What is compulsory liquidation?
This is an insolvency procedure that applies to companies (and partnerships) and is started by a court order - a winding-up order.
A winding-up petition is presented in the High Court, normally by a creditor, stating that the company owes a sum of money and that the company cannot pay. Less frequently, the company itself, its directors or a shareholder may petition, as (in some circumstances) may an administrative receiver, an administrator, a supervisor of a voluntary arrangement, the Department, the Financial Services Authority, the chief clerk (Crown Court), a clerk of petty sessions, or the Official Receiver. A petition can still be presented even if a company is already in administrative receivership or voluntary liquidation.
A winding-up order can still be made even if the company has no assets or disputes the amount claimed. Any disputes over debts should be resolved with the creditor(s) before a winding-up order is made because the effects of the order are severe.
Who handles a compulsory liquidation?
The Official Receiver (OR) handles the early stages of a compulsory liquidation.
The OR will tell the company's creditors and contributories (mainly shareholders) that the company is being wound up. If there are significant assets, an insolvency practitioner (IP) may be appointed as liquidator in place of the OR, either by the Department for the Economy or at the first meeting of creditors or contributories (shareholders).
The liquidator's role is to realise the company's assets, pay the fees and charges arising from the liquidation and share out any remaining funds to the creditors. In very rare instances a surplus may be available for distribution to shareholders.
Who is the Official Receiver (OR)?
The OR is a civil servant and an officer of the High Court. As well as administering cases, the OR has a duty to investigate the affairs of individuals in bankruptcy and companies in compulsory liquidation. He reports any evidence of criminal offences and conduct which makes an individual unfit to be a company director to The Insolvency Service's Directors Disqualification Unit.
Who are insolvency practitioners (IPs)?
IPs work in the private sector. They are usually accountants or solicitors. They must be authorised by one of the Recognised Professional Bodies (RPBs) before they can act as IPs. IPs acting as administrative receivers, administrators or liquidators in creditors' voluntary liquidations, report evidence of unfit conduct by directors in those proceedings to The Insolvency Service's Directors Disqualification Unit.
In what circumstances can a winding-up order be made?
A winding-up order can be made if the company:
- has decided that it should be wound up by the High Court
- registered as a public limited company more than a year previously but has not yet been issued with a trading certificate
- is an 'old' public company
- has not begun trading within a year of its incorporation or has suspended its trading for a whole year
- has less than two shareholders, unless it is a private company limited by shares or guarantee
- cannot pay its debts
- should be wound up because the Court forms the opinion that this would be just and equitable
Will I be notified when a winding-up order is made?
As a director of the company you should know its financial position and whether any creditors are pressing for payment by letters, statutory demands and court proceedings.
These may lead to a petition to wind up the company.
When a winding-up order is made, the Court will notify the OR, who will then send notice of the order to the directors. In some cases the OR will need to interview you at once. This can happen if there are urgent matters to be dealt with relating to the company's business, employees or assets.
Can anyone appeal against or stop a winding-up order?
There are three ways that winding-up proceedings can be stopped:
- the Court can rescind (ie cancel) a winding-up order - the company (or anyone else) can apply for it to be rescinded if the Court did not have all the relevant facts when making the winding-up order - application should be made within seven days of the order being made
- the company can appeal against a winding-up order - as a result of an appeal, the Court can rescind the winding-up order or otherwise vary its decision - an appeal should be made within four weeks of the order being made
- liquidation proceedings can be 'stayed' (ie stopped), permanently or temporarily, on the application of the liquidator, the Official Receiver, a creditor or a shareholder - liquidation proceedings are stayed permanently, the directors usually regain control of the company - an application to stay the liquidation proceedings can be made at any time after a winding-up order has been made
If you intend to take any action, you should seek professional advice at a very early stage from a solicitor, a qualified accountant or an authorised insolvency practitioner. You must also tell the OR and you must continue to co-operate with the OR in the meantime.
If the company is still trading, what will happen?
The OR will usually visit the company's premises to assess the situation.
The OR has limited powers to continue a business and these will be used in very few circumstances. Any employees will be dismissed and the assets and premises secured. It is unlikely that trading will continue.
What will happen to me once my company has been wound up?
You will no longer have control of the company's business, assets and property.
