What is a compulsory liquidation?
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
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 function is to ensure the security of the company’s
assets between the petition date and the hearing (usually several
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 a licensed 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 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?
A 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 consist mainly of certain
debts due to employees and the Redundancy
Payments Service and are paid in priority to all
other unsecured creditors.
The liquidator will pay a dividend to unsecured
creditors if enough funds have been realised
from the company’s assets after paying costs
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
Six months after writing 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 their claims. You should submit your claim to the liquidator
in writing 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. The liquidator will not necessarily
acknowledge receipt of your claim, but will advise you when he has
adjudicated your claim. Any costs incurred in submitting your claim
will not be reimbursed.
You may claim interest on your outstanding debt up to the date
of liquidation, if it bore 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 claim 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
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
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
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 a statutory scale 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;
the value and nature of the company’s assets.
R3 has produced a separate guide explaining insolvency office
holders’ remuneration, which is 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 contact the liquidator to try to resolve the problem. If
you are still not satisfied you may be able to make an application to
If you believe that the liquidator is guilty of professional
misconduct, you should contact his regulatory body.