What Is The Difference Between Voluntary Liquidation and Compulsory Liquidation?

It’s important to understand what the difference is between compulsory and voluntary liquidation. Both are insolvency proceedings but have very different implications for you, as a director, and for your company.

What Is Liquidation?

Liquidation is a formal insolvency process when a liquidator ‘winds up’ a company’s affairs. It sells all of the insolvent businesses’ assets and the proceeds go to as many creditors as possible. The proceeds are distributed in order of priority.

By the end of the liquidation process, the company is completely dissolved and struck off the Companies House register. The Insolvency Service will also investigate the conduct of the company’s directors. They will be looking for signs of wrongful or fraudulent trading.

There are two main types of liquidation; compulsory and voluntary. As their names suggest, the main difference relates to how the proceedings come about.

Compulsory Liquidation

Compulsory liquidation is forced on a company by its creditors.  This is usually after the approval of a winding up petition in Court.

After approval, the Official Receiver will take over the company’s affairs. They will freeze bank accounts and begin the investigation into what led to the company’s insolvency.

A liquidator will be appointed if there are assets to recover. The proceeds from this will cover the cost of the liquidation. Any remaining funds will go to the creditors, however it is unlikely that they’ll receive anything like the full amount owed.  It is the Official Receivers statutory duty to carry out an investigation into the directors conduct.

Voluntary Liquidation

Also known as a Creditors Voluntary Liquidation (CVL), a voluntary liquidation starts when the directors, and owners, decide to close their business as they cannot pay their creditors.  The company has to be insolvent for this to happen.  See this page to find out if your business is insolvent.

The directors then ask us as licensed insolvency practitioners to seek a decision from the creditors and the shareholders as soon as possible (within 14-21 days) to put the company into liquidation with the liquidator appointed by the creditors. In most cases we will ask for “deemed consent” whereby a date is fixed, no earlier than 7 days into the future, and if no objections by creditors have been received then the company will be deemed to have been put into liquidation. The vast majority of liquidations (95%) are done this way now. However, in larger and more complex cases it is more likely that a creditors meeting is held.

Neither the Court or Official Receiver are part of voluntary liquidation.  The process is quicker than a compulsory liquidation.

Which type of liquidation is best for you and your company?

So, the main difference between compulsory and voluntary liquidation is whether or not the process was the director’s idea. In both situations, the company is insolvent with no prospect of turnaround.

The compulsory liquidation process is not ideal for any business.

Disadvantages of Compulsory Liquidation

• Waiting for creditors to wind up the company suggests that directors were unaware, or ignoring, their company’s financial state. If the Official Receiver finds this to be the case, the director could be held personally liable for debts accrued since they knew the company was insolvent.
• What is more the whole process takes a long time.
• Being wound up by the court will appear on Companies House records.

So, the option of a voluntary liquidation may be your best option as it has several benefits;

Advantages of Voluntary Liquidation

• The directors are seen to be acting proactively in the creditors’ best interests. This is very important when it comes to the conduct investigation later on.
• Also, the process is much quicker which means that employees can receive compensation from the redundancy payments office in good time.
• It also ensures that the directors remain in control of the process, and the company closes down in an orderly manner. This helps if the directors wish to create a phoenix company, or start over in the same industry.
• In a voluntary liquidation the directors can receive pre-insolvency advice about the likely impact of the liquidation on them personally and take appropriate action.

How can you avoid being liquidated compulsorily?

• Paying the debt
• Defending the petition at court
• Entering a   Company Voluntary Arrangement (CVA)
• Choosing a CVL before the hearing ( this can only be done with permission of the petitioner i.e. they must withdraw the petition )

If you are concerned about liquidation or your company’s finances, please get in touch with our insolvency experts today. They’ll provide advice tailored to your company’s situation, and suggest several options you can take.