Skip to main content

What is Compulsory Liquidation?

What is a Compulsory Liquidation?

Compulsory liquidation, or “winding up by the court,” is a legal process where a company is forced to liquidate its assets and cease operations.

This can happen when a company is unable to pay its debts or has committed a serious breach of the law. The process is initiated by a court order, typically following an application by creditors or government agencies.

In the UK, compulsory liquidation is governed by the Insolvency Act 1986, and it is a serious matter that can have severe consequences for the company and its directors.

If you’re a company director facing compulsory liquidation, it’s crucial to understand the process and your obligations.

What are the reasons for compulsory liquidation?

1. Insolvency:

One of the most common reasons for compulsory liquidation is insolvency. This is when a company is unable to pay its debts as they fall due. If the company owes more than it can pay, creditors may apply to the court to have the company wound up and its assets sold to pay off its debts.

2. Breach of the law:

If a company has committed a serious breach of the law, such as fraudulent activities or trading while insolvent, the court may order compulsory liquidation. This is often initiated by government agencies, such as the Insolvency Service or the Financial Conduct Authority.

3. Shareholder disputes:

In some cases, shareholder disputes can lead to compulsory liquidation. If the company can’t resolve the dispute, shareholders may apply to the court to have the company wound up.

4. Director misconduct:

If the company’s directors have engaged in misconduct, such as mismanagement or fraudulent activities, the court may order a compulsory liquidation.

5. Failure to comply with statutory demands:

If the company has failed to comply with a statutory demand for payment, a creditor can apply to the court for compulsory liquidation.

In all cases, compulsory liquidation is a serious matter that can have severe consequences for the company and its directors. It’s essential to seek professional advice if you are facing financial difficulties or legal issues to understand your options and obligations.

Speak to one of our expert advisors
Live ChatWhatsapp

How does Compulsory Liquidation Work?

Compulsory liquidation begins with a winding-up petition, which can be presented by a creditor, a shareholder, or the company itself.

The petition must be supported by evidence that the company is insolvent or has committed a serious breach of the law.

The court will then issue a winding-up order, which appoints a liquidator to take control of the company’s affairs.

The liquidator’s role is to sell the company’s assets and distribute the proceeds to its creditors.

They will also investigate the company’s affairs to identify any potential claims against its directors or other parties.

Once the liquidation process is complete, the company will be dissolved, and its directors will no longer have any legal obligations or control over its affairs.

Who Pays for Compulsory Liquidation?

In a compulsory liquidation, the costs of the process are paid from the company’s assets. The liquidator appointed by the court to manage the process will be entitled to recover their fees and expenses from the company’s assets.

The liquidator’s fees and expenses can include

  • Costs of advertising the liquidation.
  • Taking control of the company’s assets.
  • Investigating the company’s affairs.
  • Selling the assets.
  • Distributing the proceeds to creditors.

The liquidator’s fees and expenses are usually paid before any funds are distributed to creditors.

Once the liquidator’s fees and expenses have been paid, any remaining funds will be distributed to creditors in accordance with their legal entitlements.

It is worth noting that in some cases, the company may not have sufficient assets to cover the costs of the liquidation process.

In this situation, the liquidator may need to seek funding from other sources, such as the government’s Redundancy Payments Service, to cover the costs of making redundancy payments to the company’s employees.

However, this funding will need to be repaid from the sale of the company’s assets if there are any available funds.

It’s also important to note that the company’s directors may be personally liable for some of the company’s debts and other obligations.

If this is the case, the liquidator may pursue the directors for the amounts owed.

However, this will depend on the specific circumstances of the case and the extent of the directors’ liability.

How long does a compulsory liquidation take?

The time it takes to complete a compulsory liquidation can vary dramatically. It depends on the complexity of the case, the size of the company, and the amount of assets and creditors involved.

However, it typically takes a good number of months to complete the process.

Here’s a general timeline of the compulsory liquidation process:

1. Petition for compulsory liquidation

A creditor, shareholder, or government agency can initiate the process by petitioning the court for a compulsory liquidation order. The court will review the petition and decide whether to grant the order.

2. Appointment of a liquidator

Once the court grants the compulsory liquidation order, a liquidator will be appointed to manage the process. The liquidator will take control of the company’s assets and begin the process of selling them to pay off the company’s debts.

3. Investigation and reporting

The liquidator will investigate the company’s affairs to determine the extent of its debts and liabilities. The liquidator will also prepare a report on the company’s financial position and the reasons for its failure.

4. Realisation of assets

The liquidator will sell the company’s assets, which may take several weeks or months depending on the complexity of the assets and market conditions.

4. Distribution of proceeds:

Once the assets have been sold, the liquidator will use the proceeds to pay off the company’s creditors per their legal entitlements.

5. Closure of the liquidation:

Once the liquidator has completed the process of selling the assets and paying off the creditors, they will apply to the court to close the liquidation.

The length of time it takes to complete each stage of the compulsory liquidation process can vary depending on the specific circumstances of the case.

However, the entire process in some cases, can take up to a year or more.

Consequences of Compulsory Liquidation

Compulsory liquidation can have serious consequences for the company and its directors. The company will cease trading, and its assets will be sold to pay off its debts.

This can result in job losses and financial hardship for employees and suppliers.

The company directors may also face legal action if they are found to have breached their duties or committed any illegal acts.

In addition to the financial and legal consequences, compulsory liquidation can also have a significant impact on the reputation of the company and its directors.

It can be a public and embarrassing process, and the negative publicity can harm future business opportunities.

Compulsory Liquidation Conclusion

Compulsory liquidation is a serious legal process that can have severe consequences for companies and their directors. It’s essential to understand the process and seek professional advice if you’re facing financial difficulties.

By taking prompt action and exploring all available options, you may be able to avoid compulsory liquidation and mitigate the consequences for all parties involved.

Make sure you contact our team of expert advisors who will help you to consider the best option for you and your business.

Speak to one of our expert advisors
Live ChatWhatsapp
Tp3 4star 175 2x

Book a free advice call




    What are the signs that a company might be facing compulsory liquidation?

    Can directors be held personally liable in compulsory liquidation?

    What happens to the company after compulsory liquidation?

    Once the liquidation process is completed, the company is dissolved. It is struck off the Companies Register and ceases to exist as a legal entity.

    What is the impact of compulsory liquidation on creditors?

    24hr Helpline

    Speak to an insolvency expert for immediate help and advice and to arrange a free no-obligation consultation with your local office

    0800 088 2142

    WhatsApp Our Team

    Email our team to arrange a call back or to request further information on how we can help

    Send us a Message

    Live Chat Online

    Immediately find out whether liquidation could be appropriate for your company

    Chat To An Expert
    Business Helpline Accreditations