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Guide for Golf Clubs on Compulsory Liquidation

This guidance note explains what compulsory liquidation means for a creditor of a business that is in the process of being wound up by the court.

Wednesday 10th of August 2016 09:30

Compulsory liquidation

This guidance note explains what compulsory liquidation means for a creditor of a business that is in the process of being wound up by the court.

What is compulsory liquidation?

Compulsory liquidation (or winding up by the court) is a procedure by which the assets of a company are sold, and the proceeds are distributed to the company’s creditors. A court order is required to put a company into compulsory liquidation. At the end of the liquidation, the company is dissolved. The most common reason for a winding up order is that the company is insolvent.

What does compulsory liquidation mean for a creditor of the company?

  • In an administration or liquidation, all unsecured creditors must share equally any available assets of the company or any proceeds from the sale of any of those assets, in proportion to the debts due to each creditor.
  • As an unsecured creditor, the business may receive a dividend paid in proportion to the debts owed to it at the end of the liquidation and possibly an interim dividend. An interim dividend is a dividend that is declared and distributed before the company’s annual earnings have been calculated. In some cases, the dividend to unsecured creditors will be just a few pence in the pound or it may be nothing at all. If the business has the benefit of security, it will be entitled to be paid from the proceeds of sale of the secured assets, subject to certain exceptions.
  • The liquidator is an officer of the court and therefore has a duty to act fairly and impartially. As a creditor, the business will be invited to provide the liquidator with details of its claim (this is known as a proof of debt). The liquidator will then assess all the proofs of debt. The claim may be accepted in whole or part or be rejected.
  • There is an automatic stay of legal proceedings against the company or its assets. If the business decides to bring or pursue legal proceedings against the company, it must first apply to court for permission. If the claim is for money only, the business is unlikely to be granted permission. Generally, only claims connected to property are allowed to continue.
  • The business is entitled to receive reports on the progress of the liquidation from the liquidator. It may also form a liquidation committee with at least two other creditors, to help the liquidator fulfil his functions.

What can a creditor do if they think the liquidator is doing a bad job?

  • The business could challenge:
    • the level of the liquidator’s remuneration.
    • the liquidator’s decision in relation to any proof of debt.
  • In extreme cases, and where it is in the interests of the liquidation, a liquidator may be removed by a court order or a meeting of the company’s creditors.

This document is for guidance only and is not intended to amount to legal advice.

 

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