What is Compulsory Liquidation?
What is a Compulsory Liquidation and how can we help?
What is a Compulsory Liquidation?
Compulsory Liquidation happens when a creditor presents a winding up petition in court, stating that the company owes them money but cannot repay. Any creditor can petition, however HMRC are usually the ones to do so as the process costs them money.
If the winding up petition is granted, the company is wound up and will eventually be forced to close through process of liquidation. An Official Receiver (OR) is appointed, and their first task of the OR is to contact the directors of the company and understand what assets there are for creditors.
Can I stop a Winding Up Petition?
Once a winding up petition has been issued, you need to act fast.
If you can, pay the debt you owe your creditors in full. If this is unachievable, you need to propose a Company Voluntary Arrangement and seek expert guidance.
A Company Voluntary Arrangement (CVA) is an official process which protects your company from compulsory liquidation. This is a legal arrangement between your company and its creditors where an insolvency practitioner negotiates with the creditors on your behalf.
What happens in a Compulsory Liquidation?
It is a court appointment and an official receiver will be appointed on behalf of the creditors, who will carry out the same duties as the liquidators, realise any assets, and investigate directors.
- Antecedent transactions (creditors that have been preferred to others) can be pursued (preference payments in the lead up to insolvency).
- Any assets that have been sold prior to liquidation will be investigated to see if market value was achieved and funds were used accordingly.
- Drawings and Dividends from the director will be scrutinised along with other payments.
- ALL directors Loan accounts that are overdrawn will be pursued and in some instances will result in the director being made personally bankrupt if unable to pay.
What does Compulsory Liquidation mean for the Director of the company?
Although, what might look like an attractive option for a director due to the fact that the creditor pays for the petition (wind up), it is not advised and should only be a last resort.
The reason for this is because you will come under criticism for allowing a creditor to essentially pay to wind the company up. Although the director doesn’t owe the debts personally (the company does), you are responsible for the company and doing nothing doesn’t reflect well on you, certainly as winding up can takes months.
If the debt isn't paid, disputed or adjourned, the process to wind up a company can take weeks or even months.
It's best to act sooner rather than later and to seek advice if your company is struggling to meet its financial obligations.Get in touch
Each creditor is invited to give proof of debt to the liquidator - "proving". The liquidator will then assess all the proofs of debt, accepting or rejecting each claim in whole or in part.
If accepted by the liquidator, unsecured creditors will be paid at the end of the liquidation (they could also receive interim dividend prior to this). If the creditor is a secured creditor, they are entitled to be paid from proceeds of the sale of secured assets.
When a winding-up order comes into play, employees of the company are automatically dismissed. The employees may be entitled to redundancy pay and could have a claim for damages due to wrongful dismissal.
The liquidators job is to collect and realise the company's assets. They then distribute any proceeds to the company's creditors.
The liquidator can carry on the business of the company, pay its debts and even bring legal proceedings in the name of the company.
The liquidators fees are usually paid as an expense of the winding up. They're generally paid from the company's assets after secured creditors have been paid.
A compulsory liquidation is where a creditor winds the insolvent company up so that they can receive some form of payment. It is not recommended because the Director is not acting responsibly, they lose all control, and the creditor pays the fee. A Creditors Voluntary Liquidation is also a formal process for insolvent companies. The Director pays the liquidation fee and is in control of the process.
From receiving the winding up petition to the beginning of the liquidation, the timeline is usually around 3 months. However, it can take up to a year for the insolvency practitioner to finish liquidating the company.
Compulsory Liquidation happens when a frustrated creditor takes action to receive payment through forcing the Director to act or by gaining access to company assets.
A winding up petition is what creditors use to apply to the court to close down your Ltd company.
If your company is insolvent and you don't liquidate your company through a Creditors Voluntary Liquidation, you will be forced into Compulsory Liquidation.
This is not recommended and reflects badly on you, the Director. You could also be investigated for fraudulent trading or wrongful trading, resulting in being held personally liable for company debts in some circumstances.
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