Compulsory liquidation (or compulsory winding up) is an insolvency procedure that applies to companies or partnerships forced into liquidation by a court order (winding up order).
Less commonly, a winding-up petition might be issued by the company itself, its directors, shareholders, an Official Receiver[2]Trusted Source – GOV.UK – Official Receiver, administrative receivers, administrators, supervisors of company voluntary arrangements, the Financial Services Authority, the chief clerk of the Crown Court, or a clerk of petty sessions.
Compulsory winding up is usually the last resort of a frustrated creditor to get paid, either by forcing the directors to act or gaining access to the company’s assets. It can also be initiated by HMRC even when a company has no major assets, simply to set an example for others.
Once the judge hears the petition, he or she can initiate a winding-up order, a legal ruling that enforces the liquidation of a company’s assets to help creditors get their money back.
If your business is facing concerns about compulsory liquidation or financial difficulties, don’t hesitate to contact us. Our licensed insolvency practitioners can offer expert, practical advice.
Examples of when a Company Might be Subject to Compulsory Liquidation
Being wound up in court typically happens for a serious non-payment of a debt which has been ignored over time.
If the court concludes that it is just and equitable, it should be wound up.
When the limited company does not start its business within a year from its incorporation or suspends its business for a whole year
If the company has less than two shareholders (unless it’s a private company limited by shares or guarantee)
What’s the Compulsory Liquidation Process?
The process of compulsory liquidation is set out in the Insolvency Act 1986 and The Insolvency (England and Wales) Rules 2016[4]Trusted Source – GOV.UK – The Insolvency (England and Wales) Rules 2016. Normally, the process unfolds as follows:
Company Receives a Statutory Demand: Once this formal payment demand has been issued, it means the creditor can seek winding up if the company doesn’t pay within 21 days.
A Winding-Up Petition is Issued: The court sets a date to decide on this petition, which is also advertised in the Gazette.
Bank Accounts are Frozen: The company’s bank account is closed immediately after the petition, making it very difficult to keep doing business. (» MORE Read our full article on My Company Bank Account is Frozen)
Court Issues a Winding-Up Order: Once the court approves the petition, the formal liquidation begins.
Official Receiver is Appointed: This officer checks the company’s financial records, especially for any legal issues caused by the directors.
Liquidator Takes Over: If there are assets, a licensed insolvency practitioner usually replaces the Official Receiver to handle their sale.
Assets are Sold: The Official Receiver or liquidator sells the company’s assets, like stock or vehicles, to pay off debts.
Company is Officially Closed: After selling the assets, the company is shut down and removed from the Companies House register. The remaining debts are usually written off unless the director personally guarantees them.
Can We Choose a Liquidator in a Compulsory Liquidation?
The short answer is no, in the initial stages. In compulsory liquidation, the court appoints an Official Receiver as the interim liquidator to begin the process.
However, there is a window of opportunity for influence. While the Official Receiver, a public official, initially takes charge, the creditors or the company can propose an alternative licensed insolvency practitioner to act as the liquidator. This proposal is subject to approval during the creditors’ meeting.
How Long Does Compulsory Liquidation Take?
The compulsory liquidation process will take at least a year and up to 24 months in more complex cases.
Can You Stop a Compulsory Liquidation?
Compulsory Liquidation can be stopped at the winding up petition stage under the following explicit circumstances:
if the debt is paid in full
if the debt is disputed
If the debtor company agrees to terms with the creditor, who then withdraws the winding up petition.
In some cases, when the debtor company assures the court it intends to pay, the court may agree to an adjournment. However, repeated adjournments are rarely sanctioned by the court, and the extension timeframes are generally weeks, not months.
If the winding up order itself has been made, it is much more difficult, but it can be done through two methods:
An application to ‘stay’ the liquidation proceedings can be made by the Official Receiver, the appointed liquidator, any company shareholder, or a creditor.
Any party has the right to apply for the winding-up order to be rescinded within seven days. It would need to be demonstrated that the court did not have all the relevant facts when making its decision.
How Much Does a Compulsory Liquidation Cost?
The cost of compulsory liquidation for a company isn’t fixed and varies based on the complexity and specific details of each case.
For the creditor initiating the liquidation, typical expenses include:
Statutory Demand Preparing and serving a Statutory Demand can cost between £200–£250. This is often the first step in the winding up process.
Winding Up Petition (WUP) Issuing a WUP to force a company into liquidation can cost between £400–£800, plus a £280 filing fee.
Court deposit: A deposit of £2,600 is required for the Official Receiver to cover their expenses during the winding-up process.
Asset realisation: The costs of selling the company’s assets can vary significantly depending on their nature, value, and the sale method. These expenses are typically covered by the proceeds from asset sales.
These figures represent the basic fees and do not account for additional expenses such as legal or professional advice that may be necessary throughout the liquidation. Therefore, the actual cost could be much higher, depending on the unique aspects of the case.
Compulsory Liquidation vs Voluntary liquidation
While both processes result in a company’s closure, there are key differences between compulsory and voluntary liquidation:
Initiation: Compulsory liquidation is forced by creditors through a court order. Voluntary liquidation is initiated by directors or shareholders.
Control: In compulsory liquidation, an Official Receiver takes control. In voluntary liquidation, directors can choose the liquidator.
Timing: Compulsory liquidation often takes longer due to court involvement.
Cost: Compulsory liquidation is generally more expensive due to court fees and the Official Receiver’s involvement.
Reputation: Compulsory liquidation can more severely damage the company’s and directors’ reputations.
The benefits of voluntary liquidation for directors include more control over the process, potentially better returns for creditors, and reduced risk of personal liability. By opting for voluntary liquidation before being forced into compulsory liquidation, directors can often achieve a more orderly wind-down of the company.
Getting Help with Compulsory Liquidation
Facing compulsory liquidation is one of the toughest situations any director can go through, but you don’t have to go through it alone.
When you contact us—your team of licensed insolvency practitioners and business rescue experts—you are making an important move towards clearer understanding and finding solutions.
We are here to help you understand all your options, explain your responsibilities, and assist you in making the best decisions possible.
To speak with one of the team to see how you can avoid compulsory liquidation, call us on freephone: 0800 074 6757
FAQs on Compulsory Liquidation
Can I Avoid Compulsory Liquidation If I Act Quickly?
Yes, acting swiftly can open up alternatives such as restructuring or negotiating with creditors, potentially avoiding compulsory liquidation.
What’s the Difference Between Compulsory and Voluntary Liquidation?
Compulsory liquidation is court-ordered, usually initiated by creditors, while voluntary liquidation is a decision made by the company’s directors or shareholders when they believe the company cannot continue due to its debts.
What Happens to My Employees During Compulsory Liquidation?
Employees are typically made redundant, and their outstanding wages and redundancy payments are prioritized claims in the liquidation.
Can I Start Another Company After Compulsory Liquidation?
Yes, but with restrictions. Directors of a liquidated company may face limitations on using the same or a similar name for a new business.
What Are My Responsibilities as a Director During This Process?
Directors must cooperate with the liquidator, providing all necessary company documents and information, and may need to attend interviews or meetings.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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