Guide to Compulsory Liquidation

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Are you a business owner or director who is considering placing a company into insolvent liquidation?

If so, it's essential that you understand the difference between the Compulsory Liquidation and creditors' voluntary liquidation (CVL) insolvency procedures.

Furthermore, in liquidation procedures, an insolvency practitioner or official receiver will send a report on your conduct to the Insolvency Service. Subsequently, you may be questioned on a range of topics regarding the affairs of the insolvent company.

The information you disclose may be used to bring misfeasance or Director Disqualification Proceedings against you. A director accused of serious misconduct could face prosecution, and be banned from managing companies for up to 15 years.

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Compulsory liquidation or CVL?

Your insolvent liquidation options...

Compulsory Liquidation and creditors' voluntary liquidation (CVL) both require a licensed insolvency practitioner (IP) although the official receiver may liquidate the company in a compulsory liquidation.

IPs tend to operate differently depending on whether they are acting as liquidator in a CVL or compulsory liquidation.

In Compulsory Liquidation, the official receiver (a court official employed by the government's Insolvency Service) nominates an IP to conduct investigations, and realise the liquidated company's assets.

IPs in Compulsory Liquidations act on behalf of the court, have far-reaching statutory powers, and will:

Show you no favour

Conduct meticulous investigations

Prioritise the rights of creditors (the businesses you owe) over your interests

Seek to take legal action against you at the earliest opportunity

Roles and duties of a liquidator

An IP / liquidator must investigate the company's affairs, and file a report on the directors' conduct to the Insolvency Service (listen to the audio clip above for more info). The Insolvency Service is responsible for investigating the conduct of directors. Following receipt of the IP's report, and the findings of their own investigations.

All serving, previous, shadow, and de facto directors involved with the company in the three years prior to its demise can also be investigated. Furthermore, an examiner (acting on behalf of the official receiver) will summon and subject you to a rigorous interview.

Disadvantages of compulsory liquidation

If you are accused of misconduct following Compulsory Liquidation proceedings, you could be prosecuted, and banned from managing companies for between two and 15 years.

Business owners and directors are free to nominate the IP (liquidator) of their choice in a creditors' voluntary liquidation (CVL) procedure.

Furthermore, Compulsory Liquidation may be avoided even if the company has been presented with a winding-up petition. It's likely the petition will fail if the company enters into a CVL procedure before the petition court hearing.

What is compulsory liquidation?

Statutory insolvency liquidation procedures

Compulsory Liquidation usually starts when an unpaid creditor files a winding-up petition in court against a company they believe is insolvent. If the court agrees to make the order, the case is sent to the official receiver.

If compulsory liquidation proceedings commence, all the company's contracts will terminate on the date of liquidation.

Shadow Directors

Although you may not be recorded as a director at Companies House, it's possible to still be held as a shadow director.

It's likely you will be deemed a shadow director if your actions or decisions directed the promotion or management of the company, and contributed to its demise.

A shadow director may be held personally liable. In Compulsory Liquidation neither a director, nor a shadow director can:

Leave all the company's debts behind and walk away without recriminations

Avoid personal liability claims

Preferential payments

Another major pitfall is making preferential payments to creditors. Unsecured creditors must be treated equally according to section 239 of the Insolvency Act 1986. Paying one, and ignoring another is strictly forbidden.

Misfeasance

Trading with an insolvent company, and obtaining credit you cannot pay for exposes suppliers and other creditors to unnecessary risk. Wrongful trading is a misfeasance contravening section 214 of the Insolvency Act 1986.

In these circumstances, Director Disqualification Proceedings will commence, and a court order sought. A director of an insolvent company may be held liable for losses incurred by creditors. Additionally, a director considering liquidating a company should avoid:

Contravening the Insolvency Act 1986 or the Companies Act (2006)

Being indebted to the company by way of an overdrawn director's loan account