Compulsory liquidation: when the court winds up a company

What is compulsory liquidation?

Compulsory liquidation is the court-ordered winding up of a limited company, started when a creditor presents a winding-up petition and the court makes a winding-up order appointing the Official Receiver to close the company, sell its assets and repay creditors in the statutory order of priority. It is the one form of liquidation forced on a company from outside.

It is the most serious way a company can be closed, because a creditor rather than the directors sets it in motion. Compulsory liquidation is one of several ways of closing a company, but unlike a creditors' voluntary liquidation the directors do not choose it, and once a winding-up order is made under the Insolvency Act 1986 control passes entirely out of their hands.

How does compulsory liquidation start?

Compulsory liquidation starts when a creditor owed more than £750 presents a winding-up petition to the court, usually after an unpaid statutory demand or County Court Judgment, and the court makes a winding-up order at the hearing because the debt is still unpaid and not genuinely disputed. HMRC is one of the most frequent petitioners.

The petition runs to a short, fixed timetable, from service at the registered office to an advertisement in The Gazette and the court hearing. Our guide on what to do about a winding-up petition covers that timetable and the ways a petition can still be stopped, and the guide to a statutory demand served on a company explains the warning that often comes first.

What happens after a winding-up order is made?

After a winding-up order is made, the Official Receiver becomes liquidator of the company, the directors' powers come to an end and the company stops trading, while legal action against it is halted unless the court gives permission. The Official Receiver is a civil servant in the Insolvency Service and an officer of the court.

From that point the liquidation follows the same course in almost every case.

What is the difference between compulsory liquidation and a creditors' voluntary liquidation?

The difference between compulsory liquidation and a creditors' voluntary liquidation is who starts it and how much control the directors keep: a CVL is chosen by the directors and run by a liquidator they nominate, while compulsory liquidation is forced by a creditor through the court and begins under the Official Receiver. The outcome for the company is similar, but the route matters for directors.

Choosing a voluntary route before the hearing usually gives directors more control and reads better on the record. Call us and we will tell you honestly which applies.

What happens to directors in a compulsory liquidation?

In a compulsory liquidation the directors lose control of the company to the Official Receiver, who investigates their conduct in the run-up to the winding up and reports on it under the Company Directors Disqualification Act 1986. For directors who have acted properly and taken advice in good time, this review is a routine part of the process rather than a penalty.

Four points affect directors personally once a winding-up order is made.

• Conduct investigation. The Official Receiver examines why the company failed and whether the directors met their duties, which shift towards protecting creditors once a company is insolvent.
• Director disqualification. Misconduct such as trading on while insolvent to the detriment of creditors can lead to director disqualification for between two and fifteen years, whereas acting early and stopping trading at the right time is the best protection.
• Overdrawn director's loan account. If you owe the company money through an overdrawn loan account, the liquidator must try to recover it as an asset of the company.
• Personal guarantees. Any borrowing or leases you personally guaranteed remain your responsibility after the company is wound up.

How much does compulsory liquidation cost, and who pays for it?

Presenting a winding-up petition costs the petitioning creditor around £3,000 in total, made up of a £2,600 Official Receiver's petition deposit, a £352 court fee and a small fee to advertise the petition in The Gazette, and the company itself pays nothing up front because the process is imposed on it. These are indicative figures that change when fees are revised, so confirm the current amounts on GOV.UK before relying on them.

The real cost to a company usually is not the court fee but the loss of control. In a compulsory liquidation the Official Receiver decides how assets are dealt with, whereas placing the company into a voluntary procedure first lets the directors appoint a liquidator they have chosen and, in a CVL, often fund the process from the company assets or their own statutory redundancy entitlement. Our guide to how much it costs to liquidate a company sets out the Official Receiver's own fees, which come out of the company's assets once it is wound up.

Figures are indicative and subject to change when fees are revised. They are the petitioner's costs, not a quote for advice to your company.

How long does compulsory liquidation take?

Compulsory liquidation commonly takes around eight to twelve weeks from the presentation of a winding-up petition to the winding-up order, with the company accounts usually frozen from the point the petition is advertised in The Gazette, roughly seven business days after service. The liquidation that follows the order then runs for as long as the Official Receiver needs to realise assets and complete the investigation.

The important window for directors is the short period before the hearing, because that is when a voluntary procedure can still be used to take control of the situation. Once the order is made the options narrow sharply, which is why early advice matters so much.

Why choose NTF for advice on compulsory liquidation?

NTF Corporate Solutions is a specialist insolvency practice whose advice on compulsory liquidation comes from named practitioners, James Kaye and Nick Morgan, who are licensed by the Institute of Chartered Accountants in England and Wales. You reach an experienced, named practitioner directly, and you can call the same day a petition arrives.

As part of the NTF group, we have helped company directors since 2009, we explain the real options in plain English, and the first conversation is free, confidential and without obligation. If your company is facing a petition, the fastest way to understand where you stand is to talk through the closure and rescue options with us before the hearing.