What happens if a Company goes into Liquidation?


Liquidation can be either a compulsory liquidation or voluntary liquidation

i. Compulsory liquidation is where a company is put into liquidation by an order of the court, usually by a creditors winding up petition.

Creditors winding up petition - An application is made to the court by one or more creditors of the company stating that the company owes £750 or more and they cannot pay.

What should I do if a creditors winding up petition is issued in the court?

If a creditor’s winding up petition is issued against your business, then you need to act fast as a successful application to the court could result in the petition being advertised. If the petition is advertised this could have incredibly damaging results for your business, as suppliers will know that the company is in trouble and the company bank may take steps to freeze the company account so you should seek legal advice immediately.

So what can I do?

If the debt is disputed this should be raised with the creditor immediately setting out why the debt is disputed in full. Winding up proceedings are not the appropriate way to deal with a disputed debt and the courts do not take favourably to parties that attempt to wind up a company over a genuinely disputed debt. Where the debt is disputed the application should be withdrawn and the matter dealt with as a dispute instead.

If the debt is not disputed and the company can pay, arrangements should be made with the creditor as soon as possible to pay any outstanding debt which is due. The creditor’s application to the court should then be withdrawn.

Be aware that there are very tight timelines in insolvency, so you should seek legal advice immediately to understand your options.

What if the creditor won’t communicate or withdraw the petition?

If the creditor refuses to withdraw the petition in circumstances where the sum should not be paid, the company should consider making an application to strike out the petition and /or to prevent the petition from being advertised depending upon the circumstances.

If the petition is struck out by the court, then you are usually in a position to recover your costs. If the petition is not struck, then the matter will continue to a full hearing, at so you will need to look at taking steps to defend the petition if appropriate.

Link to Freezing orders

ii. Voluntary liquidation is where the company is voluntarily put into liquidation, allowing the company to be wound up by agreement.

Members voluntary liquidation

The members of a company are able to take steps voluntarily place the company into liquidation. The directors of the company must be able to make a statutory declaration that the company is solvent, and that the company is able to pay its debts in full within a specified period not exceeding 12 months form commencement of winding up.

Creditors of voluntary liquidation

If the company is insolvency however, the creditors may voluntarily appoint a liquidator who will then sell the assets of the insolvent company, with all proceeds being distributed to the company's creditors. At the end of the liquidation, the company is then dissolved.

A company may go in to a creditors voluntary liquidation, or CVL, after the company directors realise that its liabilities exceed its assets or it cannot pay its debts as they fall due and so the company cannot carry on its business.

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