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What is Compulsory Liquidation

18th January, 2023 / Posted in liquidation Process

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So in a compulsory liquidation what happens

When a company ends up in compulsory liquidation it is usually a sign that a creditor has given up trying to recover money from the company, or it indicates that a Crown or Government agency has wound up the company, using a winding up petition under the public interest.


So, how does a company go into compulsory liquidation and what happens in the winding up process?

Clearly, this is a very serious action for creditors to take (not least because of the cost) and if the company is subject to this process it can severely curtail the ability to conduct business.

Read the guide and questions here but if you have a very irate creditor talking about winding up your company – TAKE PROFESSIONAL ADVICE NOW or call us on 0800 9700539.

It is possible to stop compulsory liquidation, but you have to act quickly if you have received or your company has been “served a winding up petition”.


Creditors Petitions

A creditor has pursued the debts due to it for a significant period and has exhausted all other avenues to recover. Often deals to repay will have been agreed but the debtor company has not stuck to the deals, has demonstrated intractability or simply does not communicate with the creditor. They instruct a solicitor or debt collector to collect the debt and all avenues fail. The agent then discusses the cost of proceeding with an action to wind the company up.

The costs of this action are not insubstantial and a creditor has to decide whether the debtor is likely to pay up. A debt of over £750 must be undisputed and the creditor must have notified the debtor of its intent to collect the debt. Often this involved issuing a statutory demand first. If the debtor fails to pay the statutory demand in 21 days and does not dispute the debt, then the creditor may issue a winding up petition. From solicitor to solicitor the costs vary but a typical cost of the action will be £250-500 for a stat demand, £1,000-2,000 for a winding up petition (includes court costs). Despite this for larger debts it is a very effective way of collecting money when the creditor believes that there is sufficient resource to pay it. Many larger companies use established debt collection law firms to collect their debts this way.

The application for a petition will be granted where it can be proven to the court’s satisfaction that the debt is undisputed, attempts to recover have been undertaken and the debtor is not compliant. A petition will be issued and court hearing date granted, usually the date is well in the future because of court pressures. Once the petition is correctly served upon the company it has a period to pay the debt or to defend the action. This is costly as the action is always in a High Court. This requires a barrister to attend and the costs of such defence are high. If the case is found the company is wound up by the court.

WARNING! even if the debt is paid (always with full costs) the fact that a petition is issued means that a winding up hearing (in the High Court) MUST be held. Between the date of the payment and hearing it is possible (and often happens) that another creditor learns of the petition and “substitutes” their debt for the paid debt. Thus they piggy back the action in order to get ahead of other creditors and get paid.

Government Petitions:

If the crown (either tax agencies or the DBIS) believes that a company is contravening legislation such as the Trading Standards legislation or is acting against the public or government interest, it is possible for the company to be liquidated compulsorily. This is very serious action to take and is not used very regularly. In such cases criminal and or disqualification proceedings are quite common.

Company directors disqualification: remember the DBIS/liquidator can press for action.

Advertisement of the Petition

15 days (or sometimes more) before the hearing, the petition can be”advertised” in the London Gazette. Of course all high street banks and lenders monitor this very carefully because if a customer is involved in such an action they usually MUST freeze the bank account immediately – thus stopping any trading. The purpose of this is stop assets being sold or other transactions that may worsen the creditor’s position. This is to stop dissipation of assets under s127 Insolvency Act 1986.

This mechanism is used most by HM Revenue & Customs. Over 60% of all petitions are issued by the crown agencies. Why?

Well the Revenue and the VAT are “involuntary” creditors. Because you are trading and employing people the debt to the crown ticks up. If you have tried to do deals to repay outstanding PAYE and or VAT and still fail to make payments the crown debt will be rising. So they decide to wind your company up. This way, either the company will pay, enter a CVA or Administration or simply cease trading.

If the Crown winds your company up remember this, the liquidator is court appointed and will investigate very carefully the actions of the officers of the company. If it can be proven that you traded wrongfully, took credit without reasonable prospect of repaying the debts, failed to submit accounts or a number of other offences then it is possible you will face action.

It is possible to prevent the advertisement of the petition in the London Gazette, speak to us for options. 0800 9700539

Now the technical warning

Under the Company Directors Disqualification Act 1986 you could be banned as a director for up to 15 years. You could also face criminal proceedings under the Social Security and Administration Act 1992 and the Criminal Justice Act 1988. In English, this means if PAYE has been abused to the betterment of the company and or its directors any such gains as were made can be pursued from the personal estate of the director concerned.
Under the Income Tax (Employment) Regulations 1993 the revenue is entitled to recover unpaid PAYE from directors where it can be proven that the directors were aware of the wilful failure to operate the PAYE scheme (on the directors remuneration) correctly.


In either scenario it is vital that you take all reasonable steps to protect the assets of the business, to conform with the liquidator’s wishes and to act responsibly. Remember, the last option available is to allow the company to be compulsorily liquidated, essentially this is to be avoided at all costs.

Is your company viable but struggling? Talk to us about BEATING a petition and the best alternative to winding up! 0800 9700 539 or 01289 309431.  See this page for how we have beaten winding up petitions.

Photo of Robert Moore

by Robert Moore

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