What is Compulsory Liquidation?

Compulsory liquidation is a formal insolvency procedure where a court orders a company to be wound up. It usually occurs when a company is unable to pay its debts and either a creditor, shareholders or directors take formal steps to have the company wound up through the courts.

Compulsory liquidation is different from a Creditors’ Voluntary Liquidation (CVL),  where the directors and shareholders voluntarily decide to place an insolvent company into liquidation by passing resolutions and thereby avoid the need for court involvement.

For directors and company owners, facing compulsory liquidation can be extremely concerning. At BRI Business Recovery and Insolvency, we understand how daunting and unnerving this process can be. We are here to help you. We can provide advice and guidance at any point in the process. Contact us today for your free no obligation discussion.

How Does Compulsory Liquidation Work?

Although every situation is different, compulsory liquidation generally follows a series of key stages.

1. A winding-up petition is presented

A winding-up petition is a formal application asking the court to wind up a company. In many cases, it is presented by a creditor because the company has failed to pay an undisputed debt worth £750 or more.

2. Serving the winding up petition

A winding up petition is issued with a hearing date and the creditor must serve the petition on the debtor in advance of the hearing so that they are aware of the potential for winding up.

3. Advertising the petition

A minimum of 7 days prior to the hearing the petition should be advertised in The Gazette in order for it to be valid. This gives others the chance to see the petition, potentially jump onto the back of it if they are also owed money and usually results in banks freezing the bank accounts.

4. The hearing

At the hearing the court considers the petition and the company has an opportunity to represent itself to dispute the debt, settle the matter, negotiate with the petitioning creditor or take other appropriate steps.

If the court is satisfied that the company owes the money and should be wound up, it can make a winding-up order.

5. A winding-up order is made

A winding-up order places the company into compulsory liquidation. The Official Receiver is appointed as liquidator initially to deal with the liquidation, although an insolvency practitioner may subsequently be appointed as replacement liquidator.

Can Compulsory Liquidation be Avoided?

A winding-up petition does not necessarily mean that a company will be placed into compulsory liquidation.

Depending on the circumstances, there may be ways to address the situation before a winding-up order is made. This could include paying or settling the debt, reaching an agreement with the petitioning creditor, disputing the debt where there are valid grounds, or considering an alternative insolvency or restructuring procedure such as creditors’ voluntary liquidation.

If a winding-up order has already been made, there may also be limited circumstances in which an application can be made to have the order rescinded. This is subject to strict legal requirements and timescales, so urgent professional advice is essential.

The earlier advice is sought, the more opportunity there may be to consider alternatives to compulsory liquidation.

What Happens After a Winding-Up Order?

A winding-up order has significant consequences for the company.

The Official Receiver or liquidator will determine whether any trading should continue for the purposes of the liquidation, but the general aim is to bring the company’s affairs to an orderly conclusion and usually the company must cease to trade with immediate effect.

The Official Receiver will invite the directors for an interview and ascertain the facts about the company and their role within it.

The Official Receiver or liquidator takes responsibility for dealing with the company’s affairs. This can include identifying and realising assets such as stock, vehicles, property, plant and machinery, book debts and other business assets.

What Happens to Employees During a Compulsory Liquidation?

Employees are often a big concern of directors when a compulsory liquidation is in process. Unfortunately, compulsory liquidation usually results in all employees being made redundant and losing their jobs. We know how difficult this can be for the individual staff members as well as the director who has often done their best to survive.

Remember we are here to help. Please reach out to our team. We can help you look after staff members as much as possible. We can talk to you about outstanding wages, holiday pay, statutory notice pay and redundancy pay.

What Happens to Directors During Compulsory Liquidation?

We know how daunting it is to receive a winding up petition and to be threatened with liquidation.

As a director of the company, you must cooperate with the Official Receiver or liquidator and provide information relating to the company’s affairs. The company’s financial history and the conduct of its directors will also be investigated. At BRI, we are here to help you. The main thing we want directors we work with to understand is that an investigation is a normal part of the liquidation process and does not automatically mean that a director has done anything wrong.

It’s also very important for directors to understand that compulsory liquidation does not automatically make them personally responsible for company debts or prevent them from setting up a new company in the same or similar trade (albeit with certain name restrictions). However, directors can face personal consequences in certain circumstances, particularly where there has been misconduct or a failure to comply with their legal duties.

Compulsory Liquidation vs Creditors’ Voluntary Liquidation

Compulsory liquidation and Creditors’ Voluntary Liquidation are both formal liquidation procedures for insolvent companies, but the way they begin is very different.

A CVL can therefore provide directors with an opportunity to take proactive action before matters escalate to a winding-up petition and compulsory liquidation. A CVL can even be an option after a petition has been presented subject to seeking help early enough.

However, liquidation is not necessarily the only option available to an insolvent company. Depending on the circumstances, alternatives such as a Company Voluntary Arrangement, administration or other restructuring solutions may be available.

When Should You Seek Advice for Your Business?

At BRI Business Recovery and Insolvency, we are here to help you at any point. However, we always say that the earlier you seek advice, the better. There is never a wrong time to contact us so please reach out.

If you have noticed any of these issues then now is the time to make the call.

• Persistent cashflow problems
• Difficulty paying suppliers on time
• Arrears with HMRC, including VAT and PAYE
• Increasing creditor pressure
• Statutory demands
• Threats of legal action
• A winding-up petition
• Difficulty paying debts as they fall due

These warning signs do not automatically mean compulsory liquidation is the only option. However, they indicate that professional advice should be sought.

Speak to BRI Business Recovery and Insolvency

Compulsory liquidation is a serious process, but directors do not have to navigate it alone.

At BRI Business Recovery and Insolvency, we work with directors, accountants and businesses experiencing financial difficulties. We help to understand their circumstances and identify the most appropriate way forward.

If you have received a winding-up petition, are facing increasing creditor pressure or are concerned that your company may be unable to pay its debts, we can help you understand your options.

There is no charge for an initial discussion, and it is carried out in complete confidence and without obligation.

The earlier you seek advice, the more options are likely to be available to you and your business.