Compulsory Liquidation

Compulsory Liquidation involves court-directed company dissolution, with the Official Receiver often becoming the appointed Liquidator.

Unlike Creditors’ Voluntary Liquidation where directors initiate meetings for winding up, Compulsory Liquidation typically arises from creditor action through a Winding up Petition.

What are the Grounds for Initiating Compulsory Liquidation?

A compulsory liquidation can be initiated by creditors or certain regulatory bodies on specific grounds that indicate a company's inability to meet its financial obligations. The common grounds for initiating a compulsory liquidation include:

Unpaid Debt: A creditor who is owed a significant amount (usually at least £750) can file a Winding up Petition if the debt remains unpaid and uncontested by the company.
Inability to Pay Debt: A company is deemed unable to pay its debts if it fails to satisfy a statutory demand within 21 days or if it doesn't contest a Winding up Petition successfully.
Balance Sheet Insolvency: If a company's liabilities exceed its assets on its balance sheet, it is considered balance sheet insolvent, which may lead to a compulsory liquidation order.
Failure to Commence Business: If a company hasn't commenced its business or operations within a year of its incorporation, it can be wound up compulsorily.
Public Interest: Regulatory bodies, such as government authorities, may initiate a compulsory liquidation if it is in the public interest to dissolve the company due to fraudulent activities, unlawful operations, or other significant violations.
Unresolved Insolvency Proceedings: If a company is already undergoing certain insolvency proceedings, such as an administration, but those proceedings don't result in the company's revival, it might lead to a compulsory liquidation.

It's important to note that initiating a compulsory liquidation is a serious step that involves legal procedures and court involvement. Creditors or regulatory bodies must follow specific guidelines and meet the criteria outlined by the insolvency laws in the relevant jurisdiction.

What’s the Procedure for the Compulsory Winding up of a Company?

The various stages of the process are highlighted below:

Statutory Demand

To issue a statutory demand, certain requirements and steps need to be followed. A statutory demand is a formal written notice that demands payment of a debt owed by a company or individual.

Here is the process to issue a statutory demand:

Valid Debt: The creditor must have a valid and undisputed debt owed by the company. This debt should generally be above a specified minimum threshold, exceeding £750.
Correct Form: The statutory demand must be in the correct prescribed form as per the relevant insolvency laws. It should clearly state the amount of the debt, the nature of the debt, and provide details about the creditor and debtor.
Served Correctly: The statutory demand must be served correctly on the company. This often involves personal delivery to the registered office of the company, though other methods may be accepted depending on the jurisdiction.
Timeframe: After serving the statutory demand, the creditor should allow a reasonable period (usually 21 days) for the debtor company to respond or settle the debt.
Undisputed Debt: If the debtor company fails to respond or dispute the debt within the specified timeframe, the debt is considered undisputed.
Proof of Service: The creditor should be able to provide proof that the statutory demand was served on the company. This may involve an affidavit or other forms of evidence of delivery.

Issuing a statutory demand is a significant step in the debt recovery process and can potentially lead to further legal action, including winding up proceedings, if the debt remains unpaid. It's advisable to seek legal advice and ensure compliance with the relevant jurisdiction's laws when issuing a statutory demand.

Further information may be found at: https://www.gov.uk/statutory-demands

Winding up Petition

Issuing a winding-up petition is a formal legal action taken by a creditor to initiate the compulsory liquidation of a company. Here's what is typically needed to issue a winding-up petition:

Unpaid Debt: The company must owe a significant debt to the creditor, often exceeding a certain minimum threshold (such as £750). The debt must be valid, due, and unpaid.
Statutory Demand: Before issuing a winding-up petition, the creditor usually serves a statutory demand on the company, demanding payment of the debt within a specified timeframe (usually 21 days).
Non-Payment or Dispute: If the debtor company fails to pay the debt or disputes the debt, the creditor may proceed to issue a winding-up petition. Disputed debts are generally not a valid basis for a winding-up petition.
Insolvency: The company must be unable to pay its debts. This insolvency can be proven by the company's failure to comply with a statutory demand or by demonstrating its inability to pay its debts as they fall due.
Legal Formalities: The winding-up petition must be properly drafted and comply with the relevant legal formalities of the jurisdiction. It should contain necessary details about the creditor, debtor company, the amount of debt, and grounds for insolvency.
Court Filing: The winding-up petition is filed with the appropriate court. Upon filing, the court issues a hearing date for the petition to be heard.
Advertisement: The creditor is usually required to advertise the winding-up petition in a government gazette or an official publication to provide public notice of the proceedings.