Most of your powers as director will cease and, in general, you are no longer entitled to act for or on behalf of the company (directors still keep some very limited powers, for example, appeal of the order). It follows that you will not be able to manage the affairs of the company on a day-to-day basis. Your duties and responsibilities as a director do not, however, cease.
You may, for instance, be required to assist the OR in disposing of assets.
If you are also an employee of the company, your employment will terminate on the winding-up order. You will be given details by the OR/IP about how to claim for any unpaid wages or other monies owed to you as an employee.
You must not use any of the company's assets to make payments to creditors or for your own use and benefit.
What information do I have to supply and when?
If you were not interviewed immediately when the winding-up order was made, the OR will write to you to arrange an appointment for you to attend at his office.
The letter will give the name of the person dealing with the liquidation and will tell you what you have to bring with you. You will also be sent a questionnaire to complete.
At the interview, you will have to:
- supply the completed questionnaire
- hand over all the company's books, records and business paperwork in your possession
- give full details of all company assets and liabilities
- tell the OR if somebody else is holding assets or trading records
You may be asked to:
- provide any further information asked for by the OR or relevant to the company, its business and its failure
- attend at the OR's office more than once - the OR has to be satisfied that all the information needed has been provided
- provide a sworn financial statement (called a "statement of affairs") showing all the company's assets and liabilities (plus other financial information which may be required) within 21 days of being asked to do so - the request will be made by the OR in writing
Do I have to supply information about the company to the OR/IP?
Yes, you have a duty to provide information and co-operate with the OR/IP.
Failure to co-operate is a serious matter and can result in your being publicly examined by the OR before the Court, when creditors may also ask questions. If you do not attend such an examination without giving the court a good reason, for example, serious illness, a warrant for your arrest may be issued. Your failure to attend or refusal to give information may be treated as a contempt of court for which the penalties may be a fine or imprisonment or both. It will also be a factor in deciding whether you are fit to be a director.
Will I have to pay any of the company's debts?
You may be required to contribute to the company's assets if you have misapplied company funds or if the company has traded wrongfully or fraudulently.
If you are a shareholder of the company, you may be asked to make a payment for any shares that have not been fully paid up.
If you, or any other person, have guaranteed any of the company's debts, it means that you have agreed to pay the debt if the company cannot. When a creditor becomes aware of the liquidation, you may be asked to make full payment subject to the terms of the guarantee.
When will the company cease to exist?
When the winding up is complete, the OR/IP will apply to be released from the office of liquidator.
The OR is released by the Department for the Economy. IPs are released following a final meeting of creditors. On release, the OR/IP sends a notice to the Registrar of Companies and the company will usually be dissolved three months later. It then ceases to exist.
During this liquidation, can I act as the director of another company?
You can act as the director of another company unless you are subject to a disqualification order, have given a disqualification undertaking, are an undischarged bankrupt or, after 27 March 2006, are subject to a bankruptcy restrictions order or undertaking.
A disqualified person must obtain the permission of the High Court to act as a director or to be concerned in the promotion, formation or management of a company.
You cannot be involved in another company or business that has or uses a name which is so similar that it suggests that there is an association with the failed company. This restriction lasts for five years after the winding up and applies:
- if you were a director or shadow director (a person who gives instructions on which the directors of a company are accustomed to act) of the failed company in the 12 months before the winding-up order
- to any name used by the failed company in that 12 months.
This restriction does not apply if the other company had already been known by that name during the whole of the 12-month period and was not dormant in that time.
If you do not comply with this restriction or act as a director without leave of the Court while an undischarged bankrupt or while disqualified, you may be held personally liable for the debts of the new or successor company. You may also be committing a criminal offence. If you believe that these restrictions may apply to you, you should seek advice on your own position. Less frequently, the company itself, its directors or a shareholder may petition, as (in some circumstances) may an administrative receiver, an administrator, a supervisor of a voluntary arrangement, the Department, the Financial Services Authority, the chief clerk (Crown Court), a clerk of petty sessions, or the Official Receiver. A winding-up petition can still be presented even if a company is already in administrative receivership or voluntary liquidation.
When will compulsory liquidation end?
How long liquidation takes depends on the circumstances of the individual case (eg the nature of the assets involved and the complexity of the liquidation), but once the process has been completed the company will be dissolved and cease to exist.