Compulsory Liquidation

This procedure is initiated by an individual creditor who must be owed at least Ł750. Occasionally a group of creditors acting together may take this route. The mechanics involve the serving of a Winding Up Petition on the Company, which has a number of draconian effects on the future conduct of its affairs. In particular, if the Petition is accepted by the Court and a Winding Up Order made against the Company, not only does this put it into Liquidation, but it makes each and every one of it transactions since the date when the original Petition was served potentially invalid.

Once the Winding Up Order is made, the Official Receiver automatically becomes the Liquidator, but he will often have a licensed Insolvency Practitioner appointed in his place, either where there are assets to be sold and a potential surplus for the ordinary creditors, or else if the creditor who served the original Petition or some other creditor asks him to do so.

Introduction

Compulsory liquidation is a court driven method of winding-up a company’s affairs, i.e. realising and distributing its assets and concluding its affairs in general. There are a number of grounds under which a court may make a winding-up order, principally being that the company has resolved that it be wound-up by the court, that it does not commence its business within a year/suspends its business for a whole year, that it is just and equitable to wind-up it up or, most commonly, that it is unable to pay its debts.

Purposes

There are four ways that the court may conclude that a company is unable to pay its debts and are that it is unable to pay its debts as they fall due, that its total liabilities exceed its total assets in value, that a statutory demand for greater than Ł750 remains unpaid or that the company is subject to an unsatisfied judgement execution. The application to wind-up the company must be by petition, presented either by the company, its directors, its shareholders or any creditors of the company.

This form of liquidation is principally creditor driven; allowing the Official Receiver considerable powers of investigation into the company’s affairs and may be favoured where creditors and/or the shareholders consider that the affairs of the company require detailed investigation. This may include for example the actions of a previously appointed insolvency practitioner as a receiver/administrator of the company.

The procedure

If the petition to wind-up the company is on the basis of an outstanding statutory demand, it must be preceded by a validly served demand on the company at its registered office. The debt under which the demand is served must be liquidated (i.e. ascertained in value), for greater than Ł750 and due and payable at once. The statutory demand must give the company twenty one clear days to pay or compromise the debt, following which if it fails to do so, the creditor may present a petition to court for the compulsory winding-up of the company.

The petition to wind-up the company must be submitted to court with a fee of Ł150 and deposit of Ł500, which is repayable out of the company’s assets in priority to the liquidator’s fees and any distributions to creditors. The court will then set a hearing date, usually about six weeks in advance, depending upon the availability of listings. The company itself must be given at least fourteen days notice. At the hearing the court will make the winding-up order unless the company can demonstrate sound reason not to do so.

The liquidation in general

Once the order is made the Official Receiver will become liquidator of the company. It is the Official Receiver’s duty to investigate if the company has failed the causes of the failure and generally the affairs of the company and to report to the court as he thinks fit. In addition, the Official Receiver has considerable powers to assist him in his investigations, including the ability to publicly examine past officers of the company and to require submission of any documentation necessary to conduct his investigations into the affairs of the company.

The Official Receiver also has a duty to consider convening a meeting of the company’s creditors in order that they may consider appointing an Insolvency Practitioner as liquidator of the company. This may be appropriate where there are assets to be realised and distributed to creditors and/or where the creditors may wish to provide funding to allow the Insolvency Practitioner to pursue more detailed investigations or pursue proceedings against former officers of the company.

Conclusion

The advantages from the creditors’ point of view of this form of a compulsory liquidation over a creditors’ voluntary liquidation are in the main, as detailed above, the Official Receiver’s duty to investigate the affairs of the company and the powers afforded to him in conducting those investigations. In addition, the company can be wound-up without the shareholders’ consent. There is therefore no need to convene an extraordinary general meeting to place the company into liquidation.

The disadvantages are principally the costs involved in the petition and in the liquidation the Department of Trade and Industry levies a fee on all realisations, which inevitably reduces the potential recovery to creditors. It should also be noted that a petition to wind-up a company should not be used as threat to obtain payment and, particularly in view of the initial costs; a creditor/shareholder should only pursue this route if the most beneficial remedy for the petitioner would by winding-up the company.

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