Compulsory liquidation is the process of stopping a company trading, selling off the assets and distributing the proceeds to the creditors.
This is usually the last step in what will have been a fairly lengthy debt collection procedure and should the company receive notification that an application has been made to liquidate the company (a winding up order) then the directors need to act quickly
A creditor will apply for a winding up order as a last resort. Most will know that winding up a trading company that owes money will probably result in less cash coming back to the creditor than they are owed.
Sometimes it is the only way to either realise at least some value from a bad situation or get the debtor to realise the gravity of the state of affairs.
What happens in a compulsory liquidation?
The creditor will have to have taken significant steps to have collected their money.
Typically they will have worked through their normal debt collection procedure of sending letters and statements and making phone calls.
They may also have engaged a debt collection agency and asked a solicitor to get involved.
Often the debtor will come to an arrangement to pay the debt but won’t have stuck to the terms. It’s important to note that a court won’t summarily issue a winding up order unless it is clear that efforts have been made to collect the debt.
If all else fails then the creditor will petition the court for a winding up order.
If the amount owed is small then this may be a fairly fruitless step as the costs of a petition can run into thousands of pounds in solicitors and court costs. But if the debt is substantial, issuing a winding up petition can actually help to collect the debt. It goes without saying that the creditor needs to understand before going into the process whether the debtor actually does have sufficient resources to pay what’s owed and what the likely outcome is.
The petition is a request for the matter to be heard before the High Court, and if the debt is undisputed then it is likely that it will be granted and a court date issued.
The debtor company then has an amount of time to pay and in practice the court date will probably be quite a long way from petition due to the pressures on the courts’ time.
However, allowing the petition to go through unchallenged is in practice a very risky move as other creditors may apply to join the action or, if the debt is paid have their claim substituted. Piggybacking in this way can mean that simply settling one claim won’t stop the liquidation.
It’s also important to bear in mind that even if the debt is settled before the court date a hearing must still be held in the high court and the firm has to be represented by barristers, thus increasing costs and so avoiding a winding up order is always desirable.
If it is proven that the debt exists, efforts to collect have been unsuccessful and the amount owed is undisputed then the petition will be granted and a winding up order issued.
The usual form is that the case is passed to the official receiver and they take charge of the company, its debts and assets. Typically assets will be sold off in an effort to raise funds to pay to creditors.
If the company is still trading then a visit will be made to the company premises and an assessment made as to what course of action is appropriate. Usually this will mean that the firm is closed and employees laid off.
Can we stop a winding up order?
The simple answer is; sometimes.
An appeal can be lodged with the court if the directors feel that it was not in possession of all the facts. If it finds this to be the case then the court may rescind the order.
The court can rule that a winding up order should be ‘Stayed’ or stopped either permanently or temporarily. This can be at the request of the Official Receiver, a creditor, or a shareholder.
But in most cases, where a company cannot prove that they will be able to trade out of their difficulties and there is no prospect of creditors being repaid, the liquidations will continue to the ultimate end which is the company being struck off the register.
The simple advice is to not let things get as far as a winding up order. Company Directors should look to obtain early advice from a qualified insolvency practitioner as to whether there are other options such as a CVA that would be more appropriate.