Compulsory Liquidation

In my experience of Compulsory Liquidations, of the cases which we have dealt with as a Licensed Insolvency firm, the prospects of receiving a dividend are slim, possible solutions to avoid this, I will discuss at the end of this comment.  The reasons why dividend prospects are low are as follows:

1.   Often the directors of the company have chosen to avoid the issues of the failing business, resulting in a creditor becoming frustrated and they issue a winding up petition.

2.   The result is the assets of the business have seriously been depleted by the time the court order is made, leaving few recoverable assets to collect in.

3.   The costs of collecting in the assets are often high, whether they are physical machinery or product or book debts; what remains is what could not be sold or collected quickly when the company was trading in its last weeks and months. This leaves old cumbersome obsolete machinery, old stock and disputed book debts for the liquidator to collect. Amounts recovered are low and more effort and legal costs have to be spent to realise them.

4.   In addition because following the Court Order the Official Receiver (a civil servant) is appointed to investigate the affairs of the company, there are those costs to be drawn from the assets realised. Often the Official Receiver remains as the liquidator if there is no prospects of recoverable assets. If the Official Receiver (OR) decides there are recoverable assets either the next independent Insolvency Practitioner (IP) is appointed from the OR’s Rota for that region or a creditors meeting is called for creditors to choose an IP to appoint as liquidator. I would ask creditors to vote at a meeting, this can be done by post or fax, it is your opportunity to influence the proceedings.

5.   From the assets recovered the monies is apportioned in an order of priority;

-      the OR’s costs first,

-      followed by an effective government tax called the Secretary of State Fee (charged on a percentage of realisations),

-      then others costs such as the petitioning creditors costs,

-      the liquidator’s legal costs, fees and expenses, (note that the creditors meeting can set how and on what basis fees are calculated)

-      followed by the secured and preferential creditor (latter being part of employee claims),

-      all these before the unsecured creditors (including HM Revenue & Customs) see a dividend. All unsecured creditors have to be treated the same whether they are owed £1 or £1million.

6.   The actions of the directors and the transactions the company has entered into are reviewed. Legal action may be undertaken with the aim to recover substantial claims for the liquidation from actions against the directors or overturning a transaction. However if funds are limited but the evidence is compelling a solicitor will sometimes take on the legal action for the liquidator but on a conditional fee agreement which if won the solicitor will charge at least double the fee, if however the case is lost then the solicitor takes the risk of not being paid.

7.   As stated by Ian, creditors can influence the decisions taken in a liquidation case. A liquidator often relies on evidence presented by creditors to recover assets or take on legal actions for the benefit of all creditors.

The possible solutions of avoiding being a compulsory liquidation creditor:

a)   Operate a tight credit control system and stick to it, even if your customer is your best friend, don’t extend further credit.

b)   The sooner a customer shows signs of financial stress, i.e. not paying the bill for the second time, so falling more into arrears, don’t be British and say nothing, ask them if they are experiencing difficulties. Talk to the customer.

c)   Take recover action before another customer does. Business owners will pay whoever is shouting the loudest. Ultimately it can become an unrecoverable situation when a business pays the first to take action as available cash is depleated, when informal and formal options are available.

d)   Business owners often make promises that are unrealistic; ask for an analysis of the business finances or some evidence to back up the promises.

e)   A personal guarantee from a director may result in a recovery of monies for you as the customer. If possible have security over assets of the director. If an insolvent business pays you in preference to other creditors then rules have been broken and a liquidator could ask for the money back.

f)    The biggest obstacle a business owner has is admitting there is a problem. If you have a customer who is falling into arrears with payments take some advice on the options.

g)   If the problem is short-term there are charitable organisations which operate business advice helplines to structure informal payment agreements with creditors. My advice however is that all creditors should be treated equally not just one or two where arrears have built up.

