A Compulsory Liquidation is a process whereby a company is wound up through the courts and the Official Receiver is subsequently appointed Liquidator.
Unlike in a Creditors’ Voluntary Liquidation when directors’ resolve to convene meetings of shareholders and creditors to wind the company up, 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. Both are prescribed forms served on the insolvent company and set out the grounds on which a winding-up-order is being sought. The petition will have been presented in court and if sufficient evidence is provided to demonstrate that a company cannot pay its debts, a Winding up Order will be made.
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 neither an agreement has been reached to settle the debt nor the demand is set aside, a winding up petition will then be served on the company.
- 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 is appointed initially as the liquidator to the company. The Official Receiver has a period of 12 weeks in which to make a decision in convening a meeting of the company’s creditors.
- 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 will obtain release from office by convening a final meeting of the creditors and sending a Final Progress Report to Creditors.
An Automatic Moratorium
The law surrounding compulsory liquidation stipulates that, as soon as proceedings have begun, an automatic moratorium prevents any further legal action from creditors, unless a specific court order has been obtained.
Can Directors Initiate a Compulsory Liquidation?
Company directors can apply to have their company forcibly wound up where they can demonstrate debts of more tha £750 which can’t be paid. It’s necessary to have agreement from your shareholders on this, and you must be able to clearly explain to a judge why you feel the company cannot realistically continue. Where you cannot gain sufficient shareholder agreement, the directors may still apply but they must do so in unison – a single director may not proceed alone.
Liquidating due to Director’s Disagreement
In this instance, where company directors have fallen into dispute, only a director who is simulataneously a shareholder or creditor can petition the court for a winding up.