R3 Guide to What is a Compulsory Liquidation

This is the type of liquidation which follows a Court Order for the winding up of a Company

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 with the leave of the court. In addition, no new legal 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 employees 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.

You may claim interest on your outstanding debt up to the date of liquidation,  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 form 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

Purnells can assist you with any questions that you might have on compulsory liquidations.

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