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What is Compulsory Liquidation?
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Compulsory liquidation is a legal process where a court orders the winding-up of an insolvent company, typically at the request of a creditor, because the company cannot pay its debts. Once the order is made, the company ceases trading, and an appointed liquidator will sell the company’s assets to repay creditors.
Key Facts:
Petition to the Court: A creditor can petition the court to liquidate a company if it is owed more than £750 (UK) or a similar threshold in other jurisdictions, and the company cannot repay the debt. The petition proves the company is insolvent.
Grounds for Petition: The most common reason for filing is that the company has failed to pay its debts when due. Evidence may include unpaid invoices, dishonoured checks, or a statutory demand for payment that remains unmet after 21 days.
Court Involvement: After reviewing the petition, the court decides whether to issue a winding-up order. If approved, the court appoints an official receiver, who initially acts as liquidator.
Effect of the Winding-Up Order:
The company must stop trading immediately.
The directors lose all control over the company’s affairs.
The company’s bank accounts are typically frozen.
Liquidator’s Role: The liquidator is responsible for:
Selling company assets to repay creditors.
Investigating the company’s financial affairs and the conduct of its directors.
Distributing funds to creditors according to the legal hierarchy.
The Liquidation Process
- Filing the Petition:
A creditor files a petition, often after issuing a statutory demand for payment, which the company has failed to address within 21 days.
The creditor must demonstrate the company’s inability to pay its debts.
- Court Hearing:
The petition is reviewed in a court hearing. If successful, the judge issues a winding-up order.
Once the order is issued, the process of liquidation begins immediately.
- Appointment of Official Receiver:
The official receiver is appointed as the provisional liquidator. In some cases, creditors can appoint a different liquidator later.
- Investigating the Company:
The liquidator assesses the company’s financial position, identifies assets, and investigates whether the directors acted improperly or negligently.
If misconduct is found, directors can face legal action, including disqualification.
- Asset Realisation:
The liquidator collects and sells company assets, including property, stock, and intellectual property, to generate funds for repayment.
- Distribution to Creditors:
Creditors are paid based on a legal hierarchy:
- Secured creditors (those with security, such as a mortgage) are paid first.
- Preferential creditors, including employees (for wages) and certain tax authorities, follow.
- Unsecured creditors receive payments last, from any remaining funds.
Dividends are paid to creditors based on the available funds and the amount owed.
Rights and Responsibilities of Creditors
- Attend Creditors’ Meetings: After liquidation begins, creditors may be invited to attend meetings to discuss the company’s affairs and vote on the appointment of a liquidator.
- Submit Proof of Debt: Creditors must submit a proof of debt form to the liquidator to claim their portion of any funds recovered from the liquidation process.
- Request Updates: Creditors are entitled to receive updates from the liquidator on the progress of the liquidation, including details on asset sales and anticipated distributions.
Potential Outcomes for Creditors
Repayment: Creditors may receive part of the money they are owed, depending on the company’s remaining assets and the priority of their claims.
No Recovery: In cases where the company has few or no assets, unsecured creditors may receive little to no repayment.
Directors’ Misconduct: If the liquidator discovers wrongdoing by directors (e.g., fraudulent trading), creditors may benefit from potential legal action against those directors.
How to Petition for Compulsory Liquidation
To start the compulsory liquidation process, a creditor should:
- Issue a Statutory Demand: A formal request for payment, giving the company 21 days to pay or settle the debt.
- File a Winding-Up Petition: If the debt remains unpaid, file a petition at the court, detailing the company’s inability to meet its obligations.
- Attend the Court Hearing: Present evidence of the debt and the company’s failure to pay. If the court agrees, a winding-up order will be issued.
Costs Involved
Filing Fees: Creditors must pay court fees and a deposit to initiate the petition, which may vary by jurisdiction.
Cost Recovery: Creditors may be able to recover these costs from the liquidated assets if enough funds are available.
Frequently Asked Questions
Can I recover my full debt?
It depends on the value of the company’s assets and your status as a creditor (secured vs. unsecured). Full repayment is unlikely if the company is deeply insolvent.
What happens if the company has no assets?
If the company has no significant assets, unsecured creditors may receive little or nothing.
Can I stop the liquidation process?
Only the court can stop the process once a winding-up order is made, typically if a mistake or repayment agreement is reached before the final hearing.
N.B: Submitting a proof of debt form when receiving notice of an insolvency is important as this will not only mean your claim is submitted for dividend purposes, but it will also allow a creditor the chance to have their say on the outcome of the pre-appointment process, and later on in the insolvency as it progresses.
The Creditor Services team at PKF offer a free service to all Top Service members and can assist with the following:
- Advice and support regarding any formal or non-formal insolvency process.
- A bespoke lodging and proxy management service which alleviates the administrative burden for creditors and reports back on all insolvencies in a simplified format.
- Representation at creditor meetings.
- Seeking the appointment of licensed insolvency practitioners of PKF to investigate insolvent entities and creditor concerns.
If you would like to more about the services offered to Top Service members by PKF Creditor Services, please get in touch via creditorservices@pkfgm.co.uk