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Winding up petitions / compulsory liquidation

Winding up petitions / compulsory liquidation

If a partnership or limited company is insolvent it can make an application to court to be wound up / liquidated.

For a limited company this would usually be a last resort as a voluntary liquidation may be a better remedy (if liquidation is necessary in the first place).

More often than not compulsory liquidation is usually forced upon by one or more creditors who have not been paid.

The creditor will make an application to court and issue a winding up petition against the partnership or company and unless the partnership or company takes steps to pay the debt, or have the petition withdrawn then the partnership 

One of the best ways to keep a company going that is facing insolvency is to actually deal with the problems and try and find a solution rather than just let it happen. It is often a surprise what creditors faced with the reality of losing all or most of their money they are owed, will accept.

Directors who ignore their problems will eventually be served with a statutory demand.  Once a formal statutory demand has been served, the company has 21 days to deal with it and if the company fails to deal with it in that time then the creditor can then apply to court for a petition for the winding up of the company.  

Once winding up proceedings have been started they can be very expensive and difficult (but not impossible) to stop and can cause all sorts of problems.  

Once a petition is advertised (at least 14 days before the court hearing) the bank will pick up on this and freeze the bank account of the company.  After the petition has been issued any disposal of the business’ assets is void (unless later approved by the court).  

At the winding up hearing a judge could order that the company be put into compulsory liquidation forcing the company to cease trading and triggering the redundancy of all the employees.

It can be upsetting for the director when we see them and they have left it too late to be able to avoid liquidation, especially if I can see that had we been consulted at an earlier stage, liquidation might have been avoided and we could have possibly helped to save the business.

Sometimes the issuing of a winding up petition is the final straw but in the circumstances a liquidation procedure is actually the right option for the company. It may be that a creditor’s voluntary liquidation (“CVL”) might the better route to go down to ensure the company’s affairs are wound down in an orderly manner rather than a compulsory liquidation being enforced through the court.

A CVL can often be better less painful process than a compulsory liquidation because it is usually cheaper. In a compulsory liquidation there is a flat fee (a tax) of 17% of all assets sold plus there are still all the liquidators’ costs as well. This 17% does not apply in a CVL.

With a CVL procedure the IP will hold the directors hands throughout the process and assist with liaising with the creditors and employees. 

David Kirk ACA FABRP

David Kirk

David Kirk is a Chartered Accountant and Licensed Insolvency Practitioner.
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