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A company is insolvent when it doesn’t have enough assets to cover its debts or is unable to pay its debts when they are due. There is no application process to become insolvent: it is something you are.

When a company is involvent, directors need to mainly act in the interests of creditors (people owed money) rather than shareholders. Directors are not meant to continue to trade beyond the point at which they know or shoud know that there is no reasonable prospect of avoiding liquidation. If they do this, they commit wrongful trading and can be personally responsible for losses caused to creditors by their wrongful actions.

Compulsory liquidation (or winding up) is one way of closing an insolvent company down. It involves a liquidator being appointed by the court to wind up (close down) the company.

A company (or a limited liability partnership) can be put into compulsory liquidation by court order if it cannot pay its debts, usually on the petition (request) of a creditor. A common way a company is considered unable to pay its debts is if a creditor presents a written demand for payment (known as “a statutory demand”) and the company fails to pay the debt or secure a repayment plan with the creditor.

Compulsory liquidation involves selling off the company’s assets and distributing them to creditors (who often will not be paid in full). How long liquidation takes will depend on the complexity of the case, but it ranges from months to many years. Once the process has been completed, the company will be dissolved – it will cease to exist.

This briefing summarises the compulsory liquidation process in England, Wales and Scotland.

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