Compulsory Liquidations

Compulsory liquidations are the end of the road for a company. It’s where the organisation is wound up and its remaining assets are distributed between the relevant parties.

Liquidation can either be voluntary or compulsory. The latter usually occurs when a company can no longer pay its debts and creditors have exhausted all the other options for payment.

Compulsory liquidation is initiated by a creditor owed over £750 and where the debt is not disputed. The creditor petitions the court and must demonstrate that they’ve attempted to recover the money, and that the debtor is unwilling to comply with their request for payment.

Winding-up a company is a dramatic and usually final step in the process to recover an unpaid debt. Because of the legal costs and complexity it is not undertaken lightly, but it does happen. Over one thousand companies go into compulsory liquidation every quarter, and the figures have risen over the last year.

Risks Associated with Compulsory Liquidations

The majority of these actions are taken by HM Revenue & Customs in order to recover unpaid VAT or PAYE. Most businesses accumulate this debt on a monthly, if not daily, basis and in the short term it’s easy to defer these payments because they don’t stop the inflow of essential trading supplies.

While compulsory liquidation might be a last resort, it also has serious implications if carried through. Liquidators have a responsibility to investigate the possibility of misconduct by those managing the business, and can bring action for wrongful or fraudulent trading. Directors risk being disqualified for up to 15 years, and can be pursued through the criminal courts.

Once a petition for compulsory liquidation has been lodged with the court, there is a serious risk of other creditors hearing about it. Even if the initiating creditor is then paid, other creditors may choose to continue the petition in order to secure settlement of their debts.

Avoiding Compulsory Liquidation

Because the majority of winding-up petitions are begun by HMRC it’s essential that payments of VAT and PAYE are maintained. If a business is finding it hard to fulfil its obligations it first needs to look into the deferral options offered by the Business Payment Support Service.

If a business still has problems making its agreed payments, the management need to consider the other options for optimising cash flow. These can include:

Each one of these will help cash to flow more freely in a business, making it easier to make essential payments to HMRC and suppliers on time.

If cash flow remains a problem, even when a range of measures have been taken to ease it, harder decisions may have to be taken. It’s important for management to plan ahead, because ignoring the situation is unlikely to improve it.

When creditors begin contemplating some kind of insolvency action against a business, they’ll look more favourably on an organisation that’s already taken steps to address its problems. Taking external advice from business turnaround specialists is a good place to start.

Touch Financial has decades of experience and supports a wide variety of organisations, working in partnership with them to help with stability through difficult times. We know that each business faces a unique set of challenges which is why we value having a positive relationship with our customers, and we focus on tailor made solutions to meet individual needs.

We’re committed to delivering an excellent service in an enlightened way. We talk to our customers, understanding their concerns in order to support their growth even when times are tough. If you’d like a free, no-obligation consultation with one of our experts, why not get in touch today?

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