Compulsory Liquidation

This business briefing explains what compulsory liquidation means for a creditor of a business that is in the process of being wound up by the court.

Compulsory liquidation (or winding up by the court) is a procedure by which any assets of a company are sold, and the proceeds are distributed to the company’s creditors. A court order is required to put a company into compulsory liquidation. At the end of the liquidation, the company is dissolved. The most common reason for a winding up order is that the company is insolvent.

What does compulsory liquidation mean for a creditor of the company?

• In liquidation all unsecured creditors must share any available assets of the company, or any proceeds from the sale of any of those assets, in proportion to the debts due to each creditor
• An unsecured creditor may receive payment at the end of the liquidation and possibly an interim dividend during the liquidation process. An interim dividend is a dividend that is declared and distributed before the company’s annual earnings have been calculated. In some cases, the dividend to unsecured creditors will be just a few pence in the pound or it may be nothing at all. If the creditor’s debt was secured, it will be entitled to be paid from the proceeds of sale of the assets secured, subject to certain exceptions
• The liquidator is an officer of the court and therefore has a duty to act fairly and impartially. A creditor will be invited to provide the liquidator with details of its claim (this is known as a proof of debt). The liquidator will then assess all the proofs of debt. The claim may be accepted in whole or part or be rejected
• There is an automatic stay of legal proceedings against a company in liquidation or its assets. If a creditor decides to bring or pursue legal proceedings against the company, it must first apply to court for permission. If the claim is for money only, the business is unlikely to be granted permission. Generally, only claims connected to property are allowed to continue
• A creditor is entitled to receive reports on the progress of the liquidation from the liquidator. It may also form a liquidation committee with at least two other creditors, to monitor the liquidator and help him fulfil his functions and look after the interests of all the creditors

What can a creditor do if they think the liquidator is doing a bad job? A creditor can challenge:

• The level of the liquidator’s remuneration
• The liquidator’s decision in relation to any proof of debt

In extreme cases, and where it is in the interests of the liquidation, a liquidator may be removed by a court order or a meeting of the company’s creditors.

The content of this Business Briefing is for information only and does not constitute legal advice. It states the law as at January 2019. We recommend that specific professional advice is obtained on any particular matter. We do not accept responsibility for any loss arising as a result of the use of the information contained in this briefing.