Compulsory liquidation and winding-up petitions

What is compulsory liquidation?

Compulsory liquidation is the court-ordered winding up of a limited company, started when a creditor presents a winding-up petition and the court makes a winding-up order appointing the Official Receiver to close the company, sell its assets and repay creditors in the statutory order of priority. It is the one form of liquidation forced on a company from outside.

It is the most serious way a company can be closed, because a creditor rather than the directors sets it in motion. Compulsory liquidation is one of several ways of closing a company, but unlike a creditors' voluntary liquidation the directors do not choose it, and once a winding-up order is made under the Insolvency Act 1986 control passes entirely out of their hands.

What is a winding-up petition, and what happens after one is issued?

A winding-up petition is a formal application to the court asking it to close a company that owes an undisputed debt of more than £750, usually presented after a statutory demand or an unpaid County Court Judgment has gone unmet. It is the trigger for compulsory liquidation and it follows a fixed statutory path to a court hearing.

Once a petition is presented the timeline moves quickly, and each stage narrows the company options.

• Statutory demand. Many petitions follow a 21-day statutory demand for a debt of more than £750 that the company has not paid or disputed.
• HMRC as petitioner. HM Revenue and Customs is one of the most common petitioners, most often for unpaid VAT, PAYE or corporation tax.
• Advertisement in The Gazette. The petition is advertised in The Gazette around seven business days after it is served, which is the point at which the situation becomes public.
• Freezing of the bank account. Banks monitor The Gazette and normally freeze the company bank accounts as soon as the petition is advertised, so trading effectively stops.
• The court hearing and the winding-up order. At the hearing the court decides whether to make a winding-up order; if it does, the company is in compulsory liquidation from that moment.
• The Official Receiver. The Official Receiver, a civil servant and officer of the court, becomes liquidator, investigates the company and may appoint an insolvency practitioner if there are assets to realise.

Can a winding-up petition be stopped before a company is wound up?

A winding-up petition can often be stopped if you act before the hearing, because the court will not make a winding-up order where the debt is paid, genuinely disputed on substantial grounds, or dealt with through a formal insolvency procedure. Acting early is the single thing that keeps the choice in your hands rather than the court's.

Depending on whether the business is viable, there are four main ways to head off a compulsory liquidation.

• Pay or agree the debt. Settling the petition debt, or agreeing terms with the petitioning creditor before the hearing, removes the grounds for the order.
• A creditors' voluntary liquidation. If the company cannot be saved, directors can place it into a CVL of their own choosing and appoint their own liquidator, which is generally viewed far more favourably than a compulsory winding up.
• Administration. Appointing an administrator creates a statutory moratorium that stops creditor action, including a petition, while a rescue or sale of the business is pursued.
• A company voluntary arrangement. A viable company weighed down by historic debt can propose a CVA to repay creditors over time and keep trading, which can lead to the petition being dismissed.
• A validation order. If accounts are frozen but the company needs to keep operating, we can help apply to the court for a validation order to authorise essential payments.

What is the difference between compulsory liquidation and a creditors' voluntary liquidation?

The difference between compulsory liquidation and a creditors' voluntary liquidation is who starts it and how much control the directors keep: a CVL is chosen by the directors and run by a liquidator they nominate, while compulsory liquidation is forced by a creditor through the court and begins under the Official Receiver. The outcome for the company is similar, but the route matters for directors.

Choosing a voluntary route before the hearing usually gives directors more control and reads better on the record. Call us and we will tell you honestly which applies.

What happens to directors in a compulsory liquidation?

In a compulsory liquidation the directors lose control of the company to the Official Receiver, who investigates their conduct in the run-up to the winding up and reports on it under the Company Directors Disqualification Act 1986. For directors who have acted properly and taken advice in good time, this review is a routine part of the process rather than a penalty.

Four points affect directors personally once a winding-up order is made.

• Conduct investigation. The Official Receiver examines why the company failed and whether the directors met their duties, which shift towards protecting creditors once a company is insolvent.
• Director disqualification. Misconduct such as trading while knowingly insolvent can lead to disqualification for between two and fifteen years, whereas acting early and stopping trading at the right time is the best protection.
• Overdrawn director's loan account. If you owe the company money through an overdrawn loan account, the liquidator must try to recover it as an asset of the company.
• Personal guarantees. Any borrowing or leases you personally guaranteed remain your responsibility after the company is wound up.

How much does compulsory liquidation cost, and who pays for it?

Presenting a winding-up petition costs the petitioning creditor around £1,600 to £3,000 in total, made up of a court fee and an Official Receiver's petition deposit, and the company itself pays nothing up front because the process is imposed on it. These are indicative figures that change when court fees are revised, so confirm the current amounts before relying on them.

The real cost to a company usually is not the court fee but the loss of control. In a compulsory liquidation the Official Receiver decides how assets are dealt with, whereas placing the company into a voluntary procedure first lets the directors appoint a liquidator they have chosen and, in a CVL, often fund the process from the company assets or their own statutory redundancy entitlement.

Figures are indicative and subject to change when fees are revised. They are the petitioner's costs, not a quote for advice to your company.

How long does compulsory liquidation take?

Compulsory liquidation commonly takes around eight to twelve weeks from the presentation of a winding-up petition to the winding-up order, with the company accounts usually frozen from the point the petition is advertised in The Gazette, roughly seven business days after service. The liquidation that follows the order then runs for as long as the Official Receiver needs to realise assets and complete the investigation.

The important window for directors is the short period before the hearing, because that is when a voluntary procedure can still be used to take control of the situation. Once the order is made the options narrow sharply, which is why early advice matters so much.

Why choose NTF for advice on a winding-up petition or compulsory liquidation?

NTF Corporate Solutions is a boutique insolvency practice whose advice on winding-up petitions and compulsory liquidation comes from named practitioners, James Kaye and Nick Morgan, who are licensed by the Institute of Chartered Accountants in England and Wales. You reach an experienced, named practitioner directly, and you can call the same day a petition arrives.

As part of the NTF group, we have helped company directors since 2009, we explain the real options in plain English, and the first conversation is free, confidential and without obligation. If your company is facing a petition, the fastest way to understand where you stand is to talk through the closure and rescue options with us before the hearing.