What Causes A Compulsory Liquidation & Can It Be Stopped?

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Compulsory liquidation is a formal insolvency procedure that results in a company being forcibly shut down. Whilst it can’t be ‘stopped’ as such there are proactive measures that struggling businesses can take in order to prevent their company from being forcibly shut down via forced liquidation. We’ll provide further details on this in just a second, first we need to understand what causes a compulsory liquidation in the first place.

What Causes A Compulsory Liquidation?

When a company is unable to pay its debts to creditors as they fall due, it could be at risk of compulsory liquidation. The process is usually initiated by a creditor of the company who is owed outstanding debts of at least £750. The creditor will issue a Winding Up Petition (WUP) to the debtor company and after at least seven days (and at least seven days before the court hearing), a notice will be filed in The Gazette. For more on what a First Gazette Notice for a compulsory strike off actually means, click here.

If the company does not oppose the WUP then it will be heard in court, where a Winding Up Order may be issued by the judge. Trade must be stopped at this point and an official receiver or ‘liquidator’ is appointed who will take over control of the company and begin the process of liquidating the company’s assets. Proceeds made from the sale of assets will be used to pay the company’s debts as far as possible. Any remaining debts will be written off unless the director has provided a personal guarantee making them personally responsible for any outstanding debt. At this point, the liquidation will be closed, the company will then be dissolved and have its name removed from the Companies House register.

So that’s what causes a compulsory liquidation, however, what you might be wondering is, can it be stopped?

Well, when a WUP is issued, there is a very small window in which the company can challenge it or make alternative arrangements. However, it’s important to emphasise that a WUP can only be challenged under very limited conditions. The petition may be dismissed if:

  • The debt is substantially disputed
  • You have a counter-claim against the creditor i.e they owe your company more debt than you owe them
  • There are technical errors meaning that the petition has not been served in the correct and legal way

If the company doesn’t have the grounds to challenge the petition and cannot pay the petitioning debt then the best option is to initiate an alternative insolvency procedure such as a Creditors’ Voluntary Liquidation (CVL). Although a CVL still results in the closure of the company, it is a much better alternative to compulsory liquidation. The very fact a CVL is voluntary reduces the chance of wrongful trading allegations being made against the directors, as entering into liquidation voluntarily demonstrates that they are being proactive in prioritising the interests of their creditors.

Being aware of what causes a compulsory liquidation can help business owners who find themselves in an unfortunate financial situation to be proactive in avoiding the lasting damage of compulsory liquidation. Instead, by knowing what causes a compulsory liquidation and how the process works, directors can consider alternative voluntary insolvency procedures, such as a CVL instead.

If you would like further advice on what causes a compulsory liquidation and the options available to your business if it is at risk, please don’t hesitate to get in touch with us today.

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