Our Guide To Compulsory Liquidation & What It Means For Companies

What is Compulsory Liquidation?

Compulsory liquidation is a court led process where a judge orders that a company be liquidated as it cannot pay its debts and is insolvent.

The process is started by a creditor who has given up trying to recover money from the company directly.  Consequently, they have asked a solicitor to issue a winding up petition.  A petition is a document filed at the court.  This is then served on the company at their registered address.

For winding up petition to be served, creditors must be owed at least £750. The sum must have been unpaid for at least 21 days (this stated and submitted by a statutory demand letter).

It is a serious action and can be detrimental to a business, however, it IS possible to stop compulsory liquidation, so long that you act fast in response to your company being “served a winding-up petition”.

Call us on 0800 970 0539. We can give you the professional advice needed.

Who usually forces companies into Compulsory Liquidation?

In 2023, the High Court received nearly 6,000 Winding-Up Petitions, with HMRC accounting for almost 46% of them. HMRC is most likely to ask a court to put a company into compulsory liquidation.  Why is that?

HMRC is an “involuntary” creditor. Because you are trading and employing people, the debt to HMRC increases. If you have tried to do deals to repay outstanding PAYE and or VAT and still fail to make payments, the tax debt will be rising, so they may decide to issue a winding up petition to put the company into compulsory liquidation.

What is the process?

1. A Statutory demand letter is sent to the debtor to give 21 days for the company to pay the debt.
2. A Winding up petition is issued if the debt is not paid in those 21 days. This period gives the company an extra seven days for the debt to be paid. (Be aware that WUPs are advertised in the London Gazette – though in some cases this can be avoided. Contact us today to stop an advertised petition.)  Once the petition is advertised the bank accounts of the company will be frozen.
3. Winding up order served by Court if the debt is not paid in the extra seven days.
4. Official Receiver (OR) (Liquidator or Licensed Insolvency Practitioner) appointed to to put the company into compulsory liquidation, the directors’ power and responsibilities cease. The director’s role in this process is to work with the OR, assisting if and when needed.
5. Remaining company assets are sold and distributed, with the money made from doing so used to repay the debts. It is up to the OR to get the best return for creditors and act in their best interests
6. Company is dissolved and struck off the register: it ceases to exist.

How long does the process take?

Compulsory liquidation often takes up to a year to complete. The process of issuing of the petition and when the Official Receiver is appointed can happen quickly. But the actual compulsory liquidation process itself can take time.

How much does it cost to put a company into Compulsory Liquidation?

To force a company into liquidation the costs are  high, so a creditor must decide whether it is worth it.

The typical cost of the action will be £250-£500 for a statutory demand, but a petition will cost between £400 and £800 to issue, PLUS £2,600 court deposit (from November 2022) and a filing fee of £302.

What are the consequences of Compulsory Liquidation on Directors?

• The Official Receiver has the role of investigating the actions of the officers and directors of the company thoroughly. If it is proven that you traded wrongfully, took credit without reasonable prospect of repaying the debts, and failed to submit accounts or several other offences, then you may face action
• Loss of power, duties and control of the company
• The potential closure of the business if you can’t repay the debts.
• If the directors try to raise money for a new company it is likely that any credit check will flag that the directors have had a previous failure.  A compulsory liquidation will look worse than a voluntary liquidation on their record.

Can the process be stopped?

Yes, However, you must ensure you act fast once a winding up petition has been served.

Following the winding up petition you can choose from the following options:

• Pay the debt which will dismiss the petition
• Seek an adjournment and explore the possibility of a CVA

Click the link for more information on how you can stop the process

If you act too late and the winding up petition is heard by the Court and issued, then there is no more that can be done.

How Many Companies Are Compulsory Liquidated?

The number of seasonally adjusted compulsory liquidations in September 2024 was 13% lower than in August 2024 but 18% lower than in September 2023.

The number of compulsory liquidations has increased from record low levels seen in 2020 and 2021, while restrictions applied to the use of statutory demands and certain winding-up petitions (leading to winding up orders so compulsory liquidations). In 2023, compulsory liquidations increased by 44% from 2022 but remained 4% lower than 2019 (pre-pandemic levels). So far in 2024, monthly compulsory liquidation numbers have exceeded 2019 figures.  In October 2024 there were 231 winding up orders.

A Flow Chart of the Compulsory Liquidation Process