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What Is The Difference Between Voluntary Liquidation and Compulsory Liquidation?

29th March, 2023
Keith Steven

Written ByKeith Steven

Managing Director

07879 555349

Keith is the author of the content on this comprehensive rescue, turnaround and insolvency website. He is the managing director of KSA Group Ltd - a specialist firm of turnaround and licensed insolvency practitioners. Keith was nominated for Turnaround Practitioner of the Year 2014 at the National Insolvency and Rescue Awards in 2014.

Keith Steven
  • What Is Liquidation?
  • Compulsory Liquidation
  • Voluntary Liquidation
  • Which type of liquidation is best for you and your company?
  • Disadvantages of Compulsory Liquidation
  • Advantages of Compulsory Liquidation
  • How can you avoid being liquidated compulsorily?

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.

Additionally, if you would like to liquidate your company, call us on 0800 9700539 or you can fill out a form on our website and get a quote in minutes. We can talk you through the process, organise the legal paperwork and begin proceedings.

Worried Director What Will Happen To Me After Liquidation?

in Company Liquidation What is …?

"A man in the pub said I cannot be a director of any other company if I liquidate my company. Is this true?"Actually, this statement is entirely false! Misconceptions like this frequently arise from individuals with limited understanding of the subject matter. Such misinformation can cause undue anxiety for directors considering liquidation, fearing it might personally affect them. Guess what? Listening to bar room experts, inexperienced accountants, or no insolvency specialist lawyers can stop decisions being made, this failure to make a decision is really what could land you in trouble. So how will liquidation affect me and how long does it take? Having a limited liability company means that the directors have little risk (or limited liability) if the company fails, as long as they have acted properly and acted in time. What is more, if as a director, you have been compliant and on the payroll for many years, you can actually claim redundancy from the government like any other employee. But, and it is a big but, if you fail to act in time, fail to act reasonably, fail to keep books and records, continue taking credit KNOWING that the company cannot possibly repay it, then you ARE at risk of personal financial loss or worse such as losing your house. So, act now and get help for your company and more importantly start reducing your own risks.Voluntary liquidation is the quickest most efficient way to deal with an insolvent company that has no future. As a director of an insolvent company, you are at risk if you do not act. This risk RISES the longer you don't act to put the company into liquidation.If you fail to act and the company is wound up by the creditors (compulsory liquidation) then the Official Receiver (OR) will be appointed to liquidate the business and he or she will investigate the activity of the directors and the business over the last 2-3 years. This is known as a conduct report on each director.  If the OR can prove there was wrongful trading where, for instance, you have taken credit from a supplier or took deposits from customers when you knew that it was highly unlikely that you could pay them back, then you could be made personally liable.This is known as the "lifting of the veil of incorporation" that protects directors under limited liability. If this happens then you could made liable for PAYE, VAT and creditors monies from the time that you should have known the company had no reasonable prospect of surviving the problems it faced.Additionally, the directors may face disqualification proceedings under the Company Directors Disqualification Act 1986 for up to 15 years, they can be fined and may face the loss of personal assets like your home, or even personal bankruptcy.Look, if you as directors have acted naively you may not know that you have broken these laws, but now you do know, it is vital to ensure that you protect yourself as a director by acting quickly to cease trading and put the company into voluntary liquidation; or consider a company voluntary arrangement if the company is VIABLE if the problems are solved. What is Creditors Voluntary Liquidation and what does it mean for me? In short, liquidation usually means, the company's trading stops and it's assets are turned into cash or "liquidated".All other possible liabilities, like employment liabilities, landlord's rent or payments to lease companies are stopped. It really is the end of the company, but the "business" may survive if a phoenix is organised. Liquidation is a powerful way to END creditor pressure and let you get on with your life. What if I have signed personal guarantees? If you have signed personal guarantees or indemnities to lenders, then the liquidation could lead to them being called in if the bank cannot get its money back from the company. There is little that can be done about that, but you should not delay decisions on liquidation to try and prevent a PG being called in: just think what ALL of the company's debts landing on your shoulders would do. Also it should be noted that HMRC now rank ahead of floating charge holders in any liquidation since December 2020.  Consequently, this may well mean that lenders that you have personally guaranteed will get less recovery hence exposing you more.All banks will agree a deal to repay the PG over time - provided you work with the bank to reduce their exposure.One great piece of FREE advice - always make sure that ALL tax returns, VAT returns and annual returns have been completed and sent in and that other "compliance" issues are dealt with wherever possible. These are important processes and will help protect you as individual directors. It shows that you have been acting properly.  I have heard about directors being able to claim redundancy in liquidation If you have been employed by the company and made payments via PAYE then you will be able to claim redundancy from the government and this is in fact a very simple process (20 minutes to fill out a form and we can help with that) so there is no need really to employ a third party to make a claim.  This process has been open to fraud so the HMRC are cracking down on operators that claim to be able to get money back when there is not enough "paperwork".  It isn't worth the risk.  If it sounds too good to be true then it probably is!You need to learn more about the options. This is clearly a general guide so, if you have any worries at all, please, just call us and we will talk you through the situation free and with expert guidance for your situation. Call one of our advisors or if you prefer, call our IPs (insolvency practitioners) now:Just one CALL will help relieve the stress and get you out of the mess.Why not call 08009700539 or 020 7887 2667 now?We could help you start the liquidation process today.(8.15am till 5.00pm; Out of hours call on 07833 240747, Wayne Harrison (IP)  or Eric Walls (IP) on 07787 278527)Finally, please remember this: NO BUSINESS is worth losing your health, relationships, marriages or your children over. Act properly, take advice, get the problem sorted and then get on with your life. In a little while the stress will go and you can focus on other things that are more important.Want more information on liquidation? Get our new free 2023 Experts Complete Guide to Creditors Voluntary Liquidation that covers Bounce Back LoansWe are experts in liquidation, voluntary liquidation, administration, pre-pack administration, business rescue, corporate rescue and company rescue, we can help solve your problems but only if you talk to us. Call 0800 9700539 for help.or email us your worries at 

Worried Director What Will Happen To Me After Liquidation?

Notice of Intention To Appoint Administrators

A notice of intention to appoint administrators is when the company files a document to the court to outline that it intends to go into administration if a solution cannot be found to its immediate financial problems. It can be used as part of the pre-pack administration process as well as used to restructure a failing business to avoid its liquidation.

Notice of Intention To Appoint Administrators
Man with umbrella

What Is A Winding Up Petition By HMRC or Other Creditor

A winding up petition is a legal notice put forward to the court by a creditor. The creditor petitions to the court if they are owed more than £750 and it has not been paid for more than 21 days. The application, in effect, asks the court to liquidate the company as they believe the company is insolvent.

What Is A Winding Up Petition By HMRC or Other Creditor

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