Compulsory Liquidations

To commence compulsory liquidation, the petitioner must file a winding up petition at court. This petition must also be served on the company, and advertised in the London Gazette to ensure that it is brought to the attention of as many company creditors as possible.

The presentation of a petition against a company can have very serious consequences on the company, as is often deemed to be an event of default under facility agreements that have provided funding to the company. Once the company’s bank becomes aware that a petition has been presented, they will usually take steps to freeze company accounts. It is therefore important to act quickly and take legal advice once a petition has been presented and served.

A petition can be presented by a creditor of the company, as well as the company’s directors, or the company itself. For example, where shareholders and directors are in a deadlock, it may be appropriate for the company’s assets to be distributed, and the company wound down.

If the court orders that the company be placed into compulsory liquidation, the Official Receiver will be appointed as the initial liquidator. In some instances, the Official Receiver will be the sole liquidator, but in more complex liquidations, it is common for insolvency practitioners to be appointed to realise the company’s assets and engage with stakeholders.

The liquidator is an officer of the court whose job is to realise any assets that the company has, make distributions to any creditors, and to wind down the company’s affairs before it is dissolved. This may require investigatory work to be undertaken to determine the reason for the company’s demise. For example, if a company’s assets have been paid away and have contributed to its insolvency, or if the wrongdoing of a third party has caused the company to become insolvent, the liquidator may look to commence court proceedings to make recoveries for the benefit of the company’s creditors.

In order to facilitate the liquidator in carrying out their duties, they are provided with wide-ranging powers under the Insolvency Act 1986, such as the power to compel the delivery up of information relating to the company from its officers or even third parties.

The costs of a compulsory liquidation can vary greatly depending on the complexity of the company’s affairs and the steps required to realise assets. For example, the cost of selling a property owned by a company would be far less than commencing litigation on the company’s behalf.

These costs are usually paid as an expense of the liquidation from the company’s assets ahead of payments to creditors. There are rules regarding the liquidator’s fees and expenses as well as the order in which recoveries from the assets of the company are distributed.

When a company goes into compulsory liquidation, secured creditors can still enforce their security and take possession of any secured assets. This will usually require the input of the liquidator to ensure that they are content with the security and that enforcement proceeds smoothly.

All other creditors rank “pari passu” to other creditors in their category. Certain creditors of the company are deemed to be “preferential”, meaning that they rank after secured creditors, but before floating charge holders and other unsecured creditors. There are a number of different categories of preferential creditor, but this will often include certain employee claims.

Each creditor will be required to submit a proof of debt setting out the basis of their claim against the company. Before any distributions are made, the liquidator will adjudicate on the claimed debts and choose whether to admit or reject each claim.

The powers of the company’s directors cease upon the company being placed into compulsory liquidation and they are automatically removed from office. Their duties may however be ongoing if required by the liquidators. The directors must cooperate with and assist the liquidator throughout the liquidation process.