Compulsory Liquidation sees company assets being sold involuntarily, staff being made redundant and the ultimately being struck off the register. Compulsory Liquidation is generally the least favourable insolvency process and best avoided if possible. If your company has been threatened with the issue of a Winding up Petition, seeking advice and taking action fast should be your priority.

What is Compulsory Liquidation?

Compulsory Liquidation is the most serious insolvency procedure that an insolvent company may find itself in. It occurs when a Winding up Petition is issued against the company (usually by a Creditor of the company) and a Winding up Order is given by the courts, who then appoint an ‘Official Receiver’ to begin the involuntary Liquidation of the company. Liquidation will involve the company ceasing to trade, followed by assets of the company being sold off in order to make payments to Creditors on a pro-rata basis.

Employees will also be made redundant, and the company will cease to exist once the process is complete. The conduct of the Directors will also be thoroughly scrutinised in order to ascertain whether they could have taken steps to minimise losses to Creditors or prevented the company becoming insolvent.

If it is decided that the Directors did not act in the best interests of Creditors, or may be guilty of ‘Wrongful Trading’ then evidence will be gathered and passed on to the Insolvency Service who may seek to disqualify or prosecute the Director(s) in question.

Why would Compulsory Liquidation be Instigated?

A Winding up Petition may be issued by any Creditor who is owed more than £5,000 and wishes to retrieve their debt. Usually a Creditor will be approaching the Courts for a Winding up Petition as a last resort, having already tried other means of recovery action such as statutory demands or bailiff action. A company may also be wound up involuntarily if it has been found to be acting unlawfully and it is deemed to be in the public interest for it to cease trading.

What are the Consequences of Compulsory Liquidation?

For a heavily indebted Company, with no assets available to pay for a Creditors Voluntary Liquidation and no prospects of recovery, it may indeed be a viable option to just allow the Official Receiver to deal with the winding up of the Company in order to remove creditor pressure. However in the majority of instances, Compulsory Liquidation bears the following consequences:

• The high costs associated with Compulsory Liquidation mean that there is often no return to Creditors.
• The fact that a Winding up Petition has been issued will be advertised in the London Gazette which means it will become a matter of public knowledge. This could potentially tarnish a Directors’ business reputation if they intend to apply for another Directors position in the future.
• Once the Compulsory Liquidation process begins, there will be very little action that Directors can take without either Court approval or agreement of the petitioning creditor, leaving the situation largely out of their control.
• The conduct of the directors will be thoroughly scrutinised and any evidence of wrongful trading will be reported to the Insolvency Service. If found guilty, Directors can be disqualified from being present on any board of Directors for up to 15 years under the 1986 Company Directors Disqualification Act.
• Any criminal wrong doing will also be reported which may lead to directors being prosecuted.