Compulsory liquidation or compulsory winding-up is a formal court-led procedure whereby a company’s business is brought to an end, and its assets converted into cash to be distributed among the company’s creditors by a liquidator. In this article, our insolvency solicitors explain the compulsory liquidation process and how it will impact company directors.
Jump to:
- The most common grounds for compulsory liquidation under the Insolvency Act 1986 (IA 1986)
- What is the difference between voluntary liquidation and compulsory liquidation?
- Who will begin the process of a compulsory liquidation?
- What is the process of compulsory liquidation?
- What happens after a winding-up order is made?
- Is there a fee for compulsory liquidation?
- Who pays for compulsory liquidation?
- How long does compulsory liquidation take?
- How will a compulsory liquidation affect the company directors?
- Can a compulsory liquidation be reversed or challenged?
- What to do if you disagree with the liquidator?
- Can a company be restored after a compulsory liquidation?
- Summary
The most common grounds for compulsory liquidation under the Insolvency Act 1986 (IA 1986)
- The company is unable to pay its debts.
- The court finds that it is just and equitable for the company to be wound up.
- The company has passed a special resolution to be wound up by the court.
- The company does not commence its business within a year from its incorporation or suspends its business for a year.
What is the difference between voluntary liquidation and compulsory liquidation?
Both processes result in the closure of the company, although they are used in different circumstances.
There are two types of voluntary liquidation – a members voluntary liquidation (MVL) which is used for solvent companies and a creditors voluntary liquidation (CVL) which is used for insolvent companies.
The main difference lies in how the processes are started. CVLs are voluntarily initiated by the directors and shareholders of the company whereas compulsory liquidation is a court-led process which is usually started by the creditors of the company making a winding-up petition to the court. Once a winding-up order is made the liquidator will take control of the company’s affairs and will investigate how the company is being operated and what led to the insolvency proceedings. CVLs are used in situations where directors realise that the company is no long viable and will not be able to pay its creditors in full.
In a voluntary liquidation the directors or shareholders of a company can make the decision to wind up the company and in a MVL, can themselves appoint a liquidator, allowing them to retain an element of control in the insolvency proceedings and in how the company’s affairs and the conduct of management are reported. This can be important for the reputation of the company and the manner in which the company deals with its customers and creditors and is often the reason businesses prefer voluntary liquidation over compulsory liquidation.
Who will begin the process of a compulsory liquidation?
The procedure is started by filing or ‘presenting’ a winding-up petition at court. A judge then decides at a court hearing whether it is appropriate to make a winding-up order.
There are several parties that can make a winding-up petition and begin the process of a compulsory liquidation and most of the eligible parties are listed in the IA 1986. Some of the most common parties include:
- The company itself: the company that is the subject of the liquidation can make a petition on behalf of itself (although often a petition will be from all of its directors or through a person holding a position as an insolvency officer in relation to the company such as an administrator or a liquidator);
- Any creditor of the company: (whether or not they are actually or potentially a creditor and whether or not their debt is secured or unsecured) provided they are owed more than £750 and have waited at least 21 days for the debt to have been repaid;
- An official receiver: if the company is already being wound up voluntarily, the liquidator involved in the matter can make a petition; or
- A regulatory body or official: such as the Financial Conduct Authority, Regulator of Community Interest Companies or the Secretary of State.
What is the process of compulsory liquidation?
| Step | Responsibility | Action and outcome |
| 1: petition for a winding-up order | Petitioner – this could be a creditor but the Insolvency Act 1986 provides some alternative petitioners – see Who will begin the process of a compulsory liquidation? above. | Petitioner presents a winding-up petition at the court and serves it on the company (letting the court know that it has done so). After the winding-up petition process has started, a company cannot dispose of any of its property, transfer any of it shares, or alter the status of its shareholders, unless it applies to the court and is granted permission to do so. |
| 2: court hearing date fixed | Court | Court fixes a date for the hearing. A petition will usually be heard in the Chancery Division of the High Court |
| 3: notification of the court hearing in the London Gazette | Petitioner | The petitioner publishes the fact there is a petition and the associated hearing date in the London Gazette at least 7 days before the hearing goes ahead. |
| 4. court hearing - judge decides whether or not winding-up petition has grounds to be accepted or not | Court, but it will bear in mind what the creditors of the company want. | There could be a variety of outcomes as the court has a large amount of discretion to decide the outcome of a petition. The judge can dismiss the petition, postpone the hearing (conditionally or unconditionally), make an interim order, or make any other court order that it thinks is more suitable. |
| 5. winding up order is made by the court and company goes into liquidation | Court | If a winding-up order is made, the winding up is said to have started at the time of presentation of the winding-up petition. |
What happens after a winding-up order is made?
