INSOLVENCY & LAW
Creditor’s Guide to Compulsory Liquidation
Business rescue . Debt recovery . Insolvency support
Are you a business owner or director considering placing your 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, throughout the liquidation process, an insolvency practitioner or official receiver will prepare a report on your conduct, which will be submitted to the Insolvency Service Afterwards, they may question you about various aspects concerning the affairs of the insolvent company.
The information you disclose may be used to bring misfeasance or Director Disqualification Proceedings against you. If allegations of serious misconduct are leveled against a director, they could potentially be prosecuted and prohibited from managing companies for a maximum period of 15 years.
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Compulsory liquidation or CVL?
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 holds the responsibility of investigating the conduct of directors. Once they receive the IP's report and conclude their own investigations, they will proceed accordingly.
The investigators can examine all current, former, shadow, and de facto directors who were involved with the company in the three years leading up to its failure. Furthermore, an examiner (acting on behalf of the official receiver) will summon and subject you to a rigorous interview.
Disadvantages of compulsory liquidation
If allegations of misconduct arise during Compulsory Liquidation proceedings, authorities may prosecute you and impose a ban on managing companies for a duration ranging from two to 15 years.
In contrast, in a creditors' voluntary liquidation (CVL) procedure, business owners and directors have the freedom to select the IP (liquidator) of their preference.
Moreover, it is possible to evade Compulsory Liquidation even if the company has received a winding-up petition. If the company enters into a CVL procedure prior to the court hearing of the petition, it is likely that the petition will be unsuccessful.
Discuss your situation in confidence
Financial distress is rarely straightforward, and delay often increases risk.
If you are a creditor, investor, or director affected by insolvency, speaking to an experienced insolvency expert can help clarify where you stand and what may follow.
Contact our team at Insolvency & Law to book a confidential consultation now