Compulsory Liquidation

Compulsory Liquidation

Compulsory liquidation is a legal process where a court orders a company to cease trading and be wound up, typically because it cannot pay its debts. This process is usually initiated by creditors seeking financial recovery but can also be initiated by other parties.

When is a Company Considered Unable to Pay its Debts?

A company may be deemed unable to pay its debts if:

• It owes a creditor more than £750.

• The creditor issues a statutory demand for payment, and the company does not pay or negotiate a resolution.

• Other financial indicators, such as cash flow issues, suggest insolvency.

Who Can Petition for Compulsory Liquidation?

The following parties can petition the court for liquidation:

• Creditors: Typically the most common petitioners.

• The Company: Directors or members may apply.

• The Secretary of State for Business, Innovation and Skills: For non-compliance with registration or location requirements.

• The Financial Conduct Authority (FCA): For financial institutions under its jurisdiction.

• The Official Receiver: If specific conditions are met.

Notification of the Petition

The petition must be advertised in The Gazette unless the court orders otherwise. This ensures that all interested parties are informed and have the opportunity to respond.

The Role of the Official Receiver and Liquidator

When the court grants a winding-up order:

• Official Receiver:

  • Initially oversees the process.

  • Investigates the company's affairs to determine why it failed.

  • Can act as a liquidator if none is appointed.

• Liquidator:

  • Handles the formal winding-up process.

  • Realises the company’s assets and distributes them according to a statutory hierarchy.

Asset Realisation and Distribution

The liquidator prioritises distributing the company’s realisable assets as follows:

1. Secured creditors.

2. Preferential creditors (e.g., employee wages).

3. Unsecured creditors.

4. Shareholders (if funds remain).

If the company has insufficient assets to cover winding-up costs, the Official Receiver may apply for a quick dissolution, leading to the company being dissolved three months after the application is made to Companies House.

Post-Liquidation Process

Once the winding-up is complete:

• The Official Receiver or liquidator notifies Companies House.

• A notice of dissolution is published in The Gazette.

• The company is officially dissolved three months after the notice is registered, unless otherwise directed by the Secretary of State.

Recent Legislative Updates

• Insolvency Act 1986: The primary legislation governing compulsory liquidation.

• Corporate Insolvency and Governance Act 2020: Introduced temporary provisions during the COVID-19 pandemic to support struggling businesses, including changes to statutory demand thresholds and restrictions on winding-up petitions.

• Economic Crime (Transparency and Enforcement) Act 2022: Reinforced corporate accountability, indirectly impacting how companies are scrutinised during insolvency.

Useful Links for Further Reading

• Insolvency Service: Winding Up a Company Provides guidance for creditors and directors on the compulsory liquidation process, including how to petition a court.

• Companies House: Insolvency Guidance Details filing requirements and processes for liquidators, Official Receivers, and other stakeholders.

• The Gazette: Notices A public record of all statutory notices, including winding-up petitions and dissolution announcements.