h)   However if your customer’s financial situation is more serious, then that customer should be seeking professional advice. Bottomley & Co like some other licensed firms offers a free consultation to discuss available options. Taking advice early means that if a formal insolvency is appropriate it could one of the following:

-      Administration – a rescue procedure, a creditor can now petition for the Administration of a company. Administration appoints an IP to sell the business or the assets in such a way that it provides a better result than a Liquidation

-      Company Voluntary Arrangement – a recovery plan

-      Creditors Voluntary Arrangement – a liquidation but without the specific costs of a Compulsory Liquidation

It is then more likely that assets can be realised in an orderly manner with a potential greater benefit to creditors. We as a firm are regularly paying dividends to creditors.

i)     As stated earlier the IP in whatever insolvency role relies on information from creditors. As a firm we appreciate that creditors have a business to continue after suffering a bad debt however we all too often have promises of support at a creditors meeting but when we ask for witness statements or evidence from creditors we don’t get it. This can result in the IP not taking a legal action due to lack of evidence.  We appreciate the rewards of a future dividend distribution from an insolvency case may be speculative but in this financial climate something is better than nothing. We have a duty to recover monies for creditors, yes we too are in business, but we have a statutory duty to carry out tasks often without getting paid for it, my request is work with us so that we can recover more for all creditors. My advice is, seek advice because if you don’t ask you don’t get!

Thanks for this - very useful and informative post.

I do have one qestion which may seem a little naive.

If a liquidation order has been made by the court on a petition brought by a creditor and that company has absolutely no assets whatsoever what happens after the order is made. Would an IP deal with this? In that case how would he get paid? Alternatively does the case stay in the OR's office for him to effect the wind up?

Suppose the creditor wanted to raise issues of fraudulent trading. How would that be dealt with?

Ian you are quite correct in your comment, the Official Receiver’s Office will deal with the matter if there are no available assets. In any case the OR has the role of reporting on the director’s conduct in all compulsory liquidations. The OR takes a decision whether a criminal fraudulent trading action is undertaken. However if an IP is appointed it is he or she that often supplies much of the evidence to the OR.

If a creditor or group of creditors want an IP to deal with the case then they can ask the OR to call a creditors meeting if they amount to a significant percentage (25%) of the creditors.  If creditors then agree on an IP being appointed he or she will have to assess the case prospects before accepting the appointment. This will be based on what information is available prior to the creditors meeting (which may not be very much!) to determine the economics of taking recovery action and the prospects of realising money to pay all the liquidation costs in the order of priority set out in my previous post. The IP then also calls a creditors meeting to seek the basis of how time spent on the case will be paid. The IP takes a risk that if there is a speculative legal action to recover monies into the liquidation, and the case is lost, then the time spent may be written off. The IP may ask for creditors to support financially the costs of the liquidation including IP’s fees. However creditors like Bottomley & Co have to assess the risks of not getting a return back on the effort put into a case.

If the director has acted improperly but not fraudulently this is a wrongful trading, an action which is a civil matter, it is relatively easier to prove. Fraudulent trading has to show intent to defraud (which is premeditated). Either way, the result is financial compensation or recovery to the liquidation.

Bottomley & Co do take on some cases where there is a suspicion or brief initial evidence of fraudulent/wrongful trading. As I said in the previous forum post, we rely on creditors support, providing statements and evidence. As I say many times evidence is key and the support of creditors is vital.

The moral is the director who for example is subject to say a sizeable bad debt should take professional advice so soon as possible, from a licensed firm such as Bottomley & Co rather than entering into transactions who could be pursued in a future insolvency as wrongful or fraudulent, which most likely will have increased creditor claims.

Creditors upon suspecting wrongful or fraudulent trading should notify before insolvency; the Companies Investigation Branch (www.insolvency.gov.uk) or after insolvency the OR or IP. In all cases I repeatedly stress evidence from creditors is so important for us, without it we cannot win a case, if evidence is compelling we may achieve settlement without the risks and costs of a court action.