Under the Insolvency Act 1986, compulsory liquidation is a formal court-led procedure taken to deal with a company’s debt, where a company’s business is brought to an end and the company’s assets are converted into cash and distributed among the company’s creditors. This article provides a whistle-stop tour of the compulsory liquidation process.
- What is the definition of compulsory liquidation?
- Who will begin the process of a compulsory liquidation?
- What is the process of compulsory liquidation?
- What happens after a compulsory liquidation order is made?
- Appointment of a liquidator (who pays)?
- Selling a company’s assets as part of a compulsory liquidation
- The dissolution of the company, Companies House and HMRC
- The difference between compulsory and voluntary liquidation
- How long does compulsory liquidation take?
- Can a compulsory liquidation be reversed or challenged?
- What to do if you disagree with the liquidator?
- How will a compulsory liquidation affect the company directors?
- Is there a fee for compulsory liquidation?
What is the definition of compulsory liquidation?
The Insolvency Act 1986 sets out the circumstances in which a company can be liquidated compulsorily by a court decision:
- if the shareholders of the company pass a special resolution (which is a formal decision of the shareholders of a company which requires at least 75% of the votes cast by eligible shareholders to vote in favour of it) to resolve that the company is wound up by the court. The phrase ‘being wound up’ is often used in relation to a liquidation and simply means that a company is being liquidated;
- if a company was registered as a public company on its original incorporation and it has not been issued with a trading certificate under the Companies Act 2006 and more than a year has expired since it was registered as a public company;
- if a company is an old public company, meaning that it is a company limited by shares, or a company limited by guarantee and having a share capital and: (a) the company either existed on 1st July 1983 or was incorporated following an application made before that date; (b) on that date or, if later, on the day of the company’s incorporation, the company was not or would not have been a private company within the meaning of the Companies Act (Northern Ireland) 1960; and (c) the company has not since that date or the day of the company’s incorporation either been re-registered as a public company or become a private company within the meaning of Article 12(3) of the Companies (Northern Ireland) Order or section 4(1) of the Companies Act 2006;
- if the company does not start its business within a year from its incorporation or suspends its business for a whole year;
- if the company is unable to pay its debts – there are two tests used to see if this is the case: (i) where the court assesses whether the company is paying its debts as they fall due; and (ii) whether a company’s assets appear less than its actual or prospective liabilities;
- if at the time at which a moratorium for the company under section 1A of the Insolvency Act 1986 comes to an end no voluntary arrangement has come into effect in relation to the company (a ‘moratorium’ is a court decision that effectively pauses all insolvency proceedings and legal processes that are being taken or may be taken against the company unless specific court or administrator approval is given); and
- if the court is of the opinion that it is just and equitable that the company should be wound up. An example of when this may be used is where the petitioner is a shareholder arguing that the company’s affairs are not being managed correctly and in a way that unfairly prejudices their interests
Who will begin the process of a compulsory liquidation?
There are several parties that can make a winding-up petition and begin the process of a compulsory liquidation and most of the eligible parties are listed in the Insolvency Act 1986. Some of the most common parties include:
- The company itself: the company that is the subject of the liquidation can make a petition on behalf of itself (although often a petition will be from all of its directors or through a person holding a position as an insolvency officer in relation to the company such as an administrator or a liquidator);
- Any creditor of the company: (whether or not they are actually or potentially a creditor and whether or not their debt is secured or unsecured) provided they are owed more than £750 and have waited at least 21 days for the debt to have been repaid;
- An official receiver: If the company is already being wound up voluntarily, the liquidator involved in the matter can make a petition; or
- A regulatory body or official: such as the Financial Conduct Authority, Regulator of Community Interest Companies or the Secretary of State
What is the process of compulsory liquidation?
