Compulsory Liquidation

Understanding forced compulsory closure due to a Winding Up petition

When a company is unable to meet its liabilities and creditors feel they have exhausted all avenues to recover monies owed, they can petition for your company to be placed in compulsory liquidation. This is also known as being ‘wound up’.

A winding-up order from the court means that your company will be closed down and its assets sold off to repay creditors.

If you are facing a winding-up petition, it is important to seek professional advice as soon as possible. There may be options available to you that can help resolve the situation and avoid compulsory liquidation.

This guide will give you an overview of the compulsory liquidation process, including what happens when a winding-up order is made and how to respond if you are served with a petition.

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    What is Compulsory Liquidation?

    Compulsory liquidation is the process of placing a company into liquidation and closing it down with a view to selling its  assets to repay creditors.

    It is a serious legal process that should not be confused with voluntary liquidation, where a company’s directors choose to close the business down.

    A winding-up order from the court is required to place a company into compulsory liquidation. This can be done either by the company’s creditors or by the company itself or by the directors. .

    Once a winding-up petition (WUP) presentation has been made, the company will be subject to strict restrictions on its activities. Once a WUP has been issued any dispositions of property from your company will be void unless the court orders otherwise. For example, once the WUP has been issued, you will no longer be able to make any payments from the company’s bank account.

    A compulsory liquidation is a final process and there is no going back once the court has made the order. The company will be closed down and its assets sold off to repay creditors. This can have a serious impact on the company’s directors, employees and other stakeholders.

    What are the consequences of compulsory liquidation?

    The consequences of compulsory liquidation can be serious and wide-ranging.

    For example:

    – The company will be closed down and its assets sold off to repay creditors.

    – The company’s directors may be held personally liable for the debts of the company.

    – The company’s employees may lose their jobs.

    – The company’s suppliers may not be paid for goods or services that they have provided.

    – The company’s shareholders will usually receive nothing from the sale of assets.

    – The company’s creditors may not get all of the money that they are owed.

    – Companies House will be updated to reflect the fact the company is in liquidation.

    – The Official Receiver (part of the Government’s Insolvency Service) will be appointed as the liquidator and to investigate the affairs of the company. The Official Receiver may choose to appoint a third party liquidator from a private practice. 

    How to avoid compulsory liquidation?

    If you are facing a winding-up petition, it is important to seek professional advice as soon as possible. There may be options available to you that can help resolve the situation and avoid compulsory liquidation.

    For example, you may be able to negotiate a payment plan with your creditors or enter into a creditors’ voluntary liquidation.

    You should also be aware that, if a winding-up order is made, you may be able to apply to have the order set aside within 28 days. However, this is a complex legal process and you will need to seek professional advice as soon as possible.

    What happens if I am served with a winding-up petition?

    If you are served with a winding-up petition, you will need to take immediate action.

    The first step is to seek professional advice from a solicitor or insolvency practitioner. They will be able to advise you on your options and help you to prepare your response.

    If you do not take action, the petition will be heard in court and a winding-up order is likely to be made. This will result in the company being placed into compulsory liquidation and its assets being sold off to repay creditors.

    The most serious action a creditor can take is to petition the courts for your company’s compulsory liquidation. The creditor will incur costs to liquidate your company. 

    The court will normally grant a winding up order if you are unable to pay the petitioning creditor in full. Winding up petitions are a very powerful tool in that they are a class action by creditors. For example, if a creditor issues a winding up petition against a company and that company repays the petitioning creditor, another creditor can “piggy-back” on the back of the petition and be a substitute for the original petitioning creditor.  

    Call to action: take professional advice……. 

    A compulsory liquidation has far-reaching consequences, not just for the company but also for its directors and employees. Once the winding order is made the employee contracts of employment will automatically terminate and the employees will automatically lose their jobs. The business will close and Companies House will be updated to reflect the fact that the company is in liquidation. The Official Receiver will also investigate the affairs of the company with a view to deciding whether to bring disqualification proceedings against directors and also to see whether any transactions can be challenged which may result in claims being brought against the directors.  

    Compulsory Liquidation Alternatives 

    If you are facing a winding-up petition, there may be alternatives to compulsory liquidation that can help resolve the situation.

    For example, you may be able to negotiate a payment plan with your creditors or consider alternative insolvency processes. 

    You should also be aware that, if a winding-up order is made, you may be able to apply to have the order set aside within 28 days. However, this is a complex legal process and you will need to seek professional advice as soon as possible.