Compulsory Liquidation

Compulsory Liquidation or ‘Winding Up’ in the Court is a court-based procedure under which the assets of a company are realised and any surplus distributed to the company’s creditors (after the liquidation costs). The procedure is started by the presentation of a petition at court. A court hearing is held to consider the petition and whether or not it is appropriate to make a winding up order. The most common reason for a winding up order is that the company is insolvent. Following completion of the liquidation the company is dissolved.

The procedure is set out in the Insolvency Act 1986 (IA1986) and The Insolvency (England and Wales) Rules 2016 (IR16).

The presentation of a winding up petition may have serious consequences for a company. Although the petitioner is often a creditor of the company (of which a petition by HMRC is the most common), the company itself, its directors and various other categories of people can seek to have a company put into compulsory liquidation (section 124 IA86). The most common ground for winding up a company is that it is unable to pay its debts.

The petitioner must serve a formal copy of the petition on the company and must advertise the petition in the London Gazette.

When a winding up order has been made, the Official Receiver is immediately appointed as Liquidator (section 136 IA86). However, the company’s creditors may appoint another individual, being an Insolvency Practitioner, to act as Liquidator (section 139 IA86). In addition, the Secretary of State may appoint an Insolvency Practitioner to act as Liquidator. The liquidator is an Officer of the Court.

The Liquidator’s function is to realise the company’s assets and if there are sufficient funds available after the costs of liquidation then to pay such monies to creditors in accordance with statutory rankings for distribution.

Schedule 4 of the IA86 discloses a list of the statutory powers the Liquidator can exercise to fulfil his duties.

The fees of the Official Receiver as Liquidator are laid down by statute and comprise fixed statutory charges plus percentage fee rates on assets realised and on monies distributed to creditors.

The rules as to how the Liquidator’s remuneration can be fixed are set out in the IR2016 (Paragraph 18).

Creditors are required to be provided with reports of the progress of the liquidation with the first report required to be issued by the Liquidator after 12 months and annually thereafter until the Liquidator submits a final report to the creditors to conclude the liquidation. If the liquidation does not exceed 12 months then only one report will be submitted to the creditors.

Creditors may form a Liquidation Committee of 3 to 5 creditors to assist the Liquidator in carrying out his functions and to fix the basis of the Liquidator’s remuneration.

A limited liability partnership (LLP) can be made the subject of a winding up order.

A creditor can apply for a winding up order against a partnership, if that partnership has traded in England and Wales at any time in the 3 years before the petition is presented.

Further information on compulsory liquidations can be obtained from the website of the Association of Business Recovery Professionals (R3) at www.r3.org.uk.