|Step||Responsibility||Action and outcome|
|1: petition for a winding-up order||Petitioner – this could be a creditor but the Insolvency Act 1986 provides some alternative petitioners – see Who will begin the process of a compulsory liquidation? above.||Petitioner presents a winding-up petition at the court and serves it on the company (letting the court know that it has done so). After the winding-up petition process has started, a company cannot dispose of any of its property, transfer any of it shares, or alter the status of its shareholders, unless it applies to the court and is granted permission to do so.|
|2: court hearing date fixed||Court||Court fixes a date for the hearing. A petition will usually be heard in the Chancery Division of the High Court|
|3: notification of the court hearing in the London Gazette||Petitioner||The petitioner publishes the fact there is a petition and the associated hearing date in the London Gazette at least 7 days before the hearing goes ahead.|
|4. court hearing – judge decides whether or not winding-up petition has grounds to be accepted or not||Court, but it will bear in mind what the creditors of the company want.||There could be a variety of outcomes as the court has a large amount of discretion to decide the outcome of a petition. The judge can dismiss the petition, postpone the hearing (conditionally or unconditionally), make an interim order, or make any other court order that it thinks is more suitable.|
|5. winding up order is made by the court and company goes into liquidation||Court||If a winding-up order is made, the winding up is said to have started at the time of presentation of the winding-up petition.|
What happens after a compulsory liquidation order is made?
- All company papers and websites must state that the company is in liquidation
- All employee contracts are automatically terminated on the making of a winding up order
- The company should stop trading if it has not done so already
Appointment of a liquidator (who pays)?
Once a winding-up order is made, the Official Receiver, an independent, impartial civil servant is appointed by the court as an interim receiver and manager of the company’s property to which debt is charged. Within 12 weeks of the winding up order being made, the Official Receiver can ask the company’s creditors and those persons liable to contribute in the event of a winding up of the company (called ‘contributories’) for a decision on whether to appoint an insolvency practitioner to replace the Official Receiver (this sometimes happens if there are a lot of complex valuations to be made or complicated asset structures that will require specialist expertise for example). The Official Receiver must also ask the same parties for a decision on whether or not to appoint a liquidation committee to help the liquidator to carry out their duties and if the decision is positive, the Official Receiver will also ask for nominations for appointees to the committee (usually made up of between three and five creditors). Where the Official Receiver asks for these decisions to be made, the final decision date has to be within four months from the date of the winding-up order made by the court.
Once the liquidator has been appointed, they have far-reaching powers over the company’s assets and business affairs and can even control which contracts the company enters into, although they themselves have no interests in the assets and are not holding the company’s assets on behalf of anyone else such as creditors. The main job of the liquidator is to investigate the affairs of the company, market and sell the company’s assets so that they can be converted into cash and distributed among the company’s creditors, but a liquidator will also prepare a report on the company’s directors, the compulsory liquidation process and where it thinks the company’s affairs and its management have gone wrong.
The company itself will pay for the costs of the liquidator carrying out their duties, from the company’s assets before they are distributed to creditors. If a liquidation committee has been appointed, it will also approve the liquidator’s remuneration.
Selling a company’s assets as part of a compulsory liquidation
As mentioned above, it will be the job of a liquidator or the Official Receiver to market and sell a company’s assets, to try and get the best value for those assets and then to distribute the proceeds among the company’s creditors and shareholders. Each of the company’s creditors will be asked to submit a ‘proof of debt’ which is a document that sets out the details of the debt that they believe they are owed by the company and provides evidence supporting this belief. There are statutory requirements for how this information should be presented and so it is important for creditors submitting a proof of debt to get legal advice on how to complete this documentation.
Once the assets have been collected in and converted into cash, the liquidator must pay the assets in an official order of priority set out by the Insolvency Act 1986. Usually each class of creditors must be paid in full before the funds can flow down to the next class of creditors. The categories of creditors are broadly secured, unsecured and preferential creditors and lastly, shareholders of the company. A preferential creditor is someone like an employee who is owed wages, holiday pay or pension contributions.
The dissolution of the company, Companies House and HMRC
Once a winding up order has been made by a court, the Official Receiver will need to notify Companies House and the Registrar of Companies will put the order on the company’s public record. The liquidator or Official Receiver must also provide Companies House with a copy of the statement of affairs of the company and details of the formation of, and any changes to, a liquidation committee as well as a progress report every 12 months from the date of their appointment until the winding up finishes.
