutory demand is a formal written demand for payment, with contents set by the insolvency rules. A court judgment is an order that the debt is owed. A demand left unpaid for 21 days, or a judgment that enforcement has failed to satisfy, is evidence that the company cannot pay its debts, and the creditor relies on it in the petition. If the court is satisfied that the company cannot pay its debts, it will normally make a winding-up order. It can also adjourn the hearing, dismiss the petition or make another order.
What’s the Procedure for the Compulsory Winding up of a Company?
The various stages of the process are highlighted below:
- 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.
- Winding up Petition – If the company does not pay, secure or settle the debt within 21 days, the creditor may present a winding-up petition. A company cannot have a statutory demand set aside. If the debt is genuinely disputed, the company can apply to court for an injunction to stop the creditor presenting or advertising a petition.
- Court Hearing – The Judge will consider the evidence brought before the court to assess whether a winding up order shall be made.
- Official Receiver – Once the Company is in Compulsory Liquidation the Official Receiver becomes the liquidator automatically. The Official Receiver has 12 weeks in which to decide whether to seek a decision from the creditors on appointing an insolvency practitioner in their place. Since April 2017 that decision is taken through a decision procedure such as correspondence or electronic voting, not by convening a meeting as a matter of course.
- 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’.
- Finalisation – Once all assets have been realised and funds distributed to creditors, the Liquidator sends creditors a final account and tells them how they can object to the Liquidator’s release. After the objection period, the Liquidator files the account with the court and Companies House and leaves office. Release follows at that point unless a creditor objected, in which case the Secretary of State decides when release takes effect.
What a Petition Stops, and What It Does Not
Presenting a winding-up petition does not freeze creditor action on its own. There is no automatic moratorium at that stage. What section 126 of the Insolvency Act 1986 gives you is the right to apply: the company, a creditor or a contributory can ask the court to stay or restrain proceedings, and the court decides whether to grant it and on what terms.
The automatic restriction comes later. Once a winding-up order is made, section 130(2) means no action or proceeding may be started or continued against the company except with the court’s permission. If a winding-up order is made, dispositions of company property after the petition was presented are also void unless the court validates them, because the winding up is treated as starting on presentation. That is a different rule again, and the reason bank accounts get frozen.
It is worth keeping these apart. A genuine moratorium, in the sense of automatic protection while a rescue is attempted, is what administration provides, and what the standalone Part A1 moratorium was created for. A winding-up petition provides neither.
Can Directors Initiate a Compulsory Liquidation?
They can, but it is rarely the right route. Where directors want to close an insolvent company, the normal route is a Creditors’ Voluntary Liquidation, which the company starts itself and which is usually quicker and cheaper than a court process.
Where a petition is the better course, section 124 of the Insolvency Act 1986 allows either the company or its directors to present one. For an insolvent company the usual ground is that it is unable to pay its debts. The petition must show that, for example because the company cannot pay its debts as they fall due or its liabilities are greater than its assets. Other grounds exist, including that winding up is just and equitable. No minimum debt applies to a petition of this kind: the £750 figure seen elsewhere is the threshold a creditor uses for a statutory demand under section 123.
A petition in the company’s own name needs a resolution of its shareholders. The directors can also petition in their own right, whether or not the shareholders pass a resolution, but they must act together as a board. Where there is more than one director, that means a proper board decision: a majority at a board meeting binds all the directors, and one director can then present the petition on the board’s behalf. A sole director can present one alone.
Liquidating due to Director’s Disagreement
Where the directors have fallen into dispute and cannot reach a board decision, a director can petition the court for a winding-up only in another capacity: as a creditor, or as a shareholder who meets the statutory conditions on how the shares are held. A shareholder’s petition usually relies on the ground that winding up is just and equitable. The court can refuse it if another remedy is available and the shareholder is acting unreasonably in not pursuing it.
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