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Compulsory Liquidation: Everything Directors Need To Know

The threat of compulsory liquidation can destroy a business and cause serious consequences for directors. Find out how to protect yourself and your business today.

When a company can no longer pay its debts, creditors can issue a winding-up petition against the business. If unchallenged, this will see the company forced into liquidation. You can avoid it, but this requires swift action to prevent the situation from progressing.

If you have received a winding-up petition, you need to respond as soon as possible. If you ignore the winding up petition, you could face the compulsory liquidation of your business, amongst other serious consequences. Read on to find out more about the liquidation process and how it affects you.

The Compulsory Liquidation Process

A winding-up petition is the final step before a creditor forces a company into liquidation. It is issued by a creditor, and you have 7 days to respond before it is made public.

Once the petition has been published:

  • Business bank accounts can be frozen.
  • Suppliers may stop working with you.
  • You will not be able to access finances.
  • Personal guarantees can be triggered.

There will be a date set for a court hearing. After this court hearing, a winding-up order will be issued. This begins the formal liquidation of your business. At this point, the situation is out of your control, hence why it is incredibly important to act as soon as you receive a winding up petition.

The Consequences Of Liquidation For Directors

When a company enters liquidation, a licensed insolvency practitioner is appointed to oversee the process. This can cause a variation of different issues for directors. Some of which include:

Personal Guarantees

Any formal insolvency event will make you personally liable for personally guaranteed debts. This means that the lender will pursue you, often aggressively, for the full amount outstanding. In the worst-case scenario, you may be at risk of losing your assets, your home or even being made bankrupt.

Directors’ Loans in Liquidation

Taking money from your business is not illegal. However, in the event of insolvency, it will be viewed as a company asset. This means that the liquidator will make you repay it. Although you may have ‘only taken a small amount’, liquidators will often add additional costs and other expenses into the final bill. This means you could have to pay a vast sum or, face bankruptcy.

Domilia Timonyte

Head of Communications

Huge savings and my home protected

This company really helped me out from a bad situation, I was surrounded with various debts and couldn’t see a way out never mind keep my home. They were brilliant from onboarding me as a new client right through until…

Huge savings and my home protected

This company really helped me out from a bad situation, I was surrounded with various debts and couldn’t see a way out never mind keep my home. They were brilliant from onboarding me as a new client right through until we settled with all my creditors. Not only did they save me a huge amount of money, they took away a lot of the stress knowing it was being dealt with professionally and by dealing with all the correspondence going through them, it was an immediate relief to say the least! I know first hand how difficult it can be to put trust into someone especially when things are difficult, although Bell & Company will certainly find a way to help.

Harley – GB

Illegal Dividends

Similar to a directors’ loan above, illegal dividends are dividends that you take when your company is not profitable. So, if you take dividends and your company enters liquidation, you will be made personally liable.

So although you may not think you have a director’s loan, the liquidator will pursue you for this amount. As with a directors’ loan, this will likely be a much larger amount than you initially anticipated. 

HMRC Liabilities

If you have received a winding-up petition, your business will have HMRC arrears such as VAT, PAYE or Corporation tax. If these arrears have been built up due to negligence as a director, you can be made liable, HMRC may also add additional penalties. Further to this, you can face criminal charges and disqualification as a director.

Mis-spent CBILS/BBLS

It has come to light that many of these loans were mis-spent or fraudulently obtained. As part of liquidation, an insolvency practitioner will investigate your business’ finances. If it is found that you spent one of these loans on anything other than business expenses or, you lied to obtain the loan, you can be made liable for the debt. You can also face disqualification and even criminal charges.

The above are just some of the more common issues that arise when a business is forced into liquidation. These outcomes can be prevented through swift action to control and manage your creditors, this is why it is so important to get the right advice, at the right time.

How To Halt Compulsory Liquidation

There are various options available that do not involve formal insolvency proceedings. However, the key element here is to halt the winding up of your company and prevent any further legal action. This requires swift action from experienced insolvency experts who act in your best interests and not the creditors.

If your business is unlikely to recover, liquidation may be the most commercial option available. However, it needs to be done in a controlled manner with the help of an expert team who have your best interests in mind. This alternative route informs directors of their worst-case scenario whilst giving them time to prepare and reduce the personal impact on them.

If you have received a winding-up petition or you are concerned about your business being forced into liquidation, you can contact us today to speak to a business debt specialist on 0330 159 5820.

Contact us today to speak to a business debt specialist.

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