Complete Guide to Compulsory Liquidation

Compulsory liquidation is a type of formal insolvency proceeding that sees a company being wound up against the will of the directors and shareholders. Compulsory liquidation is a legal procedure that can only be approved through the courts. If successful, it results in the complete closure of a company and the sale of its assets. It’s a complex procedure, so our team has compiled the following guide to compulsory liquidation in order to help you fully understand the process.

What Is Compulsory Liquidation?

Compulsory Liquidation is a formal, legal insolvency procedure that results in a company being forcibly liquidated. As its name suggests, this is a process that takes place despite the efforts or desires of the company directors and shareholders.

Compulsory liquidation is initiated by creditors looking to recoup monies owed to them by a company. The proceedings go through a legal court and, if successful, the court issues a compulsory ‘winding up petition’ followed by a ‘winding up order’, which means the company must be liquidated (or ‘wound up’) in order to pay off the debts it owes.

In this respect, compulsory liquidation stands in opposition to other forms of liquidation that are voluntary in nature. These include Members Voluntary Liquidation (MVL) and Creditors Voluntary Liquidation (CVL), which see a company being wound up with the assent of its shareholders and directors.

What Does It Mean for Me?

If your company has been issued with a winding-up petition, this means that your creditors have been successful in their bid to have your company liquidated. In practical terms, this means your company has to wind down. It must stop trading, and will be taken over by an ‘official receiver’.

An official receiver is a licensed insolvency practitioner who has been appointed by the courts to ensure the company is wound down as per the compulsory order. If you’re a company director, you no longer have control over any business decisions from this point onwards.

The company assets will be sold off in order to pay creditors. However, if there are still debts remaining after the liquidation process has ended, you are only responsible for these if you signed any personal guarantees for loans or debts taken on behalf of the company.

As a company director, your business decisions may come under scrutiny. However, if you have acted in good faith throughout your tenure, there’s unlikely to be any action or disqualification taken against you.

What Does It Mean for My Company?

The appointed receiver acts as the liquidator, overseeing the dismantling of the company and the sale of assets. The profits from the sales pay off any creditors, and the company is no longer allowed to trade (it’s totally dissolved).

For the company, this series of events means that it no longer exists in the way it previously did. It’s struck from the Companies House register, bank accounts are closed, and all operations cease.

What Does It Mean for My Customers?

For customers, compulsory liquidation means they can no longer purchase goods or services from the company. If they have placed orders and already paid, then unfortunately they may not receive this money back.

In this respect, customers become creditors too. However, they are far down the list in terms of repayments. As a company director, if you know a winding-up petition is heading your way, then to keep good faith with your customers you can refund payments and cancel orders ahead of time.

Customers will need to look elsewhere for the goods or services you provided them with. However, it may be the case that a director sets up a new company and attracts their old customers back.

How Can I Avoid Compulsory Liquidation?

Companies can only be liquidated once they’ve become insolvent and have begun to rack up debts. Before this occurs, there are lots of opportunities for companies to turn things around. Once the compulsory liquidation process has begun, a company can attempt to halt proceedings. However, once a company has been liquidated, there’s no way back.

What Should I Try Before Getting to This Point?

A compulsory liquidation order is very much a last resort. It’s not necessarily in the interests of the creditors to have your company wound down completely, so things will have to be out of hand for this avenue to be taken.

Before compulsory liquidation occurs, there are several methods that can be taken by your company and by creditors to deal with the issue of insolvency and unpaid bills.

These include:

  • Administration
  • Company Voluntary Arrangements
  • Members Voluntary Liquidation
  • Creditors Voluntary Liquidation

These methods are voluntary and allow a company to either pay its debts and continue trading, or be dissolved amicably.

Can I Turn My Company Around Instead?

We should note that all of the above efforts might still end up in liquidation. However, it is possible to turn a company around before or even after it becomes insolvent.

Insolvency is defined as the inability of a company to pay its debts. This isn’t a financial situation that a company finds itself in overnight. There are lots of opportunities for a well-run and well-advised company to avoid insolvency, or to remove themselves from debt without the need for liquidation.

This can take expert advice to be achieved successfully, but for company directors, it’s an essential component of running a successful business. Turnaround options vary greatly from one company and sector to the next but can include streamlining the business, finding new markets and opportunities for sales, launching new products, investing in new infrastructure, etc.

Can I Stop It?

If it gets to the point where creditors are launching winding-up petitions against your company, then it’s incredibly difficult though not impossible to stop it. Company directors can halt the process in court, but only if they have reasonable grounds to do so.