- The liquidator takes control of the company’s assets
- All company papers and websites must state that the company is in liquidation
- The powers of the directors cease and they are automatically dismissed from office
- All employees are automatically dismissed
Is there a fee for compulsory liquidation?
There a number of costs associated with a compulsory liquidation which overall can be an expensive process, including the following fees to pay when making a winding-up petition:
- £2,600: the deposit for submitting the winding-up petition - this represents security for the payment of the Official Receiver’s fees.
- £332: the fee for the court hearing.
- £12: the winding-up search fee (this may not be payable if done immediately beforehand).
Who pays for compulsory liquidation?
The liquidator’s fees are paid by the company itself as an expense of the winding-up from the proceeds of the company’s assets after fixed charge holders have been paid but before other creditors. If a liquidation committee has been appointed, it will approve the liquidator’s remuneration.
Once a winding-up order is made, the Official Receiver, an independent, impartial civil servant is appointed by the court as an interim receiver and manager of the company’s property. Within 12 weeks of the winding-up order being made, the Official Receiver can ask the company’s creditors and those liable to contribute in the event of a winding-up (called ‘contributories’) for a decision on whether to appoint an insolvency practitioner to replace the Official Receiver (this sometimes happens if there are a lot of complex valuations to be made or complicated asset structures that will require specialist expertise, for example) and whether to establish a liquidation committee to help the liquidator.
How long does compulsory liquidation take?
This depends on the circumstances of the individual company and on the scale and complexity of assets being realised. The time frame can often vary from a few months to a few years.
How will a compulsory liquidation affect the company directors?
A compulsory liquidation will have a material impact on a company’s directors as once the liquidator has been appointed, the directors of the company no longer have control of its affairs and are automatically dismissed.
The liquidator may require the directors of the company to prepare a statutory ‘statement of affairs’, including details of the company’s assets, debts and liabilities and must give the liquidator any information that they ask for, including access to company paperwork and files.
Can a compulsory liquidation be reversed or challenged?
Yes, a creditor or a contributory of the company either by itself or with the company can ask a court to stop or reverse a winding-up order. An application to rescind the winding-up order must be issued within 5 business days of the winding-up order but the court may also use its discretion to hear an out- of-time application.
The court can pause or stop the winding-up proceedings altogether in its sole discretion but there usually has to be a clear reason for doing so – for example that the circumstances are materially different to how they were originally presented to the court, or if there is some injustice that needs to be corrected or if the winding-up is not in the public interest. The company will usually also have to show that it can pay all creditors in full as well as the costs of the liquidation process to date.
What to do if you disagree with the liquidator?
There is statutory provision under the IA 1986 to apply to court if you disagree with the liquidator’s decision and the court may reverse or amend the decision or make any other order it considers appropriate.
Only in extreme cases will the court actually order the removal of a liquidator – for example, where it is in the best interests of the public or where there are elements of the liquidator’s conduct that have a negative impact on the outcome for creditors generally.
In certain circumstances the company’s creditors can also decide to remove the liquidator. There is a specific statutory decision procedure that needs to be instigated for the purpose of removing a liquidator, based on the votes of the creditors holding a majority in value. The court can monitor and review the decision.
Can a company be restored after a compulsory liquidation?
Yes, using the restoration to the register by court order procedure under the Companies Act 2006, where a company may be restored to the register on an application to court. A creditor of the company at the time of dissolution and any former liquidator of the company may apply.
In a compulsory liquidation, a creditor may need to restore the company to make a claim against it which may not have come to light at the time of dissolution.
If the compulsory liquidation was completed prior to dissolution, the court would need to make a winding-up order as part of the restoration in order to place the company back into liquidation.
Summary
In summary, this is a complex and constantly evolving area of law which will often turn on the circumstances of the individual company. Our insolvency team at Harper James is here to provide bespoke expert advice and assistance to navigate you through a compulsory liquidation and other insolvency processes so please do not hesitate to get in touch with us today.
