Help Desk
|
 |
Compulsory liquidation
Compulsory liquidation is so called because a court orders that the company be liquidated and appoints the first liquidator, normally the Official Receiver.
A compulsory liquidation mostly takes place if a creditor is not paid and seeks a court order for a winding up. It is normally best to avoid this outcome if possible as the process is more complicated and costly than a voluntary liquidation and less able to respond to commercial situations. The exception to this is where there are insufficient unencumbered assets even to meet the costs of a creditors voluntary liquidation, when a compulsory liquidation can be an effective and inexpensive way for directors to deal with the responsibility of winding up the company.
How does the procedure work?
- A creditor or the directors can present a petition for the company's compulsory winding up. There are various allowable grounds but the usual one is that the company is insolvent or that it is just and equitable to wind it up.
- In order to petition successfully, a creditor needs therefore to be able to show evidence that the company is insolvent. Typically this is done by way of a statutory demand, an unsatisfied judgment or a "bounced" cheque.
- Once the petition is presented, it is advertised after a minimum period of seven days. This can encourage other creditors to join in the petition. In practice, this publicity normally forces the company to cease trading.
- It can take about six weeks for the court to hear a petition, assuming that the company or others do not challenge it.
- Once a petition is granted, any disposition of assets of the company after the presentation of the petition is void and can be overturned by the liquidator.
- As a result, once the petition is presented, the usual practice is for a bank to close any bank account and not allow the company to make payments from a credit balance unless there is a validation order from the court allowing such payments.
- Once a petition is granted, the Official Receiver is appointed as liquidator. If there are assets in the company or an investigation to undertake, the usual practice is to call a creditors' meeting to appoint a commercial liquidator. This process can take at least a further four weeks.
- The duties and powers of a compulsory liquidator are similar to those of a liquidator in a creditors voluntary liquidation.
Advantages |
Disadvantages |
- Takes responsibility for an insolvent company and its creditors away from the directors. It is an effective way to deal with an insolvent company where there are no assets even to meet the fees of a creditors voluntary liquidation.
- It avoids further risk of wrongful trading. Allows for creditors' claims to be agreed and paid, including those that are disputed.
- A liquidator has wide powers to adopt or abandon contracts, which often helps to bring disputes to a head.
- In some case, it is the only remedy available to an unsecured creditor to achieve some legal redress for non-payment of his debt, particularly if directors refuse to act responsibly
|
- It is even slower than a creditors' voluntary liquidation and the presentation of the petition can make further trading impractical. It is not suitable for a disposal of a business where asset value quickly dissipates.
- Does not afford protection from repossession by finance creditors or distraint by landlords.
- The process can result in large discounts on asset values, particularly intellectual property and goodwill.
- There are government fees payable based on the amounts realised. This can make this a more expensive procedure than a voluntary liquidation.
- It is not in practice a useful process for creditors to initiate an investigation into the directors' conduct or events that have caused loss to the creditors, unless the creditors are prepared to arrange for a commercial liquidator to be appointed and fund the investigation.
|
|
|
Print this page ]
Back
Top of Page