COMPULSORY LIQUIDATION SUPPORT

The process will generally begin when a creditor is owed £750 or more and files for a winding up petition against the company. This is often seen as a last resort, reserved only for when various other debt recovery methods (payment demands, negotiation, etc.) have failed. The winding up petition is submitted directly to the court before being served to the business in question. 

It is possible, in some cases, that other entities, such as shareholders or HMRC, may petition for compulsory liquidation if significant debts are withstanding. Once the winding up petition has been filed, it must then also be publicly advertised in The Gazette within seven days of the court heating. This period is intended to allow any other creditors out there to be aware of the petition in order to either support or oppose it. The act of advertising a winding up petition can also have some other knock-on effects for the business. For example, banks may look to freeze company accounts once they’ve heard the news to prevent unlawful access to funds before a decision as to what should happen has been made. 

The advertisement often triggers serious consequences for the company, as banks may freeze the company’s accounts to prevent the dissipation of assets before the court’s decision.

At the official court hearing, the judge will oversee a review of the case. The purpose of this is to determine whether the company is insolvent or not, and if there are grounds for it to be wound up. The business will be deemed to be insolvent if it is unable to pay its debts as and when they are due, or if its current liabilities exceed assets. 

As part of the hearing, the company has the right to challenge the petition, if there is a belief that the firm is not insolvent after all, or if there are alternate solutions that haven’t been fully and fairly considered. 

If the court finds that the company is, in fact, insolvent and eligible for compulsory liquidation, a winding up order will be issued. This officially places the company into compulsory liquidation bringing the directors’ control of the business to a close.

In the immediate aftermath of the granting of a winding up order, an official receiver or insolvency practitioner will be appointed to act as the liquidator for the case. It is the role of the liquidator to take control of the firm’s operation, prime and protect assets ready for repayment, and oversee the actual liquidation process. This will include steps like identifying all company assets, notifying existing creditors, and ensuring compliance with the law,

It will likely also fall under the remit of the liquidator to dismiss employees and terminate contracts that are no longer deemed to be needed in either the short, medium, or long-term.

With a liquidator in place, the company is then required to immediately cease trading. All power previously held by directors also comes to an end, and they should no longer have any control over, or access to, the company’s operations and assets. 

There are some circumstances where the liquidator may deem that trading should be allowed to temporarily continue, for instance in order to maximise the sale value of firm assets. 

It is up to  the liquidator to determine whether it is best to sell off the business as a whole, or liquidate individual assets.

One of the first, and most important, duties of a liquidator is to locate and value the company’s bank of assets. This will include securing: 

• Physical property
• Business inventory 
• Intellectual property 
• Financial assets such as bank accounts 

Any money owed to the business will also be claimed at this stage.

The proceeds generated from the sale of company assets are to be immediately distributed to the firm’s creditors, according to a specific legal hierarchy.

1. Secured Creditors: Anybody holding fixed charges over assets will be paid first of all
2. Preferential Creditor: This includes parties such as employees who are owed wages and pension contributions.
3. Unsecured Creditors: Including suppliers and customers, these creditors are typically last in the order of priorities and will likely only receive a fraction of what’s owed, if there is anything left at all. 

Once all groups of creditors have been repaid, it is the turn of the shareholders. However, they will only be paid if any funds remain after all creditors have been satisfied, an extremely rare occurrence in a compulsory liquidation. 

The liquidator will also oversee an investigation into the conduct of the company’s directors in the lead-up to insolvency. The liquidator will examine whether the director(s) is/are deemed to have acted in the best interest of the creditors prior to, and after, the business became insolvent. 

If any wrongful or fraudulent trading, negligence, or misfeasance is identified, the director(s) in question will likely face some serious consequences. These can include disqualification for up to 15 years, personal liability for some or all of the debt, and criminal prosecution, which could lead to fines or even imprisonment. 

The company’s directors are required to fully cooperate with the liquidators’ investigation during the process, and any attempts to conceal anything will be looked at extremely negatively at this stage, only serving to escalate the situation.