What is compulsory liquidation?
Compulsory liquidation is a formal insolvency procedure which results in the closure of a limited company due to insolvency. Business assets are sold for the benefit of creditors, and the company is removed from the register at Companies House.
The process is generally instigated by a creditor who has unsuccessfully tried for some time to recover their money, and who decides to take legal action against the business. They present a winding-up petition at court, and a hearing is arranged to determine the fate of the company.
Why would a company be forcibly liquidated?
The most common reason for compulsory liquidation is the inability of a company to pay its debts. Creditors must prove that an undisputed debt exists of at least £750, and this is typically achieved by sending a 21-day statutory demand for payment prior to petitioning the court. This figure has increased to £10,000 as per the Government's temporary measures which will apply for the period 1 October 2021 to 31 March 2022.
When this demand for payment remains unpaid and unchallenged, it becomes proof that the company is insolvent, and the creditor goes on to petition for its winding-up.
Compulsory liquidation process
Once a winding-up order has been granted by the court, a liquidator is appointed to administer the process. This could be the Official Receiver (OR), or a licensed insolvency practitioner (IP).
Their main role is to sell the company’s assets and distribute the resulting funds to creditor groups in the prescribed order. Readily identifiable assets such as plant and machinery or company vehicles could be owned by the company, but also ‘intangible’ assets such as the company’s rights to its intellectual property.
All assets will be professionally valued and sold, sometimes at auction, with the aim of recouping as much money as possible for creditors. The liquidator also investigates the actions of directors during the time leading up to insolvency, with a view to establishing potential wrongdoing that may have caused the company’s poor financial situation.
How long does compulsory liquidation take?
Once a winding-up petition has been issued, directors have seven days in which to respond, either by paying the amount due or challenging the petition. Once seven days have elapsed, if neither of the above has happened, the court will grant the winding-up order and a liquidator will be appointed.
From this point on, the length of time taken to complete a liquidation process generally depends on the number and type of assets held by the company, how readily they can be sold, and the complexity of the business.
What is the outcome of compulsory liquidation?
A company is closed down following the liquidation of its assets. It is removed from the register at Companies House, and will not be reinstated. Directors also face stringent investigations by the liquidator to establish the cause of the company’s failure.
The outcome of compulsory liquidation for directors can be serious. Insolvency service investigations go back several years, and include the actions of former and ‘shadow’ directors.
It’s highly advisable, therefore, for directors to seek professional guidance. A qualified accountant will be able to assess the seriousness of the situation, and provide advice on how to proceed.
The office-holder will be looking for instances of wrongful trading where directors have continued to trade even when they knew, or should have known, the company was insolvent, so worsening the final position of creditors.
Company transactions will also be scrutinised, with the aim of identifying ‘antecedent’ transactions. This type of transaction could include paying one creditor in favour of others, for example, or selling company assets for less than their market value.
These transactions may have been made when the company was already insolvent, or in some cases could have caused the insolvency. Directors face fines and disqualification for up to 15 years if instances of wrongdoing or misconduct are uncovered, and a potential prison sentence should fraudulent practices be found.
Clearly, compulsory liquidation is a serious issue for company directors, and one which requires specialist professional assistance. Your accountant will be able to provide further advice and guidance on compulsory liquidation, and depending on the circumstances, may refer you to a licensed insolvency practitioner.
Handpicked Accountants has established longstanding professional working relationships with accountancy practices around the country. We can put you in touch with fully-qualified accountants in your area, whose advice you can trust.