COMPULSORY LIQUIDATION
What is compulsory liquidation?
This is an insolvency procedure that applies to companies (and partnerships) and is started by a court order - a winding-up order.
A winding-up petition is presented in the High Court, normally by a creditor, stating that the company owes a sum of money and that the company cannot pay. Less frequently, the company itself, its directors or a shareholder may petition, as (in some circumstances) may an administrative receiver, an administrator, a supervisor of a voluntary arrangement, the Department, the Financial Services Authority, the chief clerk (Crown Court), a clerk of petty sessions, or the Official Receiver. A petition can still be presented even if a company is already in administrative receivership or voluntary liquidation.
A winding-up order can still be made even if the company has no assets or disputes the amount claimed. Any disputes over debts should be resolved with the creditor(s) before a winding-up order is made because the effects of the order are severe.
Who handles a compulsory liquidation?
The Official Receiver (OR) handles the early stages of a compulsory liquidation.
In what circumstances can a winding-up order be made?
A winding-up order can be made if the company:
- has decided that it should be wound up by the High Court;
- registered as a public limited company more than a year previously but has not yet been issued with a trading certificate;
- is an 'old' public company;
- has not begun trading within a year of its incorporation or has suspended its trading for a whole year;
- has less than two shareholders, unless it is a private company limited by shares or guarantee;
- cannot pay its debts;
- should be wound up because the Court forms the opinion that this would be just and equitable.
Will I be notified when a winding-up order is made?
As a director of the company you should know its financial position and whether any creditors are pressing for payment by letters, statutory demands and court proceedings.
These may lead to a petition to wind up the company.
When a winding-up order is made, the Court will notify the OR, who will then send notice of the order to the directors. In some cases the OR will need to interview you at once. This can happen if there are urgent matters to be dealt with relating to the company's business, employees or assets.
Can anyone appeal against or stop a winding-up order?
There are three ways that winding-up proceedings can be stopped:
- The Court can rescind (ie cancel) a winding-up order. The company (or anyone else) can apply for it to be rescinded if the Court did not have all the relevant facts when making the winding-up order. Application should be made within 7 days of the order being made.
- The company can appeal against a winding-up order. As a result of an appeal, the Court can rescind the winding-up order or otherwise vary its decision. An appeal should be made within 4 weeks of the order being made.
- Liquidation proceedings can be 'stayed' (ie stopped), permanently or temporarily, on the application of the liquidator, the Official Receiver, a creditor or a shareholder. If liquidation proceedings are stayed permanently, the directors usually regain control of the company. An application to stay the liquidation proceedings can be made at any time after a winding-up order has been made.
If you intend to take any action, you should seek professional advice at a very early stage from a solicitor, a qualified accountant or an authorised insolvency practitioner. You must also tell the OR and you must continue to co-operate with the OR in the meantime.
If the company is still trading, what will happen?
The OR will usually visit the company's premises to assess the situation.
The OR has limited powers to continue a business and these will be used in very few circumstances. Any employees will be dismissed and the assets and premises secured. It is unlikely that trading will continue.
What will happen to me once my company has been wound up?
You will no longer have control of the company's business, assets and property.
Most of your powers as director will cease and, in general, you are no longer entitled to act for or on behalf of the company (directors still keep some very limited powers, for example, appeal of the order). It follows that you will not be able to manage the affairs of the company on a day-to-day basis. Your duties and responsibilities as a director do not, however, cease.
You may, for instance, be required to assist the OR in disposing of assets.
If you are also an employee of the company, your employment will terminate on the winding-up order. You will be given details by the OR/IP about how to claim for any unpaid wages or other monies owed to you as an employee.
You must not use any of the company's assets to make payments to creditors or for your own use and benefit.
What information do I have to supply and when?
If you were not interviewed immediately when the winding-up order was made, the OR will write to you to arrange an appointment for you to attend at his office.
Do I have to supply information about the company to the OR/IP?
Yes, you have a duty to provide information and co-operate with the OR/IP.
Failure to co-operate is a serious matter and can result in your being publicly examined by the OR before the Court, when creditors may also ask questions. If you do not attend such an examination without giving the court a good reason, for example, serious illness, a warrant for your arrest may be issued. Your failure to attend or refusal to give information may be treated as a contempt of court for which the penalties may be a fine or imprisonment or both. It will also be a factor in deciding whether you are fit to be a director.
Will I have to pay any of the company's debts?
You may be required to contribute to the company's assets if you have misapplied company funds or if the company has traded wrongfully or fraudulently.
If you are a shareholder of the company, you may be asked to make a payment for any shares that have not been fully paid up.
If you, or any other person, have guaranteed any of the company's debts, it means that you have agreed to pay the debt if the company cannot. When a creditor becomes aware of the liquidation, you may be asked to make full payment subject to the terms of the guarantee.
When will the company cease to exist?
When the winding up is complete, the OR/IP will apply to be released from the office of liquidator.
The OR is released by the Department of Enterprise, Trade and Investment. IPs are released following a final meeting of creditors. On release, the OR/IP sends a notice to the Registrar of Companies and the company will usually be dissolved 3 months later. It then ceases to exist.
During this liquidation, can I act as the director of another company?
You can act as the director of another company unless you are subject to a disqualification order, have given a disqualification undertaking, are an undischarged bankrupt or, after 27 March 2006, are subject to a bankruptcy restrictions order or undertaking.
When will compulsory liquidation end?
How long liquidation takes depends on the circumstances of the individual case (eg the nature of the assets involved and the complexity of the liquidation), but once the process has been completed the company will be dissolved and cease to exist.
