There are three ways in which a company can be liquidated:
- Compulsory liquidation
- Members’ voluntary liquidation
- Creditors’ voluntary liquidation
Below, we have provided some guidance on compulsory liquidation.
What is compulsory liquidation?
Compulsory liquidation is a legal process by which a liquidator is appointed by order of the Court to ‘wind up’ the affairs of a company.
Generally, a statutory demand is the first step taken by a creditor. Although this is not a pre-requisite for a winding up order to be made. However, failure to comply with a statutory demand may support a subsequent winding up petition. Statutory demands should be served at the registered office of the debtors’ company.
The circumstances under which a company can be wound up by the Court are:
- The company is unable to pay its debts; or
- It is just and equitable for the company to be wound up.
What are the different insolvency tests?
There are two different tests to determine whether a company is unable to pay its debts. These are:
- The cash flow test – The Court will look to see if on the evidence the company is paying its debts as they fall due. If not, the company is considered to be insolvent and the fact that its assets may exceed its liabilities is irrelevant
- The balance sheet test – If there is a shortfall in the value of its assets in relation to the amount of its liabilities.
The two tests above are determined by the Court after evidence has been provided. In addition to the two tests a company will be presumed to be unable to pay its debts if:
- The company fails to satisfy a creditor’s statutory demand for a debt exceeding £750; or
- The company fails to satisfy in full a judgement debt (or similar court order).
If it is determined that the company is unable to pay its debts, the company will be wound up.
Insolvency petitions
The petitioner must advertise notice of the petition in the London Gazette, no earlier than seven days after the petition is served on the debtor company but at least seven days before the hearing. The company can oppose the petition on limited grounds. However, they must file its evidence in opposition at least five days before the hearing.
The Court will dismiss a winding up petition only if there is a genuine dispute. The debtor may seek an Injunction to restrain the advertisement or winding up proceedings on the grounds that the debt is genuinely disputed.
How we can help
At Nelsons, we can assist with both the issuing of statutory demands and insolvency proceedings. We can also provide advice on the risks involved and whether this method of debt recovery is appropriate to your circumstances.
If you would like further information on statutory demands or insolvency proceedings, please contact a member of our Insolvency team on 0800 024 1976 or via our online enquiry form.
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