Company directors can also pay off the debt they owe to the creditors who launched the process against them. This is the simplest way to stop proceedings, but for a company that’s insolvent it might not be possible to raise the necessary funds to pay its creditors.

Can I Delay It?

The process can be delayed, too. Company directors can petition the courts for a reprieve, while exceptional circumstances may also help their case (all compulsory liquidations were halted due to COVID-19, for example).

Company directors may be able to raise funds to begin to pay back their creditors along the lines of a CVA, rather than having the entire company closed to pay the debts. In all circumstances, it’s important to open a dialogue with creditors, as they may become more agreeable once they are around the negotiating table.

In all cases, it’s important to act as quickly as possible if your company has been served with a winding-up petition by the courts. There are specific timeframes attached to the orders (more details below), and company directors will need to launch appeals or delaying tactics as soon as the petition has been received.

Ignoring a winding up petition isn’t a good way to delay it. If the courts receive no response, they have the power to appoint an official receiver and begin the liquidation process. Remember, this is a compulsory process. You, as director, have no say in the matter once it’s been approved.

What Is The Process?

To fully understand the implications of a compulsory liquidation order and what it means for your company, it’s important to understand what the process is and how long it takes. Compulsory liquidations always begin with a creditor launching a petition, and they usually end with the company being dissolved.

The compulsory liquidation process follows the following timeline:

  1. Your company owes its creditors money and has failed to pay. The creditors can begin the process if they are owed a minimum of £750 by their debtors and have been waiting at least 21 days for the debt to be repaid.
  2. The creditors ask the courts to issue a winding up petition. This is sent to the company directors, who may still be able to pay off their debt at this point. Seven days after the creditors have sent the petition, a company’s bank accounts can be frozen and the liquidation process gets into full swing.
  3. The next step is for a winding up order to be issued by the court. This starts the liquidation process, with an accredited liquidator appointed as the official receiver. At this point, the directors no longer have any control over their company.
  4. The liquidator begins to wind the company down, selling off assets in order to raise the funds to pay the creditors who began the process. The official receiver may also open up an investigation into the actions and decisions of the company directors.
  5. The company is totally dissolved, struck off the Companies House register, and ceases to exist.

When Do I Have To Stop Trading?

Companies that have been issued a winding up petition have seven days to respond, and to halt or slow down proceedings. If they have been unsuccessful in stopping the action against them after this seven-day period, the company has to stop trading and their bank accounts and assets are frozen.

At this point, the company is being prepared for liquidation, so it would be illegal for them to continue selling goods or services. However, up until the moment the company is ordered to stop trading by the courts, trading can continue.

In fact, a company that faces insolvency always continues to trade for as long as possible, as continued trading could attract a new buyer that saves the business or could even raise enough funds to pay off some of the debts owed.

How Long Does It Take?

The entire compulsory liquidation process doesn’t have an exact timespan. The time it takes varies, depending on the extent of the debts owed, how long it takes to find buyers for the assets, and how many disputes need to be settled by the liquidators.

Because this is a compulsory process, the company directors will often lodge appeals and try to slow proceedings down as much as possible. In general though, company directors can expect a wait of at least three months from the moment the winding up petition is issued to the moment the company is struck from the register.

This takes into account the initial seven-day period that company directors have to respond to the winding up petition, the treime taken to issue a winding up order, and the time taken for the appointed liquidator to close down the company.

Who Appoints The Liquidators?

The liquidators (also known as official receivers) are at first appointed by the courts to oversee the proceedings and begin the liquidation process.

However, it is possible for the creditors who filed the winding up petition to take control of the situation by applying to appoint their own preferred liquidators.

Liquidators must be licensed insolvency practitioners, and they take effective control of the company from the company directors, as they wind down operations and sell assets.

Can I Set My Company Up Again Later?

The company as it was will be entirely dissolved and struck from the register. However, this doesn’t stop the company directors or shareholders from establishing new companies in the future.

In fact, it’s entirely possible for a director to set up a new company during the liquidation process for the old one. There are several legal requirements that must be met, as the same name or similar cannot be used for a certain number of years, amongst other caveats that must be followed.

It’s a good idea to seek legal advice if you are looking to set up another company after going through the liquidation process.

Find Out More About Compulsory Liquidation

If you’re looking for expert and impartial advice on compulsory liquidation, don’t hesitate to get in touch with Irwin Insolvency.

Our in-house team of insolvency specialists are ready to help you through tough times. Contact Irwin Insolvency to find out more, or speak to us directly on 0800 009 3173 or send us an email at mail@irwinuk.net.

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About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency, rescue and turnaround.