Compulsory liquidation, also known as winding up by the court, is a legal process where the court orders a company to be placed into liquidation. This will often follow a winding-up petition presented by a creditor where the company cannot pay its debts.
Once the winding-up order is made, a liquidator will deal with the company’s affairs, realise its assets and distribute any funds available to creditors. From this point, the liquidation process is broadly similar to a CVL.
How is a company placed into compulsory liquidation?
Statutory demand or court judgment where debt remains unpaid
Before applying for compulsory liquidation, a creditor will generally need to establish that the company cannot or will not pay its debts. This may involve serving a statutory demand, which is a formal request for payment giving the company 21 days to pay. Alternatively, the creditor may already have a court judgment confirming the debt.
Winding-up petition
If the company fails to pay within the statutory demand period, the creditor can file a winding-up petition with the court and serve it on the company. This document formally requests that the court liquidate the company because of its inability to pay its debts.
Court hearing
The court schedules a hearing to review the petition and any responses or objections from the company. If the court agrees that the company is unable to pay its debts, it will issue a winding-up order, placing the company into compulsory liquidation.
Appointment of a liquidator
Once the winding-up order is made, the Official Receiver will initially deal with the company and an insolvency practitioner may subsequently be appointed as liquidator. The liquidator takes control of the company’s assets and affairs, realises its assets, deals with the costs of the liquidation and distributes the remaining funds to creditors in the statutory order of priority.
How does it help?
- It provides a formal legal process for dealing with the company’s employees, assets and creditors.
- If the company cannot pay amounts owed to employees, eligible employees can make claims through the Redundancy Payments Service for certain amounts, including unpaid wages, holiday pay, notice pay and redundancy pay.
- A liquidator takes responsibility for dealing with the company’s affairs, including realising its assets and dealing with creditor claims.
What are the potential outcomes?
The outcome of compulsory liquidation is the closure of the company. The liquidator deals with the company’s assets and uses the funds available to pay the costs of the liquidation and creditors as far as possible. Once the liquidation is complete, the company is dissolved and ceases to exist.
If a petition has been issued, call us today
This is the one situation where a day genuinely matters. Before a petition is advertised there are usually alternatives worth exploring. Afterwards, there are far fewer.