Compulsory Liquidation
Definition
Compulsory liquidation (also known as compulsory winding-up) is a legal process wherein a court orders the liquidation of a company. This process typically begins when a petition is presented to the court and the registered office of the company. Various entities, including the company itself, directors, creditors, an official receiver, or the Secretary of State for Business, Innovation and Skills, have the right to submit the petition. Compulsory liquidation is pursued on several grounds, such as inability to pay debts, reduction of members below the mandatory number, or the court’s opinion that it is just and equitable to wind up the company.
Examples
- Insolvency Petitions: If a company is insolvent and unable to pay its debts, a creditor may petition the court for compulsory liquidation.
- Membership Issue: If the number of members in a company falls below the legal minimum, members or creditors could petition the court for winding-up.
- Fraud: In cases where the court finds that a company is engaging in fraudulent activities, it may order compulsory liquidation on just and equitable grounds.
- Failed Voluntary Winding-Up: If an attempted creditors’ or members’ voluntary liquidation does not adhere to legal stipulations, the court may enforce compulsory liquidation.
Frequently Asked Questions
Q: Who can present a petition for compulsory liquidation?
A: The petition can be presented by the company, the directors, a creditor, an official receiver, or the Secretary of State for Business, Innovation and Skills.
Q: What are the common grounds for compulsory liquidation?
A: Common grounds include the company’s inability to pay its debts, membership falling below legal minimum, a special resolution adopted by the company, or the court deeming it just and equitable to wind up the company.
Q: What happens once the court grants a compulsory liquidation order?
A: The official receiver becomes the interim liquidator, managing the winding-up process until creditors or members appoint another liquidator.
Q: What is the role of a provisional liquidator?
A: A provisional liquidator, appointed by the court, manages the company’s assets and affairs from the petition date until a permanent liquidator is confirmed.
Q: Can a company oppose a compulsory liquidation petition?
A: Yes, the company can oppose the petition by presenting a defense at the court hearing, aiming to demonstrate solvency or refute the petition’s grounds.
- Liquidator: A person or entity appointed to manage the process of liquidating a company’s assets.
- Insolvency: The state of being unable to pay one’s debts.
- Creditors’ Voluntary Liquidation: A process where company directors choose to liquidate the company since it cannot pay its debts.
- Members’ Voluntary Liquidation: A process whereby the company elects to wind up while it is still solvent.
- Official Receiver: A government official responsible for the administration of insolvency matters, including serving as interim liquidator in compulsory liquidations.
Online References
Suggested Books for Further Studies
- Company Law by Lee Roach
- Corporate Insolvency Law: Perspectives and Principles by Vanessa Finch
- Guide to the Insolvency Act 1986 by David Raynor
- Business Law by Jane M. Friedman
- Liquidation Manual by Andrea Hayward-Yarrow
Accounting Basics: “Compulsory Liquidation” Fundamentals Quiz
### Who can present a petition for compulsory liquidation?
- [ ] Only the company's director
- [ ] Only the creditors
- [x] The company, directors, creditor, official receiver, and Secretary of State for Business, Innovation and Skills
- [ ] Only the official receiver
> **Explanation:** The petition for compulsory liquidation can be presented by various parties including the company itself, directors, creditors, an official receiver, and the Secretary of State for Business, Innovation and Skills.
### What is typically the first role of the official receiver in a compulsory liquidation?
- [ ] Company director
- [ ] Company accountant
- [x] Interim liquidator
- [ ] Financial advisor
> **Explanation:** Once the court orders compulsory liquidation, the official receiver functions as the interim liquidator, managing the company's assets and affairs until a permanent liquidator is appointed.
### What is NOT a valid ground for compulsory liquidation?
- [ ] The company is insolvent
- [x] The company is profitable
- [ ] Membership fall below minimum
- [ ] The court finds it just and equitable
> **Explanation:** If a company is profitable, it disqualifies it from being ordered into compulsory liquidation. Insolvency, membership below the legal minimum, and equitable grounds by the court are valid reasons.
### What is the main consequence for the company once a compulsory liquidation order is granted?
- [ ] The company continues normal operations
- [x] The official receiver takes over company management
- [ ] The company is immediately sold
- [ ] The directors continue getting paid
> **Explanation:** Once the compulsory liquidation order is granted, the management of the company is taken over by the official receiver as the interim liquidator.
### What does the term "just and equitable" pertain to in the context of compulsory liquidation?
- [ ] The company’s solvency
- [x] The court's opinion for fairness
- [ ] The number of directors
- [ ] The type of business conducted
> **Explanation:** The term "just and equitable" refers to the court's opinion that it is fair or appropriate for a company to be wound up based on specific circumstances.
### What can a court do after a compulsory liquidation petition is presented?
- [ ] Do nothing until the final order
- [ ] Appoint a new board of directors
- [x] Appoint a provisional liquidator
- [ ] Seize company assets immediately
> **Explanation:** After the petition is presented, the court may appoint a provisional liquidator to manage the company's property and affairs provisionally.
### What often follows the appointment of an official receiver as the liquidator?
- [ ] The company resumes its operations
- [ ] The petition is automatically dismissed
- [x] Creditors or members appoint a different liquidator
- [ ] The company’s debts are forgiven
> **Explanation:** Following the initial appointment of the official receiver, creditors or members may appoint a different liquidator to manage the liquidation process.
### What aspect is not managed by a provisional liquidator?
- [ ] The company’s day-to-day operations
- [ ] The sale of company’s assets
- [ ] Preparation of a liquidation report
- [x] Company expansion plans
> **Explanation:** The provisional liquidator's actions are confined mainly to managing existing company assets and operations, not expanding the business.
### Can a company oppose a compulsory liquidation petition, and how?
- [x] Yes, by presenting a defense in court
- [ ] No, petitions must proceed unopposed
- [ ] Yes, by agreeing to an out-of-court settlement
- [ ] No, but they can request a delay
> **Explanation:** A company can present a defense in court to oppose the petition, potentially demonstrating solvency or disputing the petition's claims.
### Whose opinion can directly lead to a "just and equitable" winding up of a company?
- [ ] The company’s employees
- [x] The court
- [ ] The creditors
- [ ] The company directors
> **Explanation:** The court’s opinion can lead to a "just and equitable" winding up, acting on the premise that the company's winding-up is fair and appropriate under the law.
Thank you for exploring the depths of “Compulsory Liquidation” through this comprehensive guide and quiz. Continue expanding your knowledge and strive for excellence in the field of business and financial law!
