If you are being threatened with compulsory liquidation by a creditor such as HMRC or a finance provider, it is something you should take very seriously.
Compulsory liquidation will usually only be used as a last resort after a creditor has made numerous attempts to recover a debt. If the money is still not repaid and the threat is ignored, the court could force your business into compulsory liquidation. A liquidator will then be appointed to sell the company’s assets and the business will be closed down.
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What is Compulsory Liquidation?
Compulsory liquidation is a formal insolvency procedure which, if no immediate action is taken, could result in a company being forcibly shut down.
The process is initiated by a creditor or multiple creditors who take legal action to pursue the money they are owed. The process begins with a winding up petition being issued against the company by the creditor(s). That notifies the company that it will be closed down if the debt is not repaid within seven days. If no payment is made, the winding up petition will be heard at a court hearing. If the judge agrees with the petition, a winding up order will be made to enforce the compulsory liquidation.
The official receiver (a civil servant) will initially be appointed to liquidate the company. The directors will be relieved of their duties, the business will stop trading and its assets will be sold to repay the creditors. There will also be a full investigation into the conduct of the board members, which could have serious consequences if any wrongdoing is found. The final step of the process is for the company to be struck off the register at Companies House.
Who can Initiate Compulsory Liquidation?
Any creditor that is owed £750 or more with a debt that has gone unpaid for a minimum of 21 days can commence the compulsory liquidation procedure. HMRC is the creditor that most commonly winds up UK companies. However, finance providers, suppliers and landlords can all take this course of action if they feel that they have no other way to get a debt repaid.
Why do Creditors Choose to use Compulsory Liquidation?
Compulsory liquidation is usually the last leg of a long journey that creditors have been on to try and force the repayment of a debt. Before issuing a winding up petition against a company, creditors will typically have tried to collect the money in a variety of different ways, such as informal negotiations, issuing a statutory demand and getting a county court judgement (CCJ).
Commencing the compulsory liquidation procedure is a last-ditch attempt to get the debt to be repaid. At this point, the creditor will have run out of options and will feel that forcing the sale of the company’s assets is the only way they will receive some of the money they are owed.
What Happens When a Company Goes Into Compulsory Liquidation?
There are several steps involved in the compulsory liquidation process. They include:
- Issuing a winding up petition - The first step is for a winding up petition to be issued against the company by a creditor. Once the petition has been issued, the company has seven days to make the payment or oppose the petition before it is advertised in the Gazette. Once the petition has been advertised, the company’s bank accounts will usually be frozen, which makes it very difficult to obtain finance to pay the debt or continue to trade.
- Making a winding up order - Seven days after the winding up petition has been advertised, it will be heard by a judge. Both the creditor and the company can attend court and argue their cases and an adjournment may be considered by the judge to give the company time to prepare a full defence or pay the debt. If the court is satisfied that the company should be shut down, a winding up order will be made and an official receiver will be appointed to liquidate the company. Trading must cease at this point if it hasn’t already.
- Taking control of the business - The official receiver will take control of the business immediately and the directors’ powers and duties will be removed. The directors may be required to assist the official receiver in the liquidation process by providing information on customers, stock and the business’s assets.
- Selling the company’s assets - The official receiver will then begin the process of selling the company’s property, vehicles, machinery, stock and any other assets it owns. The proceeds from these assets, along with the cash in the company’s bank account, will be used to repay the company’s creditors to the fullest extent that is possible.
- Dissolving the company - The next step is for the business to be removed from the Companies House register. If any of the company directors have signed a personal guarantee, they will become personally liable for the debt the guarantee applies to. Any other outstanding debts will be written off and the business will cease to exist.
- Investigating the directors’ conduct - At the end of the process, the official receiver will send a final report to creditors explaining the reasons for the business’s failure and scrutinising the directors’ conduct. The Insolvency Service may decide to investigate the directors for wrongful or fraudulent trading.
How Long Does Compulsory Liquidation Take?
After the initial threat from a creditor, compulsory liquidation can proceed quickly. It typically takes around three months from a creditor such as HMRC threatening to issue a winding up petition to the winding up order being made by the court. Depending on the size and complexity of the business, it can then take anything from a few months up to a year or more to agree the creditors’ claims, sell the company’s assets and distribute the funds to the creditors.
What are the Consequences of Compulsory Liquidation for Company Directors?
- Before the liquidation - As a company director, it may come as a shock to you when a creditor issues a winding up petition against your business, but it’s very unlikely to be the first time you’ve been contacted about the debt. If you have the means to repay the debt then you should do so immediately, as this could be your last chance to save your business. If you want to keep the business afloat but do not have the funds to repay the debt, you should waste no time in exploring emergency finance options. Invoice finance is one method that could provide the fast funding you need in as little as 24 hours.
- During the liquidation - If you are unable to repay the debt and the business is no longer viable, it will take just 14 days from the winding up petition being issued to a winding up order being made by the court. From this point, the official receiver will take control of the company and your powers as a director will cease. If you have a contract of employment, that will be terminated and you may be able to claim employment entitlements from the Redundancy Payments Service for money you’re owed by the business.
- Investigation into the directors’ conduct - You may be required to assist the liquidator in their work by providing details of the company’s assets and creditors. You must cooperate to your fullest as the liquidator will report on your behaviour during the liquidation process. Each director must also attend a two-hour interview where they will be asked to provide a statement of affairs and questioned about the events leading up to the company’s insolvency. It’s very important that you prepare for this interview thoroughly and have all of the relevant information, such as company accounts and records, ready for the official receiver.
- After the liquidation - Typically, directors are not held personally liable for the unpaid debts of the company unless the investigation found them to have acted unlawfully or they have provided a personal guarantee. As the company is insolvent, the directors will not receive any proceeds from the company in their capacity as shareholders. If examples of wrongful trading, transactions at undervalue or unfair preference to certain creditors are found, the directors can be ordered to make a repayment to the company and be disqualified from acting as a director for up to 15 years.
What’s the Difference Between Voluntary and Compulsory Liquidation?
There is more than one way for an insolvent company to enter into liquidation. As well as compulsory liquidation, where a company is forced by its creditors into liquidation to make it repay a debt, a company’s directors can also choose to close the company down voluntarily via a procedure called a creditors’ voluntary liquidation (CVL).
In both cases, liquidation is a consequence of the company being insolvent with no viable way to repay its debts and continue to trade in the future. However, there are some distinct differences between the two processes that usually make it better for the company directors to instigate the liquidation via a CVL.
If the directors have the funds or there are assets to pay a liquidator, then a CVL allows the directors to choose the liquidator they want, which can be beneficial. The process also tends to be much faster, taking a matter of days rather than months for a liquidator to be appointed. That means staff redundancy procedures can begin more quickly and employees can receive compensation in good time.
By entering into liquidation voluntarily, the directors are also seen to be acting in the best interest of creditors, which is important when it comes to the investigation into the directors’ conduct later on. It also allows the directors to retain control of the process and close the company in an orderly manner. That will stand them in good stead if they want to create a phoenix company or continue to operate in the same industry.
Benefit from a Free Consultation With an Insolvency Practitioner
Have you been threatened with a winding up petition by a creditor? Perhaps you’d like to know more about the implications for you as a director? Just call 0800 24 24 51 or email info@businessexpert for free and confidential advice from a licensed insolvency practitioner.