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A compulsory liquidation occurs when
a company is wound up by an order of the court. The purpose
of the winding up order is to appoint a responsible person
who has a duty to collect the company's assets and distribute
them to its creditors in accordance with the law.
When does a company find itself in compulsory
liquidation?
The most common circumstances are when
a petition is presented to the court on the grounds that the
company is unable to pay its debts, or it is proved to the
court that the company's liabilities are greater than its
assets.
Who can present a petition to wind up the company?
Amongst
others, a creditor, the company itself, or the Department
of Trade & Industry ('DTI') can
present a petition to the court to wind up the company.
A
petitioning creditor may feel that the company's assets might
be in jeopardy in the period
after presentation of the petition. If so, he may apply to
the court for an order to appoint a provisional liquidator,
whose main function is to ensure the security of the company's
assets between the petition date and the hearing (usually
several weeks later).
Who deals with the company's affairs?
Once a winding up order is made,
the Official Receiver becomes the liquidator. The Official
Receiver is a civil servant and an officer of the court. The
Official Receiver must decide within twelve weeks of the winding
up order whether to call a meeting of creditors to appoint
a licensed insolvency practitioner to act as liquidator. In
certain circumstances the DTI or the court may make such an
appointment.
This guide assumes that an insolvency
practitioner has been appointed liquidator.
What are the consequences of a winding up order?
Any disposition of the company's
property after the presentation of the petition is void, unless
the court orders otherwise.
After the liquidation has commenced,
any legal action against the company is stayed, except witfi
leave of the court. In addition, no new leydi proceedings
may be brought against the company without leave of the court.
The powers of the directors cease
and the liquidator takes control of the company and its assets.
What are the powers of the liquidator?
The liquidator's powers are wide and
include powers to sell the company's assets, to bring and
defend legal proceedings and to pay dividends to the company's
creditors. Some of the liquidator's powers can only be exercised
with the agreement of the liquidation committee (or if none
the DTI) or the court.
Does the liquidator pay unsecured creditors
the money owed to them?
Secured and preferential creditors
are paid before unsecured creditors. Secured creditors are
those that have some form of security over a company's property
(for instance a bank with a fixed and floating charge debenture).
Secured creditors are entitled to be repaid their debt out
of the proceeds of sale of the secured assets in priority
to ordinary unsecured creditors.
Preferential creditors are a special
category of unsecured creditor. They include certain debts
due to you when he has adjudicated your claim. Any costs incurred
in submitting your claim will not be reimbursed.
The liquidator will pay a dividend
to unsecured creditors if enough funds have been realised
from the company's assets after paying costs incurred.
When all claims have been adjudicated
or provided for, the liquidator will declare a dividend. The
dividend will be a percentage (pence in the pound) of each
creditor's total admitted claim, based on the cash available
for distribution to the creditors and the total of all creditors'
claims. All unsecured creditors are treated equally.
Six months after wnting off the
debt in your accounts you can claim VAT Bad Debt Relief from
HM Customs and Excise for VAT you have paid.
How do I make a claim in the liquidation?
The liquidator will write to all
known creditors asking them to submit a proof of debt form.
You should complete this form and return it to the liquidator
within the specified time limit. You should also send enough
supporting evidence of your claim, e.g. copy statements, invoices,
correspondence etc. to allow the liquidator to decide whether
or not your claim is valid. You must use the form sent by
the liquidator to make your claim. The liquidator will not
necessarily acknowledge receipt of your claim, but will advise
You may claim interest on your
outstanding debt Up to the date of liquidation, if it Core
interest, if it was payable at a previous date under a written
instrument, or if you had previously demanded it in writing
with notice that you would claim interest. You will not get
interest on your claim accruing after liquidation, unless
all creditors are paid in full.
If you believe that you own something
in the company's possession, you should contact the liquidator
as soon as possible with full proof of ownership and be prepared
to identify what you are claiming. The liquidator will examine
your claim carefully before deciding whether to release the
goods in question, pay you for them, or otherwise.
How will the liquidator adjudicate my claim?
