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What is Compulsory Liquidation?

1st May, 2024 / Posted in liquidation Process

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What is Compulsory Liquidation?

Compulsory liquidation is when a creditor forces the process of liquidation on a company. 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.

If this happens, the company stops trading, directors lose control and the company assets are sold.

It is a serious action and can be detrimental to a business, however, it IS possible to stop compulsory liquidation, so long that you act fast in response to your company being “served a winding-up petition”.

Call us on 0800 970 0539. We can give you the professional advice needed.

How does a company go into compulsory liquidation?

  • A creditor issuing a winding-up petition
  • Being wound up by the Crown or Government agency if doing so is in the public interest. i.e. due to criminal behaviour.

A creditor issuing a petition

Compulsory liquidation happens when creditors have exhausted all other avenues to recover their money. Deals to repay may have been agreed between both parties, but the debtor company has failed to follow the agreement, demonstrated intractability or lacks clear communication. So a Winding up petition (WUP) is served to compulsory liquidate the company.

For WUP to be served, creditors must be owed at least £750. The sum must have been unpaid for at least 21 days (this stated and submitted by a statutory demand letter).

Being wound up in the public interest

This happens when the Crown or other agencies believe a company is contravening legislation or acting against the public interest. This action is rare, but when it occurs, criminal and/or disqualification proceedings are common. In some cases, the DBEIS/liquidator can press for action.

Who usually forces companies into compulsory liquidation?

HMRC is most likely to ask a court to put a company into compulsory liquidation. Crown agencies issue over 60% of petitions. Why is that?

HMRC is an “involuntary” creditor. Because you are trading and employing people, the debt to the Crown increases. 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. The company will then either pay, enter a CVA or administration or simply cease trading.

What is the process?

  1. A Statutory demand letter is sent to the debtor to give 21 days for the company to pay the debt.
  2. A Winding up petition is issued if the debt is not paid in those 21 days. This period gives the company an extra seven days for the debt to be paid. (Be aware that WUPs are advertised in the London Gazette – though in some cases this can be avoided. Contact us today to stop an advertised petition.)
  3. Winding up order served by Court if the debt is not paid in the extra seven days.
  4. Official Receiver (OR) (Liquidator or Licensed Insolvency Practitioner) appointed to to put the company into compulsory liquidation, the directors’ power and responsibilities cease. The director’s role in this process is to work with the OR, assisting if and when needed.
  5. Remaining company assets are sold and distributed, with the money made from doing so used to repay the debts. It is up to the OR to get the best return for creditors and act in their best interests
  6. Company is dissolved and struck off the register: it ceases to exist.

How long does the process take?

Compulsory liquidation often takes up to a year to complete. The process of issuing of the petition and when the Official Receiver is appointed can happen quickly. But the actual compulsory liquidation process itself can take time.

How much does it cost to put a company into Compulsory Liquidation?

To force a company into liquidation the costs are  high, so a creditor must decide whether it is worth it.

The typical cost of the action will be £250-£500 for a statutory demand, and £1,000-£2,000 for a winding-up petition (including Court costs). Despite this, it is a very effective way of collecting more substantial debts when the creditor believes that there are sufficient resources to pay it. Many larger companies use established debt collection firms to collect their debts this way.

 

What are the consequences of Compulsory Liquidation on Directors?

  • The Official Receiver has the role of investigating the actions of the officers and directors of the company thoroughly. If it is proven that you traded wrongfully, took credit without reasonable prospect of repaying the debts, and failed to submit accounts or several other offences, then you may face action
  • Loss of power, duties and control of the company
  • The potential closure of the business if you can’t repay the debts.

Can the process be stopped?

Yes, However, you must ensure you act fast once a winding up petition has been served.

Following the winding up petition you can choose from the following options:

  • Pay the debt which will dismiss the petition
  • Seek an adjournment and explore the possibility of a CVA

If you act too late and the winding up petition is heard by the Court and issued, then there is no more that can be done.

What is the difference between Compulsory Liquidation and Voluntary Liquidation?

As mentioned above a liquidation that is compulsory is started by a creditor that goes to the court.  In the case of a Voluntary Liquidation the directors sensibly realise that the company is insolvent and that they should act to start the process themselves.  The directors seek to appoint a liquidator, who has to be a licensed insolvency practitioner, to prepare a statement of affairs setting out the position and then  he/she will ask the creditors if they approve his/her appointment.  This can be done at a creditors meeting or by what is called deemed consent.  The process’  full name is creditors voluntary liquidation as ultimately it is always the creditors that have to approve and vote.  They can appoint their own liquidators if they want to ( this is rare).

Advantages of Compulsory Liquidation

Not much except that it doesn’t cost you anything.

Disadvantages

  • Can take up to a year to complete instead of a month
  • Employees won’t get compensation until the process is complete
  • The Official Receiver will have the resources to look more closely at your conduct as a director and claim from you if necessary.
  • Generally a bit of an unpleasant experience.
  • It doesn’t look as good as a voluntary liquidation if you decide to start again and want to raise finance.

How Many Companies Are Compulsory Liquidated

The number of seasonally adjusted compulsory liquidations in April 2024 was 11% higher than in March 2024 and 21% higher than in April 2023.

The number of compulsory liquidations in 2023 increased by 44% from 2022, but remained 4% lower than 2019 (pre-pandemic levels). Numbers have increased from record low levels seen in 2020 and 2021 while restrictions applied to the use of statutory demands and certain winding-up petitions (leading to compulsory liquidations).

Photo of Robert Moore

by Robert Moore

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