Compulsory liquidation forces the closure of a limited company, so it’s essential that, if you’ve been threatened with compulsory liquidation by a creditor, you know exactly what lies ahead so you can prepare accordingly. 

Read our comprehensive guide to compulsory liquidation, from what it is, how long it takes and how the process works to the potential consequences for company directors. 

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    What is Compulsory Liquidation? 

    Compulsory liquidation, also sometimes known as compulsory winding up, is the most serious action that a creditor can take against an insolvent limited company. If you have creditors that you are unwilling or unable to pay, they can initiate the compulsory liquidation process through a court order known as a winding up petition to close your business down. 

    Unless decisive action is taken, the winding up petition will be heard in court. If the court sides with the creditor, a winding up order will be made that forces the sale of the business’s assets for the benefit of its creditors and the company will be removed from the Companies House register.

    The official receiver will be appointed to liquidate the company. They will conduct a full investigation into the conduct of the board members before and during the period of insolvency. If acts of wrongful trading or director misconduct are identified, company directors could be made personally liable for company debts or be banned from acting as directors for up to 15 years. If serious fraud is uncovered, the directors could face a custodial sentence of up to seven years. However, in reality, this is quite rare, and in most cases, you will be free to set up another company and to begin trading once the liquidation is complete. 

    How Much Money Must Your Company Owe for it to be Threatened with Compulsory Liquidation?

    Given the severity of the process and the potential consequences, you might think that only businesses that owe a large amount of money would be at risk. However, that is not the case. Any unsecured creditor can issue a winding up petition against a business if it cannot pay a debt of £750 or more when it becomes due. 

    In reality, the amounts involved are often a lot higher due to the costs involved. A winding up petition will usually be the last resort for a creditor after it has made attempts to recover the debt many times. However, it’s important to note that even relatively small debts, if ignored, could potentially lead to the closure of your company.    

    What is the Compulsory Liquidation Process?

    • The build-up – Any creditor owed at least £750 that has been unpaid for 21 days or more can petition to commence the winding up process. However, usually, it will be a much longer journey that involves other debt collection methods such as informal negotiations, statutory demands and County Court Judgements (CCJ). Only when a creditor has exhausted their options and feels that they have no other choice will they initiate the compulsory liquidation process.
       
    • Issuing a winding up petition – The first step along the road to a compulsory liquidation is for a creditor, commonly HMRC, to issue a winding up petition against the company. That is done by completing Form 4.2 and serving a copy on an employee or director of the debtor company and to either the High Court (if the paid-up share capital is more than £120,000) or the closest court to the company’s registered address that deals with insolvency procedures.
    • Advertising the winding up petition – Seven days after the petition has been issued to the debtor company, it will be advertised in the Gazette, which is the official record of public notices. At this point, life can become very difficult for the company as its bank accounts will usually be frozen, making it impossible to trade.
    • Making a winding up order – Another seven days after the petition has been advertised in the Gazette, the petition will be heard by a judge, who will decide on the next step to take. If the winding up petition is accepted by the court, a winding up order will be made, which sets the wheels in motion for the compulsory liquidation of the company. The company must cease trading at this point if it has not already done so. Once it reaches this stage, it can be very difficult to save your business. 
    • The official receiver is appointed – An officer of the court (official receiver) will be put in charge of winding up the company. They will take control of the company, bringing any influence the directors have over the day-to-day running of the business to an end and the company’s employees will be made redundant. The company directors must cooperate with the official receiver and may be required to assist them by providing information about stock, customers, debts and company assets.
    • The company’s assets are sold – Next on the official receiver’s to-do list is to value and sell the assets of the company for the benefit of its creditors. That can include vehicles, machinery, stock and property. All the proceeds, along with any cash held in the company’s bank account, will be distributed among the creditors, who will be repaid in a prescribed legal order.
    • The company is dissolved – The final part of the process is for the company to be closed down and officially removed from the Companies House register. At this point, the company will no longer exist. If any debts remain unpaid at this point, they will be written off unless they have been secured by a director’s personal guarantee. If a personal guarantee has been signed, it will crystallise and the creditor will take action to recover the debt from the director’s personal funds.
    • The investigation and final report – At the end of the process, the liquidator will send a final report to creditors that details the findings of the investigation into the directors’ conduct. If the Insolvency Service has reason to do so, it can ask to keep the liquidation open for longer so it can investigate the directors for wrongful or fraudulent trading. If you are found guilty of wrongful or fraudulent trading, you could be banned from operating as a director for up to 15 years and be made personally responsible for company debts. If you have acted properly then the company will be dissolved and the directors can claim a redundancy payment from the government like any other employee. 

    Are Directors Personally Liable for the Company Debts on Compulsory Liquidation?

    A limited company is a legal entity in its own right, which serves to separate its finances and the agreements it enters into from the directors who run the company. Therefore, any debts that are incurred by the company are not the personal responsibility of the directors. That is the case even when the company is forced into compulsory liquidation by a creditor and there are insufficient funds to repay all of the creditors. In that case, the debts of the company would be written off.

