Compulsory Liquidation (Company Bankruptcy)

Compulsory Liquidation (Company Bankruptcy)

Compulsory liquidation (often called Company Bankruptcy) of a company is when the company is ordered by a court to be wound up.

This is the closest thing to bankruptcy for a limited company. Compulsory Liquidation is used where one or more of a company’s creditors feel the need to force the company to be closed and cease trading. The creditor will present a petition to wind up the company at the court (a Winding Up Petition). The company may then be ordered by either the High Court or a local County Court (depending on jurisdiction) to be liquidated or “wound up”.

Voluntary Liquidation

This is in contrast to Voluntary Liquidation, the process by which the directors of a company choose, with the assistance of a licensed insolvency practitioner, put the company into liquidation, or wind it up

When is Compulsory Liquidation Appropriate?

Normally one or more creditors will want to force the company to be wound up because they have been unable to collect the debts owed to them by the company. A company is regarded as unable to pay its debts if:

• A creditor is owed more than £750
• A creditor presents a written demand for the repayment of the debt in the form of a Statutory demand to the company
• The company fails to pay, secure or agree settlement of the debt to the creditor’s reasonable satisfaction

How is a Compulsory Liquidation Undertaken?

A creditor who wants to force the company to be wound up must first present a petition to the Court. Unless the court directs other arrangements, the petition must be advertised in the London Gazette.

If the Court decides to grant the winding up petition, then the company must send the winding-up order to the Registrar straightaway and it will be placed on the company’s public record. The petition itself is not presented to the Registrar so it will not appear on the public records.

An Official Receiver (OR) will be appointed by the court who will have a duty to investigate the companies affairs and the causes of its failure. The Official Receiver also decides whether to call meetings of the creditors and contributories (i.e. people liable to contribute to the assets of the company if it is wound up) for the purpose of appointing a liquidator in his place.

If the Official Receiver, acting as liquidator, is satisfied that the companies realisable assets (that is, assets which could be sold or disposed of to raise money) will not cover the expenses of even the winding up process itself, and that no further investigation of the companies affairs is necessary, he may apply to the Registrar for early dissolution of the company. The company will be dissolved three months after the application is registered at Companies House.

What happens to employees in a Compulsory Liquidation?

Where a company is wound up all employment contracts are automatically terminated on the day the court order is made.

In terms of whether employees will receive payment, as with a creditors voluntary liquidation, certain amounts are recoverable from the National Insurance Fund (NIF), but these payments are very limited. Employees, who are owed more than they are able to claim from NIF, will rank as preferential creditors, which means they will be paid after payment of the insolvency’s expenses but subject to a maximum amount. The balance owed will be treated as unsecured debt in the same way as the company’s trade creditors, and it is unlikely that employees will recover more than a small proportion of what they are owed.