Helping directors for over 23 years.

Talk to us today in confidence:

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 has expert knowledge on the company voluntary arrangement (CVA) mechanism

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 www.liquidatemycompany.com website and get a quote in minutes. We can talk you through the process, organise the legal paperwork and begin proceedings.

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.

Read
What Is A Winding Up Petition By HMRC or Other Creditor
Balloon

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.

Read
Notice of Intention To Appoint Administrators
Man with balloon

What Does Going Into Administration Mean?

Going into administration is when a company becomes insolvent and is put under the control of Licensed Insolvency Practitioners.  The directors and the secured lenders can appoint administrators through a court process in order to protect the company and their position as much as possible. Going Into Administration - A Simple Guide Administration is a very powerful process for gaining control when a company has serious cashflow problems, is insolvent and facing serious threats from creditors. The Court may appoint a licensed insolvency practitioner as administrator. This places a moratorium around the company and stops all legal actions.The administration must have a purpose and the Government encourages the use of company rescue mechanisms after administration. The 3 purposes (or objectives) of Administration Rescuing the company as a going concern. (Note: this purpose is to rescue the Company as opposed to rescuing the business undertaken by the Company.)Company rescue as a going concern – this is usually a  company voluntary arrangement. The company enters protective administration and is then restructured before entering into a CVA. The CVA would set out proposals for repayment of debts to secured, preferential and unsecured creditors. When the company has its CVA approved by creditors, then the administration process comes to an end after 28 days. Achieving a better result for the company's creditors This is as a whole than would be likely if the company was to be wound up (liquidation) See the differences between Administration and Liquidation.  This better result is usually obtained by selling the BUSINESS as a going concern to one or more buyers. The company and the debts are “left behind”. The better result may include securing transfer or employees under TUPE, as well as selling goodwill, intellectual property and assets. Controlling and then selling property/debtors. This is called realising assets. Then the administrator makes a distribution to one or more secured or preferential creditors, in order of creditors priority. Usually the business ceases trading and employees are made redundant.Only if the first two options are deemed unattainable, can the administrator use this third option.Under the administration option, it is possible for the company and its directors (or a creditor like the bank) to apply to the court to put the company into administration through a streamlined process.However, the law requires that any finance provider (like a bank or lender), with the appropriate security, is contacted and the aims of the administration be discussed and approved. The finance provider must have a fixed and floating charge (usually under a debenture) and the charge holder will need to give permission for the process to go ahead. Five days clear notice is required.  Be aware, though, that a secured lender can appoint administrators over a company without notice if it thinks its money is at risk.  So communication with the secured lender is essential.  

Read
What Does Going Into Administration Mean?

Related Guides

Related News

Worried Director? We Can Save Or Restructure Your Company!

Call now for free and confidential advice