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What is Compulsory Liquidation?

Compulsory Liquidation, usually referred to as “Winding-Up”, is the process to wind up an insolvent company through the courts.
Insolvent, what does this mean?

S123 IA 1986 sets out the definition of Insolvency:- Creditor(s) are owed more than £750 and have either served a 21 day demand which has not been met or judgment has been given or it is proved to the satisfaction of the Court that the company cannot pay its debts as they fall due or the company’s liabilities exceed its assets including contingent liabilities.

When can a compulsory liquidation occur?

Compulsory Liquidation Winding-up is a court procedure usually initiated by a creditor of the company when all other debt collection procedures have failed. When a company is insolvent and fails to pay its debts, creditors can take steps to wind up the company by issuing a petition to Court.

A winding-up order can be made if the company:

  • has decided that it should be wound up by the High Court
  • registered as a public limited company more than a year previously but has not yet been issued with a trading certificate
  • is an ‘old’ public company
  • has not begun trading within a year of its incorporation or has suspended its trading for a whole year
  • has less than two shareholders, unless it is a private company limited by shares or guarantee
  • cannot pay its debts
  • should be wound up because the Court forms the opinion that this would be just and equitable

The petitioner must serve a sealed copy of the petition, which means it has been lodged in court, on the company and also advertise the petition in the London Gazette (for companies registered in England and Wales) and Belfast for companies registered in Northern Ireland.

There will be a hearing at Court which the company can oppose. If the company needs time to settle the debt, it is possible to agree an adjournment with the petitioning creditor and if they are not prepared to agree, the company will need to appoint a barrister to attend the hearing and request an adjournment. If there are reasonable grounds for granting an adjournment, either the company needs more time to prepare their defence of the petition or they need more time to pay, the judge will usually grant an adjournment. It is vital that the company seeks legal help and advice from solicitors with insolvency knowledge.

The liquidator
When a winding-up order has been made, the Official Receiver is initially appointed as liquidator (section 136, IA 1986). The company’s creditors and contributories may appoint another individual, being a qualified insolvency practitioner, to act as liquidator (section 139, IA 1986). More than one liquidator can be appointed to act jointly.
A Liquidator is an officer of the court and has a duty to act fairly and impartially.

What does the liquidator do?
A liquidator’s function is to collect in and realise the company’s assets, and to distribute the proceeds to the company’s creditors and, if there is a surplus, this goes to the shareholders.

A liquidator has wide-reaching powers to assist him in fulfilling his function. Such powers include bringing legal proceedings in the name of the company, carrying on the business of the company and paying debts.

Who pays the liquidator?
The liquidator’s fees are generally paid as an expense of the winding-up. As such, they are generally paid out of the company’s assets, after secured creditors holding fixed charge security have been paid; but in priority to creditors who either have no security or have floating charge security over the company’s assets.

There are rules governing how liquidators fees are agreed and paid which is set out in the Insolvency Rules.

What does compulsory liquidation mean for the company directors?
When a company goes into compulsory liquidation, the powers of its directors cease and they are automatically dismissed from office.

As a former director of a company that is being wound up, you may be required to assist the liquidator and to provide a statement of the company’s assets and liabilities.

If the liquidator believes that the conditions for disqualification are satisfied, he will report that to the Secretary of State with reasons why disqualification might be appropriate.

What compulsory liquidation means for creditors and employees?
Once the company has been wound up, creditors cannot bring action against the company except with the courts’ permission. Creditors will be invited to send in details of their claims and if there are surplus funds after costs, unsecured creditors will participate equally for a dividend.

Secured creditors will be entitled to be paid from secured asset realisations. Depending on the type of security, for example a legal charge on a property, the liquidator will need to get authority to pay fees and expenses out of the funds realised. There are different rules for assets subject to debentures where the charge is not a “fixed charge” but instead a “floating charge”.
All employees of a company are automatically dismissed if a winding-up order is made. As a former employee, you may be entitled to submit claims to the Redundancy Fund for arrears of wages, holiday pay, payment in lieu of notice and redundancy (if you have been employed for more than 2 years). The Official Receiver or separately appointed Liquidator will provide information on how to submit your claim.

If you've read through our section and feel like you would like some further information, please call us on our 0333 9999 600 and one of our advisors will give you the right help and advice based on your individual circustance.