    However, there are three scenarios when that changes:

    • There’s an overdrawn director’s loan account – An overdrawn director’s loan account occurs when a director takes more money out of the company than they pay in. This is common practice in profitable companies and only becomes a problem when the business becomes insolvent. In the case of compulsory liquidation, company directors will be ordered to repay all of the money they owe to the company for the benefit of its creditors.
    • A personal guarantee has been signed – Personal guarantees are commonly required by banks and other lenders to secure financial products ranging from business loans and lease agreements to invoice finance arrangements. If the debt is not repaid from the funds raised during the liquidation, the directors who signed the guarantee will become personally liable for the shortfall. Read more about directors’ personal guarantees in insolvency.
       
    • Wrongful trading or director misconduct is discovered – If the official receiver discovers any acts of wrongful trading or director misconduct in the lead up to or during the period of insolvency, their findings will be passed to the Insolvency Service and one or more directors could be made personally liable for a proportion of or all of the company’s debts.   

    How do you Stop a Company Going into Compulsory Liquidation?

    If you receive a winding up petition from a creditor then you need to act quickly if you want to save your business. You will have already had many chances to resolve the situation with the creditor but this is your last chance. Your options are already limited. You cannot sell any of the company’s assets or the company itself, or issue a notice of intention to appoint an administrator. A pre-pack administration is also no longer an option and the likelihood of entering into a creditors’ voluntary liquidation (CVL) is very slim. Instead, you have just seven days to do one of the following:

    1. Repay the debt owing to the petitioning creditor. 
    2. Dispute the debt if you have substantial proof that the debt claim is inaccurate or unfair.
    3. Arrange and propose a company voluntary arrangement (CVA) to repay the debts of the creditor in monthly instalments over a period of up to five years while the company continues to trade. 
    4. Obtain an administration order to appoint a licensed insolvency practitioner to put the company into administration. They evaluate the company’s position and sell some assets to repay the debt. Placing the company into administration will stay all legal action that’s being taken against the company.

    If you cannot afford to repay the debt and you have no grounds to dispute it, it’s typically the case that proposing a CVA is the least damaging course of action you can take. That could save the company from liquidation and give you the time and space to trade yourself out of the financial predicament you are in. 

    By this point, the creditor is likely to have lost any desire to enter into negotiations with you to help you settle the debt. However, the fact that their return is likely to be far greater if a CVA is agreed when compared to liquidation, could be the motivation they need.  

    What are a Director’s Duties During Compulsory Liquidation?

    The directors duties and responsibilities change long before the compulsory liquidation takes place. When a business is trading as normal, the duties of the directors are to promote the business for the benefit of its shareholders. As soon as the directors are aware or should reasonably have been aware that the company was insolvent, they are legally obligated to act in the best interests of the creditors as a whole. Those duties last from the point of insolvency all the way up to its liquidation and eventual dissolution. Failure to act in the best interests of the creditors during this time can result in accusations of wrongful or fraudulent trading and mismanagement of the insolvent company. That can lead to directors being made personally liable for company debts, a fine or disqualification from acting as a company director in the future.

    As well as acting in the best interests of the company creditors during the period of insolvency, company directors are also legally obliged to cooperate with the official receiver during the compulsory liquidation process. If you fail to comply with the official receiver’s requests then allegations of misconduct could be made that may result in an Insolvency Service investigation and penalties may apply.  

    Once an official receiver has been appointed to liquidate the company, they will send the directors a questionnaire to gather information about its assets and creditors. The directors will also be required to attend an interview where the reasons for the company’s insolvency and eventual liquidation will be discussed. At the interview, the official receiver will ask for:

    • The completed questionnaire
    • Company accounts, records and paperwork
    • Full details of the company’s assets and liabilities
    • Details of whether other parties are holding assets or trading records

    You must answer the official receiver’s questions to the best of your ability. If you refuse to complete the questionnaire or attend the interview, the official receiver can forcibly seize records and request the court to compel you to do so. 

    The official receiver may also request assistance from the directors in selling the company’s assets. If there is an overdrawn director’s loan account then that will have to be repaid and personal guarantees may be enforced if the company cannot afford to satisfy its debts.

    Can I be the Director of a Company After Compulsory Liquidation? 

    Generally speaking, yes. As long as you don’t receive a disqualification from acting as a company director for your role in its insolvency or conduct during the liquidation, then you are free to set up another company or continue running another business that’s already in existence.

    However, there is an important rule that you should be aware of. If you have been the director of a liquidated company, Section 216 of the Insolvency Act 1986 prevents you from setting up another company with the same or a similar name. The rules apply to any person who has acted as a company director or shadow director at any point in the 12 months before the business went into liquidation. They cannot use the same or a similar name as the liquidated company for a period of five years. 

