What is Compulsory Liquidation?
Posted on 5th November 2021 at 11:17
In business and financial management, there are lots of illegal and technical terms that can seem somewhat vague or unclear. This can be a problem when your own business finds itself having cash flow issues, and language such as 'creditors' and 'liquidators' start to crop up. It is important to have an unambiguous understanding of the language and terminology pertaining to specific business issues, so that you can be fully prepared for every eventuality.
As the name suggests, compulsory liquidation is the forced ending of a company in such a way that debts can be repaid. It is by no means an inevitability, though, and its parameters are set out in the Insolvency Act 1986 and The Insolvency (England and Wales) Rules 2016. To be clear, compulsory liquidation is a process that can be halted under certain circumstances and can even be instigated by leadership of the company itself.
The Compulsory Liquidation process
The purpose of compulsory liquidation is usually debt recovery. This means that the most common trigger is insolvency - that is, the acknowledgement that a company is unable to meet its debts when they fall due, and so they assets of that company must be released and distributed to creditors to clear the amounts owed. There are several steps to the compulsory liquidation process, with different personnel and organisations involved at each stage.
When a company is unable to pay its bills within a reasonable time frame, and creditors have exhausted all other possible avenues of debt reclamation, then a Winding Up Petition can be served. This can be instigated in a number of ways:
Petition issued by a creditor - A Statutory Demand letter must first be sent to the company, giving a 21-day payment period. If payment is not received within that period, then a Winding Up Petition can be presented to court for a fee of £280, and the company has a further seven days to pay.
Winding Up sought by directors or shareholders of the company - In the event that the company's own leadership acknowledges insolvency proactively, they can set the compulsory liquidation process in motion themselves.
The Crown or other authority finding that the company is acting against the public interest - In rare circumstances, a company may be found to be engaged in criminal behaviour and the company is wound up in the public interest, with criminal or disqualification proceedings then set in motion.
In order to qualify for serving the petition, the debt must amount to a minimum of £750 and must be at least 21 days overdue. When Winding Up Petitions are issued, they are usually also advertised in the London Gazette - one of the U.K's official journals of record.
If the debt is not paid by the end of the additional seven-day period afforded by the Winding Up Petition, then a Winding Up Order is issued by the court. The court then appoints an Official Receiver whose role is to initiate the liquidation process. Creditors must pay a deposit of £1600 to the Official Receiver to cover costs. As Official Receiver, this Officer of the Court takes on:
Investigation of Director conduct.
Control of the company's affairs.
Protection of company assets for the benefit of creditors.
Investigation of company finances to determine the cause of the failure.
Reclamation of as much as possible on behalf of creditors.
Upon the issuing of the Winding Up Order, the Official Receiver automatically becomes the Liquidator, but creditors have the option of working together to appoint a private, licensed Insolvency Practitioner to complete the process.
Asset Sales and Distribution
Any remaining company assets are sold and distributed, with all funds being directed to the clearance of debt. The role of the Official Receiver or Liquidator is to ensure creditors get the best possible return.
Once assets have been sold and distributed and all debts have been repaid, the company is dissolved, removed from the register of companies held by Companies House, and is no longer a legal entity. If any repercussions follow the Official Receiver's investigation of Director conduct, then these must still be addressed.
Your options in the event of Compulsory Liquidation
A Winding Up Petition is the most serious action that a creditor can take against a company, and the process of compulsory liquidation effectively takes the control of company affairs away from company leadership. This, in itself, severely limits the options available to company directors in terms of responsive actions. For this reason, a proactive approach is essential if you are to avoid the process of compulsory liquidation.
The point at which your company receives a Statutory Demand, or even a Winding Up Petition, is the point at which you must seek the advice and guidance of experts in the field of insolvency. The team at Smith & Barnes Insolvency can work with you to quickly and efficiently assess the company financial situation to determine whether the organisation can remain viable. If this is the case, then it may be possible to move forward with either a Company Voluntary Arrangement (efficiently), or an Administration (ADM).
Both of these options recognise the company as a viable going concern and allow the continuation of trade and operation while ensuring that debts are paid. These are insolvency processes that provide an alternative to compulsory liquidation, but can only be considered at the earliest possible stage of the process. This is why it is imperative that you contact Smith & Barnes Insolvency as soon as you are made aware of creditor issues.
The Smith & Barnes team of licensed Insolvency Practitioners work with companies across the U.K to reduce the stress associated with all types of financial issues. By applying a high level of knowledge and experience, Smith & Barnes Insolvency can provide a quick and efficient service that is both low cost and supportive. Call today to arrange a free consultation that will detail your requirements and help you reach your preferred result.
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