COMPULSORY LIQUIDATION?
What is it
This is an insolvency process initiated by an individual or company petitioning the court for a winding up of your company. Although this can be started by members or directors it’s usually an unpaid creditor of the company who is owed at least £750, and has already served an expired statutory demand.
You should be aware that if the debt is disputed “on substantial grounds” the petition may be dismissed, and the petitioning creditor may have to pay substantial costs, but this will need legal advice.
If you receive a winding up petiton
This should be taken incredibly seriously, mainly due to the petition being advertised in The Gazette, therefore being seen by banks, lenders and any other institution. Due to the petition the bank may close down the company’s bank account immediately, making it difficult for you to be able to access funds to pay staff, creditors etc.
Subsequently, this may leave you with no option but to accept the winding up order and let your company go into compulsory liquidation if you do not resolve this. Again you need advice as a validation order may be required.
What does the Liquidator do?
Once the winding up order has been made the Official Receiver (OR) automatically becomes Liquidator for a period up to 12 weeks. Following this, if the creditors or OR then desire, a private Insolvency Practitioner (IP) may then be appointed to take over the case.
Both the OR and a private IP protect and preserve the company assets, collect debts and generally gather money (including bringing claims if necessary).
what you can do to try and stop it
Pay the creditor who has presented the petition in full using third party funds in the hope the petition is withdrawn, but get advice on a validation order.
You can ask the court for time to pay the creditor, however you have to demonstrate that you have a reasonable prospect of making the payment within a reasonable timescale i.e. weeks not months. On this basis the court may agree to an adjournment, however it will unlikely provide repeat adjournments if it’s not satisfied there is a benefit to creditors and therefore the winding up order may be made.
Be aware, even if the petitioning creditor is paid, it does not stop any other creditors joining the original petition pre advertisement in The Gazette if it can verify there are not supporting creditors. Legal / insolvency advice should be taken here.
Payment to creditors may come from third party funds because if the company was to subsequently go into liquidation any payments made to them may be requested back by the liquidation, unless there is a validation order, as it may be seen as a void payment (i.e. payment after presentation of the winding up petition) or indeed as a preferential payment (i.e. choosing to pay one creditor in preference to another).
What Does compulsory Liquidation mean for....
...Employees
The company is likely to be closed down if it hasn’t been already therefore they will be made redundant and contracts cease. They can make a claim upon the Redundancy Payment Service if payment is not available from the assets.
If a new company has already been set up in anticipation of the winding up then the employees may be willing to transfer over, however they should obtain legal advice, as this is specialist area.
...creditors
You will be unable to pay the creditors and they will subsequently have to provide a proof of debt to the liquidator as well as provide evidence substantiating the said debt.
...directors
Once the order is made, directors are no longer in control. There is a duty to co-operate with the Liquidator, including providing books and records to understand the financial position.
Liquidators also look into directors’ conduct in the years leading up to insolvency which may lead to future claims in relation to breach of duties including
Reimbursing directors’ loans
Repayment of dividends
Preferential payments
Transactions at an undervalue