Compulsory Liquidation: Everything Directors Need To Know

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.

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.