Compulsory liquidations are common in business circles. They usually occur when creditors or the government asks a company to be liquidated. The reason for liquidation varies. In most cases, the creditors are usually seeking to bankrupt a company. The government, on the other hand, orders for this form of liquidation if a company is involved in tax fraud or has been carrying out fraudulent activities.
Compulsory liquidations are not executed instantly. The process starts with either the government or creditors requesting for a court order to liquidate a company. If the court sees enough evidence to warrant liquidation, it compels the business to stop operations immediately. By ordering this form of liquidation, the court is able to ensure that all those who incurred damage are compensated and fines and any punitive damages are paid.
When is Compulsory Liquidation used?
This type of liquidation is normally used when a creditor is tired of waiting for their payment. So, he or she petitions to the court to get a wind up order. The minimum amount money owed that can allow one to file for insolvency is £750.
The winding-up petition is a legal document that the creditor files to the court in order to start the process of winding up the company that owes them money. Once filed, the winding-up petition and a hearing date is formally advertised. This will lead to the freezing of all bank accounts that belong to the company.
Submitting a Winding-up Petition
To formally submit a winding-up petition, the creditor sends a written application to the court. The application must contain substantial evidence that the company in question is insolvent and is not paying their debts. It then takes 6 to 8 weeks before the hearing commences. During this period, the insolvent company can do several things to avoid compulsory liquidation. In order to successfully execute these options, the company must seek business debt advice from insolvency practitioners.
Who Performs Compulsory Liquidation?
This form of liquidation is a court directed procedure. Normally, an official receiver is selected from the court to do the winding up. The official receiver can decide to pass the case to an insolvency practitioner for them to liquidate the assets. The official receiver performs the rest of the winding up and carries out an investigation to determine the alleged insolvency of the company.
There are several alternatives to compulsory liquidation. They include:
- Creditors Voluntary Liquidation
- Company Voluntary Arrangement
- Company Administration Process
These methods are more flexible and have less detrimental repercussions.
Avoiding Compulsory Liquidations
There are ways through which a company can avoid this form of liquidation. It can do so by acting quickly and seeking voluntary arrangements to pay the debts within a set timeframe. To know the best options that are available, the company needs to get business debt advice from professionals. This way the company can choose the right option.
Administration is usually the best option, especially if the company has a viable future and reliable cash flow. It ensures the company’s survival by protecting its assets from creditors. This gives the company time to restructure and avoid termination. Compared to insolvency, administration does not offer great return to creditors. Moreover, it eliminates the possibility of any return. This increases unemployment and prevents the chance of building a successor business.
Act as Soon as Possible
The best way to deal with financial problems in a company is to act quickly. The company must get business debt advice as soon as they spot any problems, like decreasing cash flow and increased pressure from creditors. Through early detection, the company can take the necessary measures to avoid serious consequences such as liquidation.
During compulsory liquidations, the companies in question can get advice from a licensed insolvency practitioner. He or she offers advice about formal insolvency procedures and explains each insolvent winding-up process to make sure that the company directors are familiar with each of them before making a decision. Before hiring an insolvency practitioner, it is important to ensure that he or she is licensed. This is because there are some unlicensed professionals who offer misleading information. With the right information and advice, the company gets to avoid any extra costs during the procedure.