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What is Compulsory Liquidation?

Reviewed 12th February 2024

Understanding Compulsory Liquidation for a limited company

Compulsory Liquidation is a formal insolvency procedure used to close down limited companies that cannot pay their debts. A creditor of the company (someone the business owes money to) can ask the court to close the company. If the court accepts the creditor’s application, the company could be forced into liquidation. 

What is the Compulsory Liquidation process in Scotland?

A creditor issues a Winding Up Petition - The first step is for a creditor to issue a Winding Up Petition against the company. The creditor must be owed £750 or more and have waited at least 21 days for you to repay the debt before issuing the petition. 

The creditor advertises the petition - If the court accepts the WUP petition, the creditor must advertise it in the Edinburgh Gazette and a local newspaper. Interested parties have eight days to lodge ‘answers’ to the petition with the court. At this point, the banks will become aware of the petition and typically freeze the company’s bank account, which makes it very difficult to trade. 

The court makes a Winding Up Order -  If ‘answers’ are lodged to the petition, the court will arrange a hearing to discuss matters further and determine whether to make a Winding Up Order. If there are no ‘answers’ to the petition, the court can make a Winding Up Order to liquidate the company. There must be at least eight days between the creditor advertising the WUP in the Gazette and the Winding Up Order being made.

The court appoints a liquidator - The court will appoint a liquidator to take control of the company. This will initially be an Official Receiver although the liquidation may later be sent to an independent Insolvency Practitioner to deal with. They will sell the company’s assets and use the proceeds, plus any cash held in the company bank account, to repay its creditors as far as possible. The liquidator will also investigate the conduct of the company directors in the period leading up to and during the liquidation. 

The company is dissolved - Once all the assets have been liquidated and the proceeds distributed, the company will be removed from the register at Companies House and it will cease to exist. Any remaining debts will be written off unless the director has signed a personal guarantee or faces personal liability issues due to their conduct. 

Why would a creditor want to force my company into Compulsory Liquidation?

You’re most likely to receive a Winding Up Petition if a creditor believes forcing you into liquidation is the only way to receive the money you owe them. Issuing a Winding Up Petition against your company is expensive, which is why it’s only used as a last-ditch resort to get paid.

HMRC issues more Winding Up Petitions in the UK than any other type of creditor. It takes this action to force the repayment of tax liabilities and prevent your company from accruing further tax debts it cannot repay.  

What does Compulsory Liquidation mean for a company director?

Once a liquidator has been appointed, you will no longer manage the company’s day-to-day affairs, but your duties and responsibilities as a director do not end. 

You may have to assist the liquidator with the process of identifying and selling company assets. You also have to comply with a directorial investigation, where the liquidator will look closely at your role in the failure of the company. You must cooperate with the liquidator and provide the information they ask for. Failure to do so can bring serious repercussions.   

If the investigation finds that you have misapplied funds or the company has traded wrongfully or fraudulently, you could be made personally liable to contribute to the company’s assets. You may also be banned from acting as a director for up to 15 years, and in cases of fraudulent trading, you could even receive a custodial sentence.  

What are the alternatives to Compulsory Liquidation?

The potential consequences of Compulsory Liquidation mean you should see it as a last resort. If your company is facing financial difficulties, there are other routes to explore. 

Negotiating a Company Voluntary Arrangement (CVA) allows you to repay your creditors over time while you continue to trade. If your company is no longer financially viable, a Creditors’ Voluntary Liquidation (CVL) is a way to close it voluntarily that gives you more control over the process.   

Need advice?

If you’re the director of a company that’s struggling financially and has been on the receiving end of legal threats from creditors, you should act early. At Scotland Debt Solutions, we can identify all your options and offer guidance to help you avoid Compulsory Liquidation. Call our team for a free, same-day consultation.

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