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Company Insolvency – Compulsory Liquidation

If creditors feel they have exhausted all avenues to recover monies owed to them by a company, they can petition the Court for it to be put into Compulsory Liquidation.

The threat of Compulsory Liquidation should never be a surprise for a company. It is the final stage in long process of a creditor trying to recover money it is owed. Except in those cases where it is being used a nuclear option to settle an unresolved dispute over a debt, it is the inevitable conclusion of a company being unable to pay its debts as they are demanded for payment and therefore becoming technically insolvent. If full payment is not made or a settlement cannot be reached, the company will eventually be forced into Compulsory Liquidation.

Prior to this, it is highly likely that the company’s directors will have been pressed by the creditor for payment for some time, culminating in being served with a Statutory Demand. If the indebted company does not pay the Statutory Demand within 21 days or does not dispute the debt, the creditor can ask the Court to wind it up.

This is the most serious enforcement action by creditor and it is not taken lightly. It will cost around £2,000, emphasising the creditor’s determination to recover its debt, even if it may lead to the company’s closure. It can also be a last step to convince the debtor that the amount owed must be paid and can no longer be ignored.

Once a winding-up petition has been served, the company has seven days to respond or the Court will fix a date to hear the petition at which will probably be put into Compulsory Liquidation. This will lead to the closure of the business and the sale of its assets.

Company directors should seek advice immediately on receiving the winding-up petition especially if they are to have any prospect of saving the business. Alternatively, it may not be too late to place the company into Creditors Voluntary Liquidation but this will require early engagement with the petitioning creditor as the compulsory liquidation process is deemed to have started on presentation of the petition (unless subsequently withdrawn) and limits the options available to directors. In any event, you can no longer sell the company, its business or its assets. Never the less, a Company Voluntary Arrangement might still be an option depending on the company’s financial position and even Administration if the business is still viable and could benefit from being restructured. The petition can be defended where there is a genuine answer to the creditor’s claim, which has been ignored.

At the earliest possible stage in the Compulsory Liquidation process, it is highly recommended that the company should speak with a licensed insolvency practitioner (IP) for advice on what options, if any, it has. Opus has a number of highly experienced IPs, who will be pleased to assist.

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