What is compulsory liquidation and how does it work?

What is compulsory liquidation and how does it work?

August 11, 2021 by Sandra

Compulsory liquidation is a formal business insolvency procedure which results in a company being forcibly shut down.

It is typically started by outstanding creditors of a company who have exhausted all other options.

The process begins with a court order known as a winding up petition, which notifies the company that a petition has been lodged to close the business and liquidate its assets. Any unsecured creditor can submit a winding-up petition to the court, provided they are owed more than £750.

So, what is compulsory liquidation? What does it mean for employees and directors? And how can McAlister & Co help should you be issued with a winding up petition? Read on to find out...

The compulsory liquidation process

So, what is compulsory liquidation and how does the process work? Compulsory liquidation is typically a longer procedure than voluntary liquidation.

Whilst the time between a winding up petition being issued and an Official Receiver being appointed can move quite rapidly, the entire process itself is much lengthier, with the process being as follows:


1. Winding up petition is issued

The first step is for the creditor to issue a winding up petition against the company. The petitioner must be owed a minimum of £750 and have waited at least 21 days for the debt to have been repaid.

Once a WUP has been issued, seven days must pass before it is advertised in the Gazette, and the company will then find that their bank accounts will be frozen, leaving them unable to trade.


2. Winding up order is granted

After a further seven days (as a minimum), the winding up petition will be heard by a judge who will then decide the next step. It can however take months to get a court hearing date, and companies can often be left in limbo without a bank account to trade during this period.

Once the court is satisfied that the company should be liquidated, a winding up order will be issued and an Official Receiver will be appointed, and if it hasn’t done so already, trading must stop at this point.


3. Official Receiver appointed

The Official Receiver, also known as a liquidator, will then take control of the company and the directors will cease to have any influence over the day to day running of the business.

The directors may also be asked to assist the Official Receiver by providing information on customers, stock, or other assets.


4. Company assets are sold

Next, the Official Receiver will begin to liquidate the company’s assets. This could include stock, vehicles, property, or machinery.

All proceeds from the sale of the assets, along with any cash left in the company’s bank account, will be used to repay as many of the company’s debts as possible.


5. The company is dissolved

Once the assets have been sold, the company will officially be shut down. Its name will be removed from the register at Companies House, and the company will no longer exist.

Any outstanding debts will at this point be written off, unless the director has provided a personal guarantee, in which case the personal guarantee will crystallise, and the director will become personally responsible for any debts secured in this way.


What does compulsory liquidation mean for directors?

Once your company has been liquidated, it ceases to exist, and you will therefore no longer be able to trade.

If, as a director, you have a contract of employment with the company, this will automatically be terminated and like the rest of your employees, you would claim any employment entitlements from the Redundancy Payments Service.

Additionally, as part of the liquidation process, the Official Receiver will investigate your conduct to see if any fraudulent activity has taken place. The kinds of things the Official Receiver will be looking for include the following:

  • The reimbursement of directors’ loans.
  • The repayment of monies taken out of the company as dividends.
  • Irregular payments, or payments that have benefitted the directors or their families.
  • Preferential payments.
  • Transactions at undervalue.

If you are found to have acted unlawfully, you could be held responsible for the company’s debts, or possibly even face disqualification from acting as a director in the future.


What does compulsory liquidation mean for employees?

Once a liquidator has been appointed, the company will be closed down and employees will be made redundant. Redundancy payments should be paid from the assets of the company if it is able to do so. If not, employees will need to make a claim via the Redundancy Payment Service.


Can compulsory liquidation be stopped?

Once a winding up petition has been lodged, there is a very small window of time where it can be challenged, and alternative arrangements can be put in place.

Unless the company is in the position to be able to pay the petitioning debt and have the petition dismissed, alternative insolvency procedures such as a creditors’ voluntary liquidation or a company voluntary arrangement could be a preferable alternative option.

However, once a winding up order is issued by the court, there is nothing that can be done to prevent the company being forcibly wound up, so it’s important to act fast. Discover what to do if you are issued with a winding up petition here.


Voluntary versus compulsory liquidation 

Although both compulsory liquidation and voluntary liquidation have the same end result, there are a number of benefits of voluntary liquidation as opposed to court-ordered compulsory liquidation.

For starters, with a CVL, the company directors can retain an element of control over the process and select their own choice of insolvency practitioner.

They are also more in control of timings, whereas with a compulsory liquidation, because the whole thing is managed by the courts, it is all taken out of your hands, and you have very little say in what’s going on.

Additionally, voluntary liquidation reflects better on the directors than compulsory liquidation and it demonstrates that the directors were aware of the problems facing their company and that they have taken action to prevent things getting worse for their creditors.

On the other hand, compulsory liquidation suggests that the directors were unaware of the company’s financial distress, or worse, that they chose to continue trading for as long as possible regardless.


How McAlister & Co can help

If you have been threatened with compulsory liquidation, it’s important to act fast and seek expert advice as soon as possible to explore the different options available to you.

From CVLs to CVAs to advice on how to handle WUPs, our expert team is on hand to provide FREE, confidential initial advice. So, contact us today to discuss your next steps. 


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