Creditor’s Guide to Compulsory Liquidation
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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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Your insolvent liquidation options...
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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:
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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.
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.
If your actions or decisions influenced the promotion or management of the company and played a role in its failure, it is probable that you will be classified as a shadow director.
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
| 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.
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MisfeasanceTrading 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. Under such circumstances, the initiation of Director Disqualification Proceedings will occur, and an application for a court order will be made. A director of an insolvent company may be held liable for losses incurred by creditors. Additionally, a director considering liquidating a company should avoid:
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Evaluate your insolvent liquidation options...
Both Compulsory Liquidation and creditors' voluntary liquidation (CVL) 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
To investigate the company's affairs, an IP/liquidator has the obligation to examine and 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.
Additionally, they can investigate all serving, previous, shadow, and de facto directors who were involved with the company within the three years leading up to its failure. Moreover, 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.
In contrast, 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.
Statutory insolvency liquidation procedures
Unpaid creditors initiate Compulsory Liquidation by filing a winding-up petition in court against a company they believe to be insolvent. If the court grants the order, it assigns the case to the official receiver.
Moreover, in the event that compulsory liquidation proceedings commence, the termination of all the company's contracts takes place on the date of liquidation.
Shadow Directors
Even if your name is not listed as a director at Companies House, it is still possible for you to be regarded as a shadow director.
If your actions or decisions have directed the promotion or management of the company and have contributed to its failure, it is likely that you will be classified as a shadow director.
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
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.
Consequently, 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