Compulsory Liquidation is the name given to the court procedure used by creditors of a company to force a company owing them money into liquidation. In all but exceptional cases company directors will wish to take steps to avoid compulsory liquidation if it is possible to do so.
The Compulsory Liquidation Process
A creditor of the company who is owed £750 or more and whose debt is undisputed can issue a formal demand to the company for payment. If the debt remains unpaid after the demand notice period expires (21 days) the creditor can apply to the court by submitting a ‘winding up petition’ for the company to be wound up.
The winding up petition bearing the seal of the court in which the petition was issued will be served by delivering it personally to the registered office address of the company. The petition will contain details of the time and place at which the court will hear the petition and decide on the making of a winding up order.
Notice of the petition will also be advertised by the creditor who has issued the petition. This notice will always come to the attention of the company’s bank and the bank will immediately freeze the company’s bank accounts. If you believe your company is able to get out of its difficulties or you wish to avoid compulsory liquidation it is important to act at the earliest possible moment and try to avoid the petition being advertised.
The directors’ of the company must act only in the interests of the company’s creditors after a winding up petition has been issued. They become at risk of personal liability for all trading activity of the company and they are particularly at risk if the company loses further money after the winding up petition has been issued and before the court formally confirms the company is to be wound up.
The Court hearing of the winding up petition which will typically be within 6 weeks to 12 weeks after the petition has been presented to the Court.
Dismissing or Postponing Compulsory Winding Up Petitions.
It is sometimes possible to arrange for a postponement of the hearing of the petition if the Court can be persuaded that a postponement will be in the interests of the Company’s creditors. Even if the petition is postponed and eventually dismissed the Company will end up paying the creditors’ legal costs which been incurred in the proceedings to date.
There are only limited grounds which the Court will accept as grounds for postponing a winding up petition. The Court must be satisfied that either
- there are good grounds for believing the company will pay the petition debt and all other debts owed by the company in a short period of time or
- that the company is able to agree manageable payment terms with the creditor who has issued the petition and is also able to manage payments of debts owed to all the company’s other creditors or
- the company will enter into a different formal insolvency process which is likely to produce a better outcome for the company’s creditors.
There are several options for companies facing compulsory winding up which may enable the company’s directors to offer a better return to the company’s creditors and also to avoid an investigation by the Official Receiver into the conduct of the directors in the period leading up to the liquidation. Even though it is more likely than not that you as directors will not have done anything which could cause you difficulties it is preferable to avoid being involved in an investigation.
Options which could be considered are
- Company Voluntary Arrangement
- Creditors Voluntary Winding Up
- Pre pack Administration
It is important for the company’s directors to act quickly if they wish to postpone the winding up petition or arrange for the petition to be dismissed. The prospects of successfully postponing or dismissing a winding up petition rapidly decrease the longer it takes for the directors to act.