A quick guide to compulsory liquidation

What is compulsory liquidation?

Compulsory liquidation (or winding up by the court) is a procedure by which the assets of a company are sold, and the proceeds are distributed to the company’s creditors. A court order is required to put a company into compulsory liquidation. At the end of the liquidation, the company is dissolved.

The procedure is set out in the Insolvency Act 1986 (IA 1986) and the Insolvency Rules 1986 (SI 1986/1925) (IR 1986).

How does a company go into compulsory liquidation?

The process starts when a winding up petition is “presented” at court. The presentation of a winding up petition has serious consequences for a company.

The petitioner is often a creditor of the company. However the company itself, its directors and various other categories of people can seek to have a company put into compulsory liquidation (section 124, IA 1986). The most common ground for winding up a company is that it is unable to pay its debts. An order may be made on other grounds, as set out in section 122(1) of the IA 1986.

The petitioner serves a copy of the petition on the company, and must, in due course, advertise the petition in the London Gazette.

There will then be a hearing in court at which the company has an opportunity to oppose the petition. The judge may make a winding-up order, or may dismiss or adjourn the petition.

The liquidator

When a winding-up order has been made, the Official Receiver. The company’s creditors and contributories may appoint another individual, being a registered insolvency practitioner, to act as liquidator (section 139, IA 1986). More than one liquidator can be appointed to act jointly.

The liquidator is an officer of the court (Re Oasis Merchandising Ltd [1998] Ch 170). As such, he has a duty to act fairly and impartially (Condon, ex parte James [1874-80] All ER Rep 388).

What does the liquidator do?

A liquidator’s function is to collect in and realise the company’s assets, and to distribute the proceeds to the company’s creditors and, if there is a surplus, to the persons entitled to it (section 143(1), IA 1986).

A liquidator has wide-reaching powers to assist him in fulfilling his function. Some powers, such as bringing legal proceedings in the name of the company, carrying on the business of the company and paying debts, may only be exercised if the liquidator first obtains sanction from the court or a committee of the company’s creditors (liquidation committee).

Who pays the liquidator?

The liquidator’s fees are generally paid as an expense of the winding-up. As such, they are generally paid out of the company’s assets, after secured creditors holding fixed charge security have been paid; but in priority to creditors who either have no security or have floating charge security over the company’s assets.

The rules relating to how liquidators’ fees may be fixed are set out in rules 4.127 to 4.131C of the IR 1986.

What does compulsory liquidation mean for a creditor of the company?

Claims by unsecured creditors are paid on a pari passu basis. As an unsecured creditor, you may receive a dividend paid pro rata at the end of the liquidation (and possibly also an interim dividend). In some cases, the dividend to unsecured creditors will be just a few pence in the pound, and it may be nothing at all.

If you have the benefit of security, you are entitled to be paid from the proceeds of sale of the secured assets, subject to certain exceptions.

As a creditor, you will be invited to provide the liquidator with details of your claim (your proof of debt). The liquidator will then assess all the proofs of debt. He may either accept a claim in whole or part or reject it.

There is an automatic stay of legal proceedings against the company or its assets (section 130, IA 1986). If you wish to bring or pursue legal proceedings against the company, you must first apply to court for permission. If your claim is for monetary relief only, you are unlikely to be granted permission; generally only claims that have a proprietary nature are allowed to continue. The stay does not extend to the enforcement of security or the forfeiture of a lease.

You are entitled to receive reports on the progress of the liquidation from the liquidator (rules 4.43, 4.49B and 4.49D, IR 1986). You may also form a liquidation committee with at least two other creditors, to help the liquidator fulfil his functions (section 101, IA 1986 and rule 4.153, IR 1986).

What does compulsory liquidation mean for an employee of the company?

All employees of a company are automatically dismissed if a winding-up order is made. As a former employee, you may be entitled to a redundancy payment, and may have a claim for damages on the grounds of wrongful dismissal.

What does compulsory liquidation mean for a director of the company?

When a company goes into compulsory liquidation, the powers of its directors cease and they are automatically dismissed from office (Measures Brothers Ltd v Measures [1910] 2 Ch 248).

As a former director of a company that is being wound up, you may be required to assist the liquidator and to provide a statement of the company’s assets and liabilities (section 131, IA 1986).

If the liquidator believes that the conditions for disqualification are satisfied, he may report on you to the Secretary of State (section 7, Company Directors Disqualification Act 1986).

What can a creditor do if he thinks the liquidator is doing a bad job?

Creditors may be able to challenge the level of the liquidator’s remuneration under rule 4.131 of the Insolvency Rules.

The liquidator’s decision in relation to any proof of debt may be challenged by a creditor or a contributory (rules 4.70 and 4.83, IR 1986).

In extreme cases, and where it is in the interests of the liquidation, a liquidator may be removed by a court order or a meeting of the company’s creditors (section 172, IA 1986 and Legal update, Replacing a liquidator must be in the best interests of a compulsory liquidation).