The standard process is that after the assets have been dissolved and distributed amongst the company’s creditors (and shareholders if applicable), the liquidator will prepare a final account for release and send it to the company’s creditors letting them know how they can object to the release. The liquidator then sends a copy of the final account to the court and to Companies House notifying them if creditors have objected to the release. When the Registrar of Companies is notified that winding-up is complete and gets the final account from the liquidator or Official Receiver, the liquidation is registered and the company is then automatically dissolved three months later (unless the Secretary of State decides to defer the dissolution) and taken off the company register at Companies House.
HMRC often follows a compulsory liquidation when a company owes it money to track the progress of the liquidation and to assess the likelihood of the outstanding sum being paid. Before a company is taken off the company register at Companies House, HMRC can stop an application to make sure that the company in question is officially wound up and investigated.
From 6 April 2020, there is a government proposal to boost HMRC up the list of creditors so that it is likely to be paid earlier. The government have said this is so that more of the taxes paid by a company’s employees and customers will go to fund public services rather than being distributed to other creditors. The proposed reform will apply to taxes collected and held by businesses on behalf of other taxpayers such as VAT, PAYE Income Tax and employee National Insurance contributions but will not apply to taxes owed by the company itself such as corporation tax and employer National Insurance contributions.
The difference between compulsory and voluntary liquidation
The main difference between compulsory and voluntary liquidation is that with compulsory liquidation the process is usually outside of the control of the company and its directors. It is usually the creditors of the company that make the winding-up petition to the court. Once a winding up order is made the liquidator or Official Receiver will take control of the company’s affairs and will investigate how the company is being operated and what led to the insolvency proceedings. In comparison, in a voluntary liquidation the directors or shareholders of a company can make the decision to wind up the company and can themselves appoint the insolvency practitioner that will act as liquidator, allowing them to retain an element of control in the insolvency proceedings and in how the company’s affairs and the conduct of management are reported. This can be important for the reputation of the company and the manner in which the company deals with its customers and creditors and is often a reason why businesses prefer voluntary liquidation over compulsory liquidation.
How long does compulsory liquidation take?
The length of time that a compulsory liquidation takes from start to finish will depend on the circumstances of the individual company, particularly on the complexity and amount of assets being dissolved and the nature of the company’s affairs. The time frame can often vary from a few months to a few years.
Can a compulsory liquidation be reversed or challenged?
Yes but within a limited time – a creditor or a contributory of the company either by itself or with the company can ask a court to stop or reverse a winding-up order. Usually this has to be done within 5 business days of the winding-up order but the court can also use its discretion to hear an out of time application if it wants to. The court can pause or stop the winding-up proceedings altogether in its sole discretion but there usually has to be a clear reason for doing so – for example that the circumstances are materially different to how they were presented to the court, or if there is some injustice that needs to be corrected or if the winding up is not in the public interest. The company will usually also have to be able to show that it can pay its debts as they fall due as well as the costs of the liquidation process so far.
What to do if you disagree with the liquidator?
The liquidator has wide powers to operate once it is appointed and challenging its authority may be difficult but provided that the court considers a person to be an appropriate applicant (and note a contributory will not be considered appropriate), they can apply to the court to remove a liquidator in a compulsory liquidation. Only in extreme cases however will the court actually order the removal of a liquidator – for example where it is in the best interests of the public or where there are elements of the liquidator’s conduct that have a negative impact on the outcome for creditors generally.
In certain circumstances the company’s creditors can also decide to remove the liquidator. There is a specific statutory decision procedure that needs to be instigated for the purpose of removing a liquidator, based on the votes of the creditors holding a majority in value. The court can monitor and review the decision.
How will a compulsory liquidation affect the company directors?
A compulsory liquidation will have a material impact on a company’s directors as once the liquidator or Official Receiver has been appointed, the directors of the company no longer have control of its affairs and can no longer direct and manage how the company’s business is operated and run.
The Official Receiver or liquidator may require the directors of the company to prepare a statutory ‘statement of affairs’, including details of the company’s assets, debts and liabilities and must give the Official Receiver or liquidator any information that they ask for, including through access to company paperwork and files and through being interviewed.
Is there a fee for compulsory liquidation?
There a number of costs associated with a compulsory liquidation which overall can be an expensive process, including the following fees to pay when making a winding-up petition:
- £1,600: The deposit for submitting the winding-up petition.
- £280: The fee for the court hearing.