Compulsory Liquidation (WUC)

A creditor driven process, using the power of the court to place a company into liquidation, leaving the directors with little or no control over the process up to the point of the appointment of a liquidator. Alternative courses of action are available to directors who act early, but the options diminish rapidly as the process progresses.

Any creditor who is owed £750 or more in respect of an undisputed debt (the anticipated  increase to £5,000 in October 2015 does not appear to have been implemented, although it was for creditors’ petitions for bankruptcy of individuals) is able to present a petition to the court to have the debtor company wound up.

As a general rule, creditors do not issue a winding up petition because they want the company to be wound up.  They simply want to be paid. It is sadly often the case that a company receiving a winding up petition will never be able to pay the debt and it will be wound up. However, there are circumstances where for example, a company is recovering from a catastrophic event and given time, it may be able to pay its creditors the whole or a substantial part of its debts.

If nothing is done by these companies, they will be wound up and the benefits of future profitability and payments to creditors will be lost. However, a Company Voluntary Arrangement may be the vehicle that provides the solution for both the company and its creditors.

It is therefore of paramount importance that the directors of a company take immediate action as soon as they become aware of the existence of a Statutory Demand. Failing to do so will result in a loss of some control over the future of the company.

If a creditor presents a winding up petition in the court, the court will seal the petition and endorse it with a hearing date before returning it to the creditor. The creditor must then serve the petition on the debtor company.

Once the petition is served, the creditor must advertise its existence including details of the court in which it is to be heard and the hearing date, in the London Gazette, However he cannot do this until at least business seven days have elapsed since the petition was served and he must also ensure that the advertisement appears at least seven business days before the hearing is due to take place.

The effects of the presentation of the petition and its advertisement are serious.

Firstly, if the company is wound up by the court, any disposition of the company’s assets, including payments to creditors or any other party after the date of presentation of the winding up petition are void, unless a successful application is made to the court for the disposition to be validated.

Secondly, once the petition is advertised, any other creditor who is owed £750 or more (again, this figure is expected to increase to £5,000 in October 2015) is entitled to support it. The effects of this are discussed below. In addition, the petition will come to the attention of the company’s bankers and other funders such as invoice discounters and they will be likely to at least suspend any facilities granted and if credit balances are held by them, these could be frozen. It is probable therefore that the company would be starved of cash and may be unable to continue to trade.

Where a company is wound up by the court, there are costs incurred that do not apply in other company insolvency processes. The most notable of these is the level of fees that are payable to the government, known as Secretary of State Fees. These fees, which can be substantial, are effectively a levy on the value of assets realised in the liquidation and distributions paid to creditors.

Delays often arise between the making of the winding up order and the appointment of a liquidator, which can result in certain assets, notably debts owed to the company, becoming extremely difficult to recover.

Often a creditor who has petitioned for the compulsory winding up of a company will be receptive to a proposal for the company to be placed into Creditors Voluntary Liquidation, particularly where this procedure is likely to produce a more rapid realisation of assets and consequential increased dividend prospects for creditors. Communication must however begin at the earliest possible stage. Preferably, immediately after the petition is served on the company.

Any creditor who has a floating charge over the assets of the company would also be able to appoint an Administrator if they so wish.

Usually, the best way forward to avoid a winding up order being made is to pay the petition debt. However, this is not as straight forward as it seems. Firstly, it will be necessary not only to pay the petition debt, but also the petitioning creditors’ legal costs. Secondly, it is no longer possible for a creditor to agree to withdraw the petition and even if the debt is paid, the hearing will still take place.

At this hearing, the creditor may agree to ask the court to dismiss the petition. However, any other creditor who has chosen to support the petition is entitled to object to its dismissal and they would be able to carry it on in the place of the original petitioner.

In some circumstances, therefore, the company could still be wound up, even if the original petition debt has been paid, unless the debts of all supporting creditors are also paid.

The issue of a winding up petition or even the threat of it by a creditor should be taken seriously and if the debt cannot be paid, immediate and authoritative professional advice should be sought in order for the directors to maintain a degree of control over the fate of the company. It is most important for the directors to keep as many options as possible open to them. However, the evaporation of those options accelerates rapidly as the petition hearing date looms closer.

For more information please see our liquidation overview for a easy to read guide or contact us to talk things through or to arrange a free, initial, no obligation consultation.