What is Compulsory Liquidation?
The quick answer
Compulsory Liquidation is the process for a creditor (someone owed a debt) to use to force a company into liquidation in an effort to make it pay back the debt. It can also apply to Limited Liability Partnerships in the same way as limited companies.
Compulsory Liquidation is controlled by the UK Courts and usually, it means an unpaid creditor has asked the Court to issue a winding up order against your company because they have not been paid. At the Court hearing, if the judge agrees and the company is forced into liquidation, the Official Receiver (a civil servant) will be appointed as the initial liquidator.
Most compulsory liquidations are made for unpaid tax debts on the application of HM Revenue and Customs.
In more detail
COMPULSORY Vs creditors VOLUNTARY LIQUIDATION
Creditors Voluntary Liquidation means that the directors have decided to liquidate the company and call in a Liquidator who is a Licensed Insolvency Practitioner. It is relatively quick and can be done in 8 days. Compulsory liquidation means that the liquidation has been forced by a creditor although in some smaller cases where there are no assets to pay a liquidator, the director may petition for liquidation. It is a much slower process and can take up to two to three months just to get into liquidation.
AS A DIRECTOR IS IT BETTER IF I INSTIGATE THE LIQUIDATION?
Usually, yes. If the directors have the funds or there are assets to pay a liquidator it is often better to choose the liquidator you want. It can also be a lot faster process, taking just eight days rather than months for a Compulsory Liquidation. This can be important as it helps to ensure employees get paid quicker by the Government redundancy fund that steps in to pay any arrears of wages and redundancy. It also means creditors can deal directly with the liquidator, removing the responsibility from directors.
CAN I CHOOSE THE INSOLVENCY PRACTITIONER I WANT TO USE IN A COMPULSORY LIQUIDATION?
Normally no you can not unless you are also the major creditor.
Only the creditors can influence the choice of liquidator in this process, not the directors or shareholders of a company.
Sometimes in a Compulsory Liquidation the Insolvency Service will appoint an independent liquidator if the case is more complex.
Directors often prefer to choose a liquidator that they want to use, rather than having one forced upon them who is often the Official Receiver working for the Insolvency Service.
COMPULSORY LIQUIDATION – WHAT HAPPENS IN THE COURT HEARING?
There are various parties that can apply to have a company wound up by the Court, but more often than not it is by a creditor (person or business that you owe money to). For Compulsory Liquidation to be considered, the creditor has to be owed a minimum of £750. The most common creditor to issue a winding up petition that leads to Compulsory Liquidation is H M Revenue & Customs.
It is a common myth that a creditor legally has to first serve a Statutory Demand, although most do this as it gives the company the right to dispute the debt by having the Statutory Demand set aside if they believe the debt claimed is wrong. If you do not serve a Statutory Demand first, there is a risk of getting to Court and the debt being disputed. The judge may then dismiss the claim and award legal costs to the company for wasted time.
A compulsory wind up means that the judge at the Court hearing orders the company to be put into liquidation. Both sides can attend and argue their case. Often the judge will consider an adjournment giving the company time to prepare a full defence or be given time to pay, although it would be risky to rely on that.
WHAT HAPPENS AFTER THE WINDING UP COURT HEARING?
As soon as the company goes into liquidation, the director’s powers cease and the Official Receiver from the Insolvency Service will take over. They write to the directors within a very short time requesting the directors fill in a questionnaire and attend a meeting.
The Official Receiver will also usually visit the company premises, secure any assets and make any staff immediately redundant.
In due course, an independent Licensed Insolvency Practitioner may be appointed liquidator. This usually happens if creditors request it or the case is complex.
SOMETHING TO BE CAREFUL OF
If your company or LLP is served with a winding up order you must be given at least 14 clear days written notice of the Court hearing date. This Court hearing notice is advertised in the London Gazette – so your bank will probably see it and freeze your bank account. In fact, once the winding up hearing has been advertised, the law says all dispositions are void. This means that all payments or asset transfers you make or receive are void. You can apply for a Validation Order – this is a Court order allowing you to continue.
If you dispute the debt you should get on and deal with it quickly or try and negotiate with the creditor.