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Compulsory liquidation is generally avoided if possible

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What is compulsory liquidation?

Compulsory liquidation is generally viewed as the worst thing that can happen to a limited company and as such should be avoided if possible. It will result in the company assets sold off, your staff being made redundant and your company being struck off the register.

Has your company been threatened with a winding up petition? If it has, you need to get advice and put a plan into action as quickly as possible.

If a company ends up in compulsory liquidation or has received a winding up petition, it can significantly affect the ability of the business to operate. Compulsory liquidation is brought about by a creditor who will apply to the court to serve you with a winding up petition.

It is quite a serious action for a creditor to take, due to cost of the petition and the procedures involved. So it is usually an indication creditors have already tried and failed to recover the money owed to them.

If you feel that your company does have a future, you must act quickly to deal with this situation before it spirals out of control.

The process

A creditor will usually pursue a debt for a considerable amount of time to recover money before employing a third party to deal with this for them and/or considering issuing a winding up petition. If the third party, like a solicitor or debt collector, also fails to collect the money, then a creditor may be left with few options but to serve the petition.

The cost of serving the petition is quite high but if the creditor feels there is a high likelihood of monies being recovered, then it is an effective solution to this problem. If the debt has not been recovered after notification of intent to collect, through a statutory demand, or a deal between the company and debtor was made and not stuck to by the company owing, then a winding up petition is very likely to be granted.

A winding up petition application is likely to be granted if the creditor can prove:

  • The debt is unchallenged by the company owing
  • Attempts have been taken, by the creditors and/or a third party working on their behalf, to recover monies have been taken
  • The company owing is not willing to pay monies or discuss terms with their creditor.

If you run a business that has had a petition advertised in The Gazette, then your business is all but lost. When this happens, your bank and any lenders will freeze your company accounts. So even if you have money in your account or cheques to pay in, you will not be able to do this to pay off your debts. Effectively the company will cease to trade.

Once the petition is issued, a court date will be granted to wind the company up and appoint a liquidator. The company has a period to pay the debt, or defend its actions in not paying its debts, after they have been served with the winding up petition.

All actions, including issuing of the petition and the subsequent hearing, take place in the High Court and require the presence of a barrister. The costs of defending your company after a petition has been issued are high.

If you pay your creditor in the period after the issuing of the petition, you must still attend a winding up hearing at the High Court. After the issuing of the petition and before the court date, especially after advertisement in The Gazette, it is possible for any other creditors of yours to learn of your company’s current position. They can then attach or ‘piggy-back’ on the action substituting their debt for the one you have paid off already.

At the hearing, a winding up order will be issued as a result a liquidator will be appointed by the courts. He will sell assets and investigate your company for any wrongdoing.

HMRC’s use of winding up petitions

Many winding up petitions are issued by Her Majesty’s Revenue and Customs (HMRC). It is a procedure widely used by them to deal with debts owed to them. HMRC are involuntary creditors, you owe them PAYE and VAT as a result of running your business and employing staff, and not paying tax liabilities.

You can try and put together a deal with HMRC to repay PAYE and VAT debts but if this fails, they are likely to apply to the courts to wind your company up.

If HMRC believe a company is breaching any legislation, such as Trading Standards or Employment Legislation, or is acting against public interest, it is possible for that company to be compulsorily liquidated. This action is very serious and is only used occasionally; criminal proceedings following this action are quite

The law and winding up petitions

If you abuse the PAYE system to the advantage of your company or any of the directors, the monetary profits can be pursued from the personal estate of the director concerned.

Under Income Tax Regulations 1993, HMRC is entitled to recover any unpaid PAYE from the director(s) of a company when there is proof the director(s) was aware of deliberate failure of the scheme.

You can also be banned from acting as the director of a company for up to 15 years as a result of Company Directors Disqualification Act 1986. You could face criminal proceedings (if applicable) under the Social Security and Administration Act 1992 or the Criminal Justice Act 1988.

How to avoid compulsory liquidation

Whatever the reason for the issuing of a winding up petition to your company, it is extremely important you take action as soon as possible to have a chance of salvaging your business and its assets.

Compulsory liquidation is to be avoided where possible. As it is always a last resort by a creditor, there are ways you can sort debt problems with creditors prior to this action.

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