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Compulsory liquidation is a tool of last resort often used by creditors against a company that is either insolvent and therefore unable, or just unwilling to pay its debts. The creditors apply to court to force the company in question into liquidation so that they can recover some or all the monies due to them.
Less well known is that compulsory liquidation can also be used to force solvent companies to close if they are misbehaving and/or acting against the public interest.
Compulsory Liquidation on Just & Equitable Grounds
Certain public authorities, trade bodies, regulators, as well as certain company officers or other stakeholders can apply to have a company wound up ‘on just and equitable grounds’.
There are several justifications for applying to have a solvent company wound up in these circumstances.
- The company may have achieved the goal it was formed to achieve, or conversely be unable to meet that goal and therefore have no remaining purpose.
- The management or members may fundamentally disagree and be in a state of deadlock as to how the business is to go forward. This may involve an impasse caused by management irregularities or even misconduct and breaches of trust, meaning that there’s no way the company can continue as is.
- Majority shareholders can be shown to have oppressed minority shareholders in a way which is both serious and sustained.
- If the company has been formed for a purpose which is either fraudulent, illegal or both.
Compulsory Liquidation on Public Interest Grounds
The Secretary of State has the power to petition the court directly to wind up a company on public interest grounds.
This petition can come as a result of an investigation into the affairs of a company which has been conducted as a result of a number of complaints received by the authorities.
If the inspectors (often investigators from a branch of The Insolvency Service) uncover evidence that the company is indeed conducting itself against the interests of the public, then the court can uphold the winding up petition and close the company on those grounds, whether the company is solvent or not.
The Insolvency Service and ‘Scams Awareness Month’
June is ‘Scams Awareness Month’ and during this month, The Insolvency Service has been highlighting what it has done to investigate and close down rogue health supplement companies, in some cases using compulsory liquidation on public interest grounds to achieve these ends.
In one particular example, ‘Healthspring Wellness Products Ltd’ was found to be targeting vulnerable individuals over 55 years of age using an offshore call centre. These victims , often housebound or with mobility issues, were subjected to aggressive sales tactics and false medical advice in order to dupe them into making purchases.
The Insolvency Service investigated the company and successfully petitioned the court to wind it up in the public interest, and it was wound up. As with any liquidation, the behaviour of the company’s Directors is also scrutinised and as a result, the Director of ‘Healthspring Wellness Products Ltd’ has been banned from running companies for 11 years.
If your business has been subject to a compulsory liquidation petition, or is considering making such a petition, it’s worthwhile to take advantage of the free consultation we offer to discuss the available options and help you arrive at the best outcome.
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