Compulsory Liquidation

Compulsory liquidation is a legal process that involves selling off your insolvent business’ assets and closing the company down. The procedure is similar to voluntary insolvent liquidation, but because a creditor has initiated it, directors are more exposed to accusations of wrongful trading.

When a company becomes insolvent, directors must stop trade straight away in order to protect their creditors’ interests. By waiting for a creditor to force compulsory liquidation, also known as forcibly winding up a company, it’s easy for directors to unwittingly breach UK insolvency laws.

What is compulsory liquidation?

When a creditor successfully petitions for a company to be wound up, a liquidator takes control of the company and its affairs. This is typically the Official Receiver (OR) initially, but an independent licensed insolvency practitioner (IP) may be appointed to carry out the liquidation.

All business assets are sold at auction to generate funds for creditors, and the company name is removed from the register at Companies House. An investigation into director conduct also commences on liquidation, leaving directors at risk of serious allegations regarding the downfall of their company.

So when can a creditor force a company into liquidation, and what are the ramifications for directors?

When can a creditor force compulsory liquidation?

Certain conditions must be met before a creditor can make a winding up petition. If you owe a debt of £750 or more and a creditor has served a 21-day statutory demand on your company that remains unpaid, they can force compulsory liquidation.

Once the petition is submitted, you can’t sell or otherwise dispose of any business assets. If you take no action to repay the debt or challenge the petition, your business bank accounts will also be frozen when the petition is publicly advertised in the Gazette.

If you’re found to have traded wrongfully, or other forms of misconduct are uncovered, you face disqualification as a director for up to 15 years, and potentially personal liability for business debts.

How to avoid being forced into liquidation by a creditor

You can avoid the considerable harm that compulsory liquidation inflicts on your business’ reputation and on yourself as a director, by entering a procedure called Creditors’ Voluntary Liquidation (CVL).

Being proactive in dealing with your company’s insolvent situation protects your creditors, and also helps you and other directors to meet your legal obligations under UK insolvency law.

Although the end result is the same, this route to closure demonstrates your intent to protect creditors and minimise their losses. But how do you pay for a CVL when the business is insolvent? Isn’t it preferable from a financial point-of-view to allow a creditor to force compulsory liquidation on the company?

Don’t wait for a creditor to wind up the company

If the cost of a CVL can’t be wholly financed through the sale of assets, you may be required to use personal funds to cover the cost of the professional fees associated with liquidating your company. Depending on your situation, you may be able to claim statutory redundancy as a director so long as you are also classed as an employee of the business.

In order to be eligible for director redundancy, you must have worked under a contract of employment for at least two years, for a minimum of 16 hours per week. If you also receive a regular salary through PAYE, you may be able to make a claim for redundancy pay and other statutory entitlements. The amount you will be entitled to will depend on a number of factors including your age, length of service, and salary taken.

For more information on compulsory and voluntary liquidation, please contact our expert team at UK Liquidators. We’ll be able to advise on director redundancy, and whether you’re eligible to make a claim. Please get in touch to arrange a free, same-day consultation - we operate an extensive network of offices around the UK.