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Compulsory Liquidation

When your company ignores a statutory demand from a creditor £750 or more, it could be closed through the courts and have its assets sold via a process known as compulsory liquidation.

Compulsory liquidation occurs when a creditor takes legal action to wind up your company. Any unsecured creditor that’s owed £750 or more by your company can legally petition the court to issue a winding up order and start liquidation.

If a creditor successfully initiates the compulsory liquidation process, the result will be the closure of your company and the liquidation of its assets. In some cases, there is a significant risk that you could face charges of wrongful trading.

Even if you’re planning to close your company and liquidating its assets, it’s usually preferable to enter into liquidation voluntarily through a CVL than to let a creditor wind up your company through the courts.

Is your company under pressure from a creditor? Read on to learn more about the compulsory liquidation process, the end result of compulsory liquidation, the risks you could face as company director and the options your company has.


Compulsory liquidation quick facts

  • Compulsory liquidation is a type of company liquidation initiated by one of your company’s creditors in order to recover debts, following the delivery of a statutory demand.
  • If you’ve failed to follow your duties as company director after realising your company is insolvent, you could face wrongful trading charges as a result of the liquidator’s investigation into your company.
  • As a result of compulsory liquidation, your company will be closed and its assets will be sold by a liquidator to generate cash to pay creditors.
  • Compulsory liquidation is viewed as a legally risky option for companies, making a Creditors Voluntary Liquidation a preferable option.
  • There are several options available for insolvent companies that want to prevent a creditor from starting compulsory liquidation, such as entering into administration or proposing a Company Voluntary Arrangement.


What is compulsory liquidation?

Compulsory liquidation is a type of liquidation initiated by a creditor, typically in an effort to recover debts. Any unsecured creditor owed more than £750 can petition a court to wind up your company if certain conditions are met.

There are costs involved in petitioning the court to wind up your company, such as a £280 court fee and a petition deposit of £1,250. These costs mean that creditors see compulsory liquidation as a ‘last ditch’ attempt to recover debts from your company.

All winding up petitions are published in The Gazette, resulting in publicity for your company’s financial issues. During liquidation, your company will be closed and its assets will be sold by a liquidator to create liquidity.

As company director, you could potentially face charges of wrongful trading if you have failed to follow your directors duties during insolvency, or fraudulent trading in the event that you defrauded third parties regarding your company’s solvency.


How does the compulsory liquidation process work?

The compulsory liquidation process begins with a creditor sending your company a statutory demand. This is a legal demand for your company to pay its debt within 21 days of receipt or face serious legal action.

If your company ignored the demand, the creditor can receive a winding up petition against your company. This is a document that lets the creditor petition to wind up your company in order to recover their debts.

A successful winding up petition will result in a winding up order being filed against your company and the liquidation process beginning. A receiver and liquidator will be appointed to value and sell your company’s assets in order to create liquidity.

Your company’s creditors will be paid some or all of the amount they are owed from the company’s assets, including bank account balances, and the cash raised from the liquidation sale.

During the compulsory liquidation process, a detailed investigation is carried out to determine whether your company’s directors have broken their legal duties as part of the Insolvency Act 1986.

Learn more about statutory demands

Learn more about winding up petitions


Should you wind up voluntarily?

Because compulsory liquidation is quite a legally risky process, particularly for a company’s directors, most companies opt to wind up voluntarily through a CVL when faced with serious financial issues.

A CVL, or Creditors Voluntary Liquidation, is a voluntary liquidation procedure that results in the sale of your company’s assets and its closure. While the results are the same as compulsory liquidation, the process is significantly less legally risky.

As company director, you have a legal obligation under the Insolvency Act 1986 to ensure that the interests of your company’s creditors are prioritised in insolvency.

If your company is insolvent and you’re certain that it can’t recover, proposing to wind up voluntarily through a CVL could be the most effective option for ensuring your company’s creditors’ interests are represented.

Although an investigation is carried out during a CVL into your conduct as company director, there is a significantly lower risk of you facing wrongful trading charges if it’s clear that the decision to liquidate was made to prioritise creditor interests.

Learn more about Creditors Voluntary Liquidation


How can your company prevent compulsory liquidation?

Is your company going through temporary cash flow issues? If your company has short-term cash flow issues that can be resolved, liquidation is very unlikely to be the most effective option for ensuring its creditors are paid.

Insolvent but viable companies that are under pressure from creditors have several options for preventing compulsory liquidation, including:


Company Voluntary Arrangement

A Company Voluntary Arrangement, referred to as a CVA for short, is an agreement between your company and its creditors to pay some or all of its debts via a monthly payment for a certain period of time.

The biggest advantage of a CVA, particularly for an insolvent company that’s facing pressure from its creditors, is that proposing a CVA immediately ends legal pressure against your company.

CVAs typically last for two to five years and require your company to pay creditors every month. Because your company’s debts are paid back gradually, there’s less of a strain on cash flow, allowing your company to continue to trade.

Learn more about Company Voluntary Arrangement



Administration is an insolvency solution that protects your company against legal action from its creditors. Many companies enter into administration as a result of creditors threatening to use compulsory liquidation to wind up the business.

During administration, your company’s directors hand control of the company to a third party administrator. The administrator will work to maximise the interests of your company’s creditors and, if possible, facilitate a financial turnaround.

While in administration, your company could propose a CVA to its creditors, begin voluntary liquidation or pursue other options for recovery. Companies can exit the administration period and eventually return to normal trading.

Learn more about administration


Emergency Loans and Finance

One of the easiest ways to end creditor pressure and prevent your company from being wound up is by paying back creditors directly. If your company has limited cash, raising capital via a loan or financing solution can help it pay back creditors.

There are several financing options available for companies experiencing cash flow issues. These include emergency loans, asset-based financing and solutions such as invoice factoring and discounting that use existing company sales invoices.

Learn more about emergency finance

Learn more about invoice factoring

Learn more about invoice discounting


Could you face wrongful trading charges and personal liability?

After your company has been closed and its assets have been sold, an investigation is held to determine whether your company’s directors have broken the Insolvency Act 1986 by trading or selling company assets while insolvent.

Since your company is an independent entity, company directors are typically not liable for its debts. However, if you have committed wrongful trading, you may be found partially or fully liable for the debts incurred by your company.

The most effective way to minimise your risk of being charged with wrongful or fraudulent trading is to act as soon as you discover your company is insolvent to ensure the interests of creditors are prioritised.

Entering into liquidation voluntarily through a CVL is also an effective way to show creditors that their interests are being considered first, reducing the risk of charges of wrongful trading and personal liability.


Get expert financial help

Is your company under pressure from its creditors? If your company has received a statutory demand that it cannot pay due to cash flow issues, there’s a serious risk of its creditors taking legal action to begin the liquidation process.

If you’re certain your company can’t recover from its current issues, entering into liquidation voluntarily can reduce your risk of facing wrongful trading charges and ensure creditors have access to some cash from the sale of company assets.

If you’re confident that your company can recover, proposing a CVA or entering into administration can protect your company from being wound up by its creditors via a winding up order.

We have extensive experiencing helping insolvent companies recover, negotiate an agreement with their creditors and avoid liquidation. If you’re under pressure and need expert advice, we’re here to help.

Contact us to speak to an insolvency expert and learn more about the compulsory liquidation process. We can review your company’s financial situation and provide the advice and assistance you need to make an informed decision about its future.


Learn more about liquidation