It’s important to understand what is the difference between compulsory and voluntary liquidation. Both are insolvency proceedings, but have vastly different implications for you as a director and for your company.
What Is Liquidation?
Liquidation is a formal insolvency process whereby a liquidator (or insolvency practitioner) ‘winds up’ a company’s affairs. It sells all of the insolvent businesses’ assets, including property, and the proceeds go to as many creditors as possible.
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, seeking examples of wrongful or fraudulent trading.
There are two core types of liquidation; compulsory and voluntary. As their names suggest, the main difference relates to how the proceedings come about.
What Is Compulsory Liquidation?
After approval, the Official Receiver will take over, 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. An investigation into the directors conduct is carried out as a statutory duty of the official receiver whether or not there is any evidence of wrong doing.
What Is 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.
This requires a meeting of the shareholders and creditors to pass appropriate resolutions and appoint a liquidator. 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. 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. The whole process takes a long time
So, the option of a voluntary liquidation may be your best shout as it has several benefits;
The directors seem 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. In a compulsory it can be up to a year before they can claim. 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.
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 ie 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.
Worried about poor cashflow? Covid-19?, How to pay wages on pay day? For expert advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.