Compulsory liquidation is normally as result of a hostile process initiated against the company’s wishes via the courts. This can lead to much litigation.
There are various grounds upon which a petition for liquidation can be filed. The most common of these grounds is that the company is unable to pay its debts as and when they are due and payable. There are four circumstances in which a company is unable to pay its debt. These are:
- neglecting to comply with a statutory demand made by a creditor for a sum of over £750 – If a creditor is owed more than £750 he can serve a Statutory Demand upon the company. A Statutory Demand is a prescribed form detailing who the creditor and debtor is, what the debt is and the circumstances upon which the debt occurred. If the company does not respond or challenge such a Demand within 21 days then the creditor can issue a petition for winding up.
If the company challenges the Statutory Demand then a Court date is set for the matter to be brought to Court for the Court to decide whether or not the amount being claimed by the creditor is payable by the company.
- An unsatisfied judgment – If a creditor has a judgment against the company they can file a petition based on that judgment.
- The company’s assets are exceeded by its liabilities, including contingent and prospective liabilities – This is the ‘balance sheet’ test, and is not often used in practice.
- The company is unable to pay its debts as and when they fall due and payable – This is the cash-flow insolvency test. There are a number of indicators that a court can take into account as to whether a company may be unable to pay its debts when they fall due. These include failing to comply with creditors demand for money without reasonable excuse or admitting it cannot pay the debt (for example, in correspondence).
In this procedure the courts are involved, a court date is set for the Hearing of the Petition and, once again, if the amount owed is not paid before the Hearing the company will be Wound Up. If the company is going to pay this debt to avoid the Winding Up then it is imperative that this is done before the advertisement of the petition as others may join the action and then the company will have to find the monies to pay them as well.
In a compulsory liquidation, the company is always insolvent. Once the Petition is advertised the consequence of this is the company’s bank account is frozen and the company must cease to trade. Should the company wish to continue to trade during the period between the issue of the Petition and the hearing of same then it must make an application to the Court to obtain a Validation Order whereupon the bank account will be unfrozen.
Once the company goes into compulsory liquidation the Official Receiver (a civil servant) is always appointed first and continues to be involved as it is his responsibility to investigate the actions of the directors rather than any Insolvency Practitioner appointed in place of the Official Receiver.
The basic procedure for a compulsory liquidation is as follows:
- A creditor will petition the court and then the petition is advertised in the London Gazette
- The court hearing
- The court makes order
- Official Receiver becomes liquidator
- Official Receiver advertises order in the London Gazette and a local newspaper and notifies both the Registrar and the company
- The directors are asked to prepare a statement of affairs
- A meeting of creditors is convened to enable them to nominate a liquidator of their choice. The Official Receiver may decide not to convene a meeting as there are no assets to realise, but the creditors may request the Secretary of State to appoint a liquidator of their choice
- Assets are realised and distributed to creditors in required order
- Final meeting of creditors held
- Final return filed with court and Registrar of Companies
- company dissolved three months later
The powers of the liquidator in a compulsory liquidation are very similar to the powers of the liquidator in a Voluntary Liquidation. The only major difference is that if a Liquidator wants to conduct litigation or to carry on the business he needs the sanction of the Court.
Upon the making of a compulsory winding-up order, the Official Receiver is always appointed liquidator of the company. Directors’ powers pass to the Official Receiver and (unlike voluntary liquidations) the directors’ appointments are terminated. All legal actions against the company are stayed.
The Official Receiver is under a duty to investigate the affairs of the company and the reasons for the company’s failure and the actions of the directors. Even if an independent Insolvency Practitioner is appointed, the Official Receiver is the one that carries out the investigation necessary under The Directors Disqualification Act.
Once he has investigated the affairs of the company and the reasons for failure he may report to the court, if necessary. He must also report to the creditors at least once during the course of the liquidation on the results of his investigations, but not in respect of his investigations of the directors’ actions regarding disqualification.
The Official Receiver has the power to call officers of the company for public examination before a Court for them to answer questions regarding the affairs of the company and reasons for the company’s failure. The creditors can compel the Official Receiver to call officers for public examination if half the creditors in value wish public examination to take place.
An independent Insolvency Practitioner can be appointed in place of the Official Receiver in the following ways:
- the Official Receiver can call a meeting of creditors to enable creditors to appoint the Insolvency Practitioner of their choice or:
- by the Secretary of State. If there are assets in the liquidation the Official Receiver can request the Secretary of State to appoint an Insolvency Practitioner from the Rota or the creditors can request that such an appointment to be made.
This and the fact that the liquidation is brought about by a Court Order makes the process slower than voluntary liquidation, generally more expensive, more formal and more rigorous in terms of examination of the directors and reasons for failure of the company.
The reasons why it is a more expensive procedure are:
- The original cost of the Petition is payable as an expanse of the liquidation. Additionally if the petition is challenged then both solicitors and barristers need to be engaged, which push up the costs tremendously.
- An Ad Valorem Fee is payable to the Insolvency Service on all realisations as follows;
Charge on the first £2,500.
Charge on the next £1,700.
Charge on the next £1,500.
Charge on the next £396,000.
Charge on the Balance until total of £80,000 taken in fees.
- The bank account must be held with the Insolvency Service and they charge for every transaction whereas in a Voluntary Liquidation Liquidators negotiate with banks for the bank account to be interest bearing and free of charges.