Compulsory liquidation is traditionally used when one or more of the company’s creditors felt the need to force the company to stop trading. This was normally because they felt that the company was insolvent
and unable to pay its creditors.
Winding up a company means that it can no longer continue to trade and potentially increase its liabilities to current and future creditors.
One of the main creditors who will use the process of compulsory liquidation is HM Revenue and Customs (HMRC).
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Using Winding Up as a debt collection procedure
Over the past few years, the process of winding up has started to be used as a debt collection procedure. Very often a creditor will issue a statutory demand for the payment of an outstanding debt with the associated threat of a winding up petition. The company directors know the negative effects such action could have on the business and therefore are inclined to pay what they owe to prevent the action.
It is important to understand that the court views the winding up of a company as a last resort. In general it will not issue a winding up petition unless all other reasonable avenues for debt collection have been exhausted. For example a count court judgement has been issued but remains unpaid.
If a winding up order is granted, the creditor who instigated the liquidation will not be treated preferentially to any of the other creditors. A liquidator will be appointed and all creditors will be treated equally.
