Compulsory liquidation is a winding up ordered by the court, most often on a petition from an unpaid creditor. When the order is made the official receiver becomes liquidator, the directors lose all control, and the official receiver investigates why the company failed and whether the directors’ conduct should lead to disqualification or other action.

Who can ask the court to wind up a company?

Section 124 of the Insolvency Act 1986 allows a petition by the company itself, its directors, any creditor (including a contingent or prospective creditor) or a contributory (broadly a shareholder), alone or together. A shareholder can usually petition only if the shares have been held for at least six of the 18 months before the winding up, or were originally allotted to them or inherited.

The court can make an order on several grounds in section 122(1), but in practice two are used most: the company is unable to pay its debts (paragraph (f)), or it is just and equitable to wind it up (paragraph (g)). The Insolvency Service points out that a shareholder who wants a winding up because of a disagreement must show the court why the company should not be allowed to continue. A company can also resolve by special resolution to be wound up by the court. The Insolvency Service notes that where the directors petition without shareholder agreement, all directors must join in if there is more than one.

Directors who can still choose the timing usually prefer a creditors’ voluntary liquidation, where they and the creditors pick the liquidator.

How does a creditor prove the company cannot pay?

Section 123 sets out when a company is deemed unable to pay its debts:

  • a creditor owed more than £750 serves a written statutory demand at the registered office and the company fails to pay, secure or compound the debt within three weeks
  • enforcement of a court judgment is returned unsatisfied in whole or in part
  • the court is satisfied the company cannot pay its debts as they fall due
  • the court is satisfied that the company’s assets are worth less than its liabilities, taking contingent and prospective liabilities into account

Ignoring a statutory demand therefore gives the creditor a simple route to a petition without first having to sue for the debt.

How does the petition process work?

The petitioner completes form Comp 1 with evidence of the debt, such as the statutory demand or judgment, and form Comp 2. Where the company’s paid up share capital is £120,000 or more, the petition goes to the High Court; below that, a county court hearing insolvency cases has concurrent jurisdiction (section 117), though companies whose registered office is in the London insolvency district must start in the High Court. Gov.uk’s guide for creditors lists a petition deposit of £2,600 plus a court fee.

The petition is served on the company, and the hearing must be advertised in the Gazette at least seven working days beforehand. A copy of the advert and a certificate of compliance go to the court at least five working days before the hearing. If the court makes a winding up order, the company is in compulsory liquidation.

Why is the company’s bank account frozen?

Under section 129(2) a compulsory winding up is treated as starting when the petition was presented, not when the order is made, unless a voluntary winding up resolution was passed first. Section 127 then makes any disposition of the company’s property after that date void unless the court orders otherwise. Banks therefore freeze the account once they learn of a petition. To keep trading while the petition is pending, the company must apply for a validation order, giving the petitioner notice and explaining why the payments should be allowed.

Illustration only. A supplier owed £4,000 serves a statutory demand, which is ignored, and presents a petition on 1 March. On 10 March the director pays £10,000 to another supplier to keep deliveries coming. A winding up order is made in April. Because the liquidation is treated as starting on 1 March, the £10,000 payment is void unless the court validates it, and the liquidator can seek its return.

What does the official receiver do?

On the order, the official receiver becomes liquidator by virtue of the office (section 136(2)). Within 12 weeks the official receiver decides whether to seek nominations from creditors and contributories for an insolvency practitioner to take over (section 136(4) and (5)), and can also ask the Secretary of State to appoint one (section 137). From the order onwards, no legal action can be started or continued against the company without the court’s permission (section 130(2)).

Section 132 gives the official receiver a duty to investigate the causes of failure and the company’s promotion, formation, business, dealings and affairs. The official receiver can require current and former officers to prepare a statement of affairs verified by a statement of truth (section 131). The Insolvency Service says it usually sends creditors a report on the company’s assets and debts within eight weeks of the director interview, and sometimes up to 12.

What are the consequences for directors?

Directors no longer control the company or anything it owns and cannot act on its behalf. They must cooperate with the official receiver. In practice that means:

  • attending an interview, usually face to face and often lasting two to three hours, and completing a questionnaire
  • handing over all company financial records and papers, which the official receiver keeps
  • explaining the circumstances that led to the insolvency

The court can order a public examination of anyone who has been an officer or involved in managing the company, and the official receiver must apply for one if asked by half in value of the creditors (section 133).

The investigation feeds into possible director disqualification. Under section 6 of the Company Directors Disqualification Act 1986 the court must disqualify a director of an insolvent company whose conduct makes them unfit, for between 2 and 15 years. In a court winding up the official receiver can bring the application if the Secretary of State directs (section 7(1)), normally within three years of the insolvency (section 7(2)). The liquidator can also pursue directors for misfeasance (section 212), fraudulent trading (section 213) and wrongful trading.

For five years after the liquidation, anyone who was a director in the previous 12 months cannot use the company’s name or a similar one without falling within an exception or getting court permission (section 216). Otherwise a director of a liquidated company remains free to act as a director elsewhere unless disqualified, bankrupt or subject to similar restrictions.

How does a compulsory liquidation end?

When the winding up is complete, either the liquidator sends a final account or the official receiver sends a notice to Companies House. The registrar registers it and the company is dissolved three months later, unless the Secretary of State defers the date (section 205). Tax issues during the process are covered in corporation tax in liquidation.

What mistakes make things worse?

  • Ignoring a statutory demand instead of paying, disputing it with evidence or taking advice within the three weeks.
  • Continuing to pay suppliers or directors from the company account after a petition has been presented, without a validation order.
  • Moving assets or records out of the company before the order, which the official receiver will investigate.
  • Arriving at the official receiver interview without the books, bank statements and paperwork requested.
  • Setting up a replacement company with a similar name in breach of section 216.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.