At the start of a voluntary liquidation of a company, directors will appoint a licensed insolvency practitioner to occupy the role of liquidator. In this role, the liquidator will take the reins of a company, liquidating its assets, emptying its accounts, and settling the company’s debts and liabilities. After all these loose ends are tied, the liquidator will wind up the company and have it struck off from the register at the Companies House. However, in case of a compulsory liquidation, this plays out differently. Instead of choosing their own insolvency practitioner, the courts will assign an Official Receiver (OR) to assume the role of liquidator.
In this article, Clarke Bell will discuss the role of the Official Receiver, what they do, and how you can avoid one being assigned to your company.
What is compulsory liquidation?
Compulsory liquidation is the other side of the coin to voluntary liquidation. It is an insolvency procedure forced upon a company by the courts, often resulting from a winding-up petition filed by a company’s outstanding creditors. This typically happens when a company’s creditors lose faith that their debt will be repaid and so they feel they have to pursue this route to recover what they are owed.
The compulsory liquidation procedure follows a similar path to voluntary liquidation, with the main exception being reduced freedom on the part of directors. The company will be liquidated, proceeds will be distributed amongst creditors, and the company will be closed, ceasing to exist as a legal entity.
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What is the Official Receiver’s role during compulsory liquidation?
The Official Receiver (OR) assumes the role of a provisional liquidator during compulsory liquidation. Broadly speaking, the duties of a provisional liquidator closely resemble those of a director-appointed liquidator. They will take control of the company in question, essentially taking over as the director of the company for the duration of the liquidation.
During this point, they will communicate clearly with the company’s creditors, keeping them up to date with the progress of the procedure. Additionally, they will realise a company’s assets in order to repay these creditors, as we mentioned. However, the OR has an additional responsibility when it comes to a company’s assets. As this form of liquidation is forced upon a company, it comes with some risk that directors will attempt to resist it. As such, the provisional liquidator is responsible for protecting company assets, ensuring directors do not attempt to remove these assets from the company. To achieve this, the OR will draft a thorough list of all the assets, accounts, properties, contracts, and leases currently owned by the company. Any attempt to remove an asset owned by the company is likely to be treated as misconduct, resulting in serious consequences for the directors involved.
Lastly, an Official Receiver is responsible for opening an investigation into the company in question and the conduct of its directors. This investigation is conducted to search for evidence of misconduct, either confirming its presence or absence. The OR will send its findings to the Insolvency Service, which will decide whether or not to open a further investigation, or whether penalties are appropriate.
What will an Official Receiver investigate?
As part of the compulsory liquidation procedure, the Official Receiver will conduct a thorough investigation into the affairs of the company in question and the conduct of its directors. As a company undergoing compulsory liquidation is typically insolvent, the main purpose of these investigations is to determine whether director conduct had a hand in its financial decline.
This investigation is conducted during another insolvency procedure, a Creditors’ Voluntary Liquidation (CVL), which has a similar purpose. However, although an investigation will be conducted in both procedures, the compulsory liquidation itself is a red flag. Company creditors had to take action themselves in order to recover their money, implying company directors failed in their duty to act swiftly in the interests of their creditors. As company directors knew the unsalvageable state of their company’s finances, yet were not spurred into action, they start the procedure off in a poor light.
Start of the investigation
At the start of the investigation, the OR will hold an interview with each director. This is to form a timeline of events from the company’s creation to the current date, and gain insight into each director’s influence over the company’s current situation. If the OR so chooses, they can also communicate with banks, clients, accountants, and other parties related to the company to paint a more detailed picture.
In addition to interviews, the OR will focus their investigation on certain key factors. There are several factors that would catch the attention of an OR, with some depending on the particular scenario at hand. For example, if directors had begun to make repayments, the OR would look for evidence of any ‘preferential payments’. This is when directors repay loans to their own benefit, such as prioritising secured loans or loans to family members over other creditors. Similarly, if directors have recently sold off or transferred business assets, the OR will look for evidence of ‘transactions at undervalue’. This refers to the sale of assets at a price considerably lower than their fair market value. This is viewed as attempting to redirect assets out of the reach of creditors, which in turn is viewed as misconduct and carries significant penalties.
What to do to avoid compulsory liquidation
The best way to avoid your company being forced into compulsory liquidation, and having an OR appointed to your case, is to act before your creditors take action against you. Approaching a licensed insolvency practitioner with a view to implementing a Creditors’ Voluntary Liquidation is likely to be your best option.
A CVL is a formal insolvency procedure that is geared towards liquidating insolvent companies with unmanageable debts. The procedure can be initiated voluntarily by a company’s directors, showing that the directors are willing to act in the best interests of their creditors. Directors will also be able to choose their own liquidator, rather than have a provisional liquidator forced upon them.
The role of the liquidator during a CVL is much like that of the OR during compulsory liquidation. They will be tasked with liquidating the company’s assets and accounts, using any funds to pay creditors and other liabilities, and winding up the company at the end of the procedure. The liquidator will also investigate the company’s affairs and the conduct of company directors. However, as directors chose to use a CVL, they are viewed much more favourably than if they were subjected to compulsory liquidation. For more information on Creditors’ Voluntary Liquidations, read our complete CVL guide.
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If your company is insolvent and struggling to find a solution to its debt problems, let Clarke Bell help you.
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