This commons briefing paper provides an outline of the compulsory liquidation process in respect of an insolvent company.Jump to full report >>
A company is said to be insolvent if it has insufficient assets to cover its debts, or is unable to pay its debts as and when they fall. It is the company directors’ responsibility to know whether the company is trading whilst insolvent and they can be held responsible for continuing to trade in that situation (the offence of wrongful trading).
Depending on the circumstances, the procedures open to an insolvent company are:
• Company Voluntary Arrangement (CVA)
• Scheme of Arrangement
• Administrative Receivership
• Creditors’ Voluntary Liquidation
• Compulsory Liquidation (or ‘winding-up’)
The first four procedures provide the ‘potential’ for the rescue of the company or its business, while the last two do not.
This briefing paper provides an outline of each insolvency procedure but is primarily concerned with compulsory liquidation.
A company (or a limited liability partnership) can be put into compulsory liquidation if it cannot pay its debts, usually on the petition of a creditor. A company is considered unable to pay its debts if a creditor presents a written demand for payment (known as "a statutory demand") and fails to be paid or to secure an agreement with the company.
Compulsory liquidation (or winding up) is a legal process by which a liquidator is appointed by order of the court to wind-up the affairs of a limited company. It involves the collection and realisation of company assets into cash and the distribution of this money to the company’s creditors (who often will not be paid in full). How long liquidation takes will depend on the circumstances of each individual company (for example, the number and location of company assets, the number of creditors and the complexity of the case). Once the process has been completed, with the liquidator sending the final accounts to the Registrar of Companies, the company will be dissolved and cease to exist.
This Commons briefing paper provides a summary of the compulsory liquidation process under the Insolvency Act 1986 (as amended). It includes information on the impact of liquidation on creditors, employees and company directors.
Commons Briefing papers SN04937
Author: Lorraine Conway