How To Avoid Compulsory Liquidation & Why It’s Important

person displaying closed sign in business window

If a company has unpaid debts that they have failed to address then they could be at risk of compulsory liquidation. This process is initiated by a Winding Up Petition (WUP) being presented to the court (usually by a creditor), for the company to be dissolved. The WUP will be filed in The Gazette, which if unopposed, will be heard in court, where a Winding Up Order may be issued. At this point, trade must be stopped and an ‘official receiver’ or ‘liquidator’ will be appointed to take over control of the company and begin liquidating the company’s assets. Proceeds from the sale of assets will be used to pay off the company’s debts as far as possible, before the company is dissolved and removed from the Companies House register. 

What’s The Problem With Compulsory Liquidation?

Where possible, compulsory liquidation should be avoided at all costs. The main reason the process is so problematic is that it removes all control from the business owners. A liquidator will take full control of the business, leaving no alternative other than dissolution, and preventing directors from having any input. The conduct of creditors will also be thoroughly investigated. If evidence is found to suggest that directors have not acted in the interest of creditors during the period leading up to the liquidation, or there is evidence of wrongful trading, then action may be taken against them. This could include being burdened with personal liability for business debts. 

Can It Be Stopped? 

When a winding up petition is issued, there is a small window in which the business can challenge it or make alternative arrangements to avoid compulsory liquidation.In order to dispute the petition, the company will need to provide legitimate evidence for the debt itself to be disputed, or provide evidence of how they intend to repay the debt (in the case of validation orders).

Wherever possible, the best step is to repay the money that is owed. However, if this is not possible then the next step should be to place the company into voluntary liquidation. 

Why Choose A Creditors Voluntary Liquidation (CVL)? 

There are many benefits to closing your company via a CVL rather than letting it enter compulsory liquidation. The most important advantage is that it enables directors to remain in control. It also reduces the chances of wrongful trading allegations being made against the business as directors are showing that they are being proactive in prioritising the interests of creditors. A CVL will not leave lasting damage like a compulsory liquidation has the risk of doing, ensuring that directors can trade for a new company in the future.

The Importance Of Acting Early

The key to avoiding compulsory liquidation is identifying and addressing any financial issues head on. As soon as you have any concerns, it’s essential to consult the advice of an insolvency practitioner or business rescue specialist as early as possible, even if your company is still solvent. Don’t wait for action to be taken by creditors, and instead be proactive in managing your debts. The earlier you act the more options you have for recovering the business, or liquidating it under your own terms. 

Please don’t hesitate to get in touch with our experienced team for advice on the next steps to take. 

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