It's crucial to follow the correct legal procedures and obtain legal advice before proceeding with a winding-up petition, as it's a significant legal step that can have serious implications for both the creditor and the debtor company.

Court Hearing

During the hearing of a winding-up petition, several key steps and considerations take place:

Representation: The petitioner (creditor) and the respondent (debtor company) are typically represented by legal counsel or representatives.
Debtor's Response: The respondent (debtor company) may appear to challenge the petition, dispute the debt's validity, or present evidence of solvency or payment arrangements.
Adjournment or Consent: If the parties agree on a resolution, the hearing might be adjourned to allow time for the agreement to be formalised. If the debtor consents to the winding-up order, the court might make the order then.
Evidence and Arguments: Both sides present their arguments and supporting evidence. The petitioner may provide evidence of the debt's validity and the debtor's inability to pay, while the respondent may present counterarguments or evidence of solvency.
Judgment: The court will consider the evidence and arguments presented and make a judgment. If the court is satisfied that the debtor is insolvent and unable to pay its debts, it may issue a winding-up order.
Winding-Up Order: If the court issues a winding-up order, this legally compels the company's compulsory liquidation. An official liquidator is appointed to oversee the process.
Consequences: Once a winding-up order is issued, the company's assets are frozen, and the official liquidator takes control. The company's affairs are wound up, and its assets are realised to pay off creditors.

It's important to note that the specific proceedings can vary based on jurisdiction and legal procedures. Legal representation is highly recommended to navigate the complexities of a winding-up petition hearing and to ensure compliance with the relevant laws and regulations.

Official Receiver

Once the Company is in Compulsory Liquidation the Official Receiver is appointed initially as the liquidator to the company. The Official Receiver has a period of 12 weeks in which to make a decision as to whether he wishes to convene a meeting of the company’s creditors.

Appointment of Liquidator

When opting to appoint an independent insolvency practitioner as the liquidator in a compulsory liquidation, creditors have a range of methods at their disposal:

Decision Procedure: This structured process enables creditors to actively participate in selecting a liquidator by casting votes electronically or through other defined means.
Physical and Virtual Meetings: Creditors can convene physical or virtual meetings to collectively decide on the liquidator's appointment, with options for proxy voting to ensure broader participation.
Written Resolution: Creditors can reach consensus on the liquidator's appointment through a written resolution, provided a specified majority of creditors agree.
Court Application: In certain situations, creditors may need to apply to the court for permission to appoint a specific liquidator.

Selecting the appropriate method depends on factors like creditor involvement. A licensed insolvency practitioners can provide guidance to ensure a compliant and effective appointment process.

Finalisation

A compulsory liquidation concludes with the company's dissolution and creditor payment:

A brief summary of the whole process is as follows:

Liquidator's Role: After the winding-up order, the liquidator manages asset sales and creditor payments.
Asset Realization: Assets are sold, converted into cash.
Creditor Payments: Proceeds pay creditors in order of priority.
Final Steps: Reports and meetings update creditors.
Dissolution Application: Liquidator seeks dissolution.
Company Dissolution: Approved application results in dissolution.
Conclusion: Process ends, company dissolved; assets settle creditors' claims.

An Automatic Moratorium

The law surrounding compulsory liquidation stipulates that, as soon as proceedings have begun, an automatic moratorium prevents any further legal action from creditors, unless a specific court order has been obtained.

Can Directors Initiate a Compulsory Liquidation?

Company directors can apply to have their company forcibly wound up where they can demonstrate debts of more than £750 which can’t be paid. It’s necessary to have agreement from your shareholders on this, and you must be able to clearly explain to a judge why you feel the company cannot realistically continue. Where you cannot gain sufficient shareholder agreement, the directors may still apply but they must do so in unison – a single director may not proceed alone.

Liquidating due to Director’s Disagreement

In this instance, where company directors have fallen into dispute, only a director who is simultaneously a shareholder or creditor can petition the court for a winding up.

Free Liquidation Advice

The threat of a compulsory winding up can be a stressful time for both the Debtor and the Creditor. Cornerstone Business Recovery specialises in helping alleviate this stress with sound advice and prompt action.