The liquidator will consider your
proof of debt fomi and any supporting information. He will
compare your claim to the company's records and any other
available information, and may discuss the claim with the
directors. The liquidator may ask you for additional information
or evidence if he thinks you have not sufficiently proved
your claim. For example, if you have supplied goods to the
company, the liquidator may ask you to provide copies of signed
delivery notes.
The liquidator may agree your claim
in full, or in part, or he may reject your claim if he does
not think it is valid.
What can I do if I believe the liquidator has
unfairly rejected my claim?
It is best to contact the liquidator
in the first instance to discuss any amounts under dispute.
If you cannot reach agreement you can, within 21 days of rejection,
appeal to court. After 21 days, if you do not apply to court
the adjudication is final.
Is the liquidator bound by contracts entered
into by the company prior to his appointment?
No. The liquidator may refuse to perform
or formally disclaim any onerous or unprofitable contract
entered into by the company prior to liquidation. The other
party will then have a claim for breach of contract, which
ranks as an unsecured claim. However, a contracting party
that has acquired a beneficial interest in property of the
company will still be able to enforce it.
Is the liquidator liable for sums due under
contracts entered into by the company subsequent to his appointment?
The liquidator can cause the company
to enter into new contracts, in which event the associated
liabilities of the company rank as an expense of the liquidation.
As an unsecured creditor, what information am
I entitled to?
The Official Receiver will have sent
a report to creditors. If you would like information on progress
at any time, you should contact the liquidator. Meetings of
creditors are normally convened only at the beginning and
the end of the liquidation. Creditors may demand a meeting
of creditors if they constitute 10% in value of the creditors
as a whole.
How can I help the liquidator to achieve the
best possible outcome for creditors?
The unsecured creditors can form a liquidation
committee to help the liquidator (see below). You should also
tell the liquidator if you believe that the company has assets,
income or business interests that the directors have not disclosed,
or if you think you may have any information that might be
useful to the liquidator.
Can the unsecured creditors form a liquidation
committee?
Yes. A liquidation committee may
be appointed at a meeting of creditors and must consist of
at least three and not more than five creditors.
The liquidation committee receives
reports from the liquidator and may meet periodically. It
assists the liquidator, approves his remuneration and sanctions
the exercise of some of his powers.
Liquidation committee members are
not paid, but will receive their reasonable travelling expenses
as a cost of the liquidation.
How is the liquidator's fee determined?
The liquidation committee (if there is
one) or the creditors agree the liquidator's fee, failing
which it will be determined in accordance with the scale laid
down for Official Receivers or fixed by the court. Although
the fee can be fixed as a percentage of the assets realised
or distributed (or both), it is normally based on the following
factors:
- the time properly spent by
the liquidator and his staff;
- the complexity of the case;
- any exceptional responsibility
borne by the liquidator;
- the effectiveness with which
the liquidator carries out his duties; and
- the value and nature of the
company's assets.
R3 is preparing a separate guide explaining
insolvency office holders' remuneration, which will be available
from the person who gave you this guide.
When is the liquidation complete?
The liquidation is complete when
all the assets have been realised, all creditors' claims have
been adjudicated (where there are sufficient funds) and net
realisations after expenses of the liquidation have been distributed
to the creditors.
The liquidator will call a final
meeting of creditors and present his final receipts and payments
account, together with a report showing how the liquidation
has been conducted.
What should I do if I am dissatisfied with the
liquidator's handling of the case?
You should first contact the liquidator
to try to resolve the problem. If you are still not satisfied
you may be able to make an application to court.
If you believe that the liquidator
is guilty of professional misconduct, you should contact his
recognised professional body (see below).
R3 is a centre of excellence representing
all those who work with under-performing businesses in the
UK. R3 does not license or discipline insolvency practitioners;
this is the responsibility of the practitioner's recognised
professional body. The RPBs are:
- The Association of Chartered
Certified Accountants
- The Institute of Chartered Accountants
in England and Wales
- The Institute of Chartered Accountants
in Ireland
- The Institute of Chartered Accountants
of Scotland
- The Insolvency Practitioners
Association
- The Law Society
- The Law Society of Northern
Ireland (for Northern Ireland only)
- The Law Society of Scotland
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