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Compulsory Liquidation
What Is Compulsory Liquidation?
Unlike creditor’s voluntary liquidation, compulsory liquidation is instigated by a dissatisfied creditor who has either obtained judgement in respect of an unsatisfied debt or has issued a statutory demand which has not been disputed, satisfied or secured within a 21 day period.
Who can benefit from it?
Creditors, who by forcing the liquidation of the company will provide an opportunity for the appointed liquidator to investigate the affairs of the company and the conduct and actions of the director(s).
The Procedure in Brief
A creditor at his own cost (this can be between £1500 and £2500 and who is owed in excess of £750) may, having obtained judgement or having issued a statutory demand that remains unsatisfied, unsecured and not subject to dispute after a 21 day period, present a petition for the winding up of the company.The petition is formally served on the company and must also be advertised in the London Gazette, a statutory publication, which includes details of all petitions issued on a daily basis.
If the debt continues to remain outstanding at the date of the hearing, a winding up order is made by the court. Once the order has been made by the court, the company is in liquidation and control of its affairs passes to the Government department known as the Official Receiver’s Office ("OR"). It is the responsibility of the OR to take control of the assets of the company, to do this the directors of the company are required to attend an interview with the OR to explain the current circumstances of the company and advise of details of the assets and their respective locations.
In the event that the company has assets, the OR will instruct agents to secure them. It is also likely that the OR will call a meeting of creditors with a view to appointing an Insolvency Practitioner ("IP") to administer the liquidation. Alternatively, creditors which account for 25% of the entire creditor base of the company may require a meeting to be called by the OR in order that an IP can be appointed. Assuming an IP is appointed it will be his responsibility to administer the liquidation although the OR will retain his duty to investigate the affairs of the company and to consider whether steps ought to be taken to pursue disqualification proceedings against the directors.
In the event that there are insufficient assets with which to seek the appointment of an IP, the role of liquidator will remain with the OR whose responsibility will be to deal with the affairs of the winding up of the company to include detailed investigations into the conduct of the directors and the affairs of the company prior to liquidation.
Advantages Of Compulsory Liquidation
The CompanyThere are no cost implications for the company as the creditor incurs the expense in petitioning for the winding up of the company. Please note however that petitioning creditors costs are payable as a priority expense of the liquidation.
Creditors
In the vast majority of cases the petitioner forces the company to cease trading and through the appointment of a liquidator enables a comprehensive investigation into the affairs of the company and the conduct of the directors to be undertaken, which will take into consideration all the aspects concerned within the director’s responsibilities section of this web site.
Disadvantages of Compulsory Liquidation
DirectorsWill be subject to a comprehensive investigation by the Official Receiver into the conduct and the affairs of the company generally, which may lead to an action being brought for disqualification or other such actions resulting in potential personal liability.
The very fact that the directors had not taken the relevant steps to deal with the affairs of the company and had allowed it to be wound up compulsorily is, in itself, an indication that they were not effectively controlling the company. Additionally, it can be regarded that allowing the company to proceed into compulsory liquidation may represent a breach of the directors fiduciary duty to the company and his obligation to minimise losses to creditors where the directors are aware that there is no reasonable prospect of avoiding insolvent liquidation. Each of these matters rank highly when consideration is being given as to whether there are merits in pursuing an action for the disqualification of the directors.
Under no circumstances should directors allow companies under their control to be forced into liquidation on a compulsory basis. If a winding up petition is presented against your company please seek immediate advice and engage us to undertake our free business review in order that alternative measures may be considered.
Creditors
In addition to the OR’s costs for administering the case, all realisations from the sale of the assets or collection of the money owed by the debtors, are subject to an automatic ad valorum charge of 15%, thus immediately depleting the funds available to the creditors of the company.
It provides little opportunity for recovery of any funds for creditors.