    This rule is in place to reduce confusion for creditors of the liquidated company and prevent bad feelings between the creditors and the new company. It’s understandable that creditors who had all or a proportion of the debt they were owed by the old company written off would not be pleased to see the appearance of a new company with the same or a similar name. If you do choose to use the same or a similar name for a new company, criminal action could be taken against you and you could be liable for all of the debts of the new company if it enters liquidation.  

    There’s also one other factor to consider when setting up a new company following liquidation. If HMRC was a major creditor of the liquidated company and it did not receive all of the money it was owed, it may insist on a VAT or PAYE deposit being paid, known as a security bond, to protect its position. That will involve a potentially large payment that you’ll have to make upfront when registering the new company with HMRC. 

    Will Compulsory Liquidation Affect my Personal Credit Rating?

    As a company director, it’s understandable that you’ll be concerned about the potential impact of liquidation on your personal credit score. The good news is that a limited company is a separate legal and financial entity from the people who own and run it, so their credit records are entirely separate. Therefore, none of the debts or legal judgments made against the liquidated company will appear on a director’s or shareholder’s personal credit file. 

    However, there are a few instances when the liquidation of a company may impact your personal credit rating:

    • You signed a personal guarantee – If you have signed a personal guarantee for a debt that is not repaid in full by the company on liquidation, you will become personally liable to repay the debt as outlined in the terms of the guarantee. The lender will be able to pursue you personally for the debt and any action they take will be placed on your personal credit file, which will impact your ability to access credit in the future.     
    • You have an overdrawn director’s loan account – If you have an overdrawn director’s loan account then the official receiver can demand repayment of the debt for the benefit of the company’s creditors. They have the power to take legal action against you to enforce the repayment of the debt, which will leave a mark on your personal credit file. 
    • You’re made personally liable for company debts – If the official receiver finds that you did not meet your fiduciary duties to the company’s creditors in the period leading up to and during insolvency, you could be made personally liable for a proportion of the company’s debts. Action can be taken against you personally to enforce the payment, which will leave a mark on your credit file.  

    Compulsory Liquidation vs. Voluntary Liquidation

    Compulsory liquidation is initiated by the creditors of an insolvent company to force the repayment of debts. A creditor’s voluntary liquidation (CVL), on the other hand, is a process that’s initiated by the directors of the insolvent company themselves. They will appoint a licensed insolvency practitioner to sell the company’s assets, repay its debts and close the business down. 

    One of the main advantages of choosing to liquidate the company voluntarily is that it allows the directors to close it down in an orderly manner and prepare more thoroughly for what the future might bring. The directors are in control of the process and are seen to be acting proactively in the best interests of the creditors, which is very important when it comes to the investigation into the director’s conduct. Voluntary liquidation is also much quicker than a compulsory liquidation, which allows the employees to receive redundancy payments and compensation in good time.

    How Long Does Compulsory Liquidation Take?

    A creditor must have a debt that has been unpaid for 21 days before they can issue a winding up petition. If the court accepts the petition, it will arrange a hearing and give the company at least 14 days notice of the hearing date. Once the date for the hearing has been set, the company has seven days to act to save the business before the petition is advertised in the Gazette, at which point it is likely that the company’s bank accounts will be frozen. If the business repays the debt in full or comes to an agreement with the creditor during this time, the petition will be dismissed by the court. 

    If the company cannot raise the funds to repay the debt and does not reach an agreement with the creditor, the hearing will take place, a winding up order will be made and an official receiver will be appointed. In a compulsory liquidation, the time between the initial threat and reaching this point is usually around three months. Once the court proceedings are over, liquidating the company can take a year or more, depending on the number of assets and creditors the company has. The whole process, from initial threat through to dissolution, can take anything from six to 24 months.

    What are the Compulsory Liquidation Costs and who Pays?

    Forcing a creditor into liquidation is quite an expensive process and the costs are initially borne by the petitioning creditor. That’s why, in reality, compulsory liquidation is usually only an option for creditors who are owed substantially more than £750. 

    It costs around £400-£800 to issue the petition, plus an additional £1,600 for a court deposit and a filing fee of £280. The only reason a creditor other than HMRC or a secured creditor would pay these costs is if it believes the company has sufficient assets to repay the debt and reimburse the petitioner’s costs. However, a petitioning company does not have priority when it comes to the distribution of assets following liquidation. The order of distribution is set out in law and places unsecured creditors, such as suppliers, unsecured lenders and customers, at the bottom of the pile. Therefore, it’s unlikely an unsecured creditor will petition to wind up your business unless it is sure that you have company assets of considerable value.

    Have you Been Threatened With Compulsory Liquidation?

    If you and your company have been threatened with compulsory liquidation, you should seek professional assistance immediately. Give us a call on 08000 24 24 51 or email info@businessexpert.co.uk for a free and confidential initial consultation to discuss the best way forward for your business. 

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