While both voluntary liquidation and compulsory liquidation are insolvency proceedings, they are very different in terms of process and procedure. It is therefore important to understand the difference between the two since each one has vastly different implications for the company.
What is Liquidation?
Before we can understand the major differences between voluntary and compulsory liquidation, it is vital to understand what liquidation is. Liquidation is a formal insolvency process where a liquidator, “winds up” a company’s affairs. Part of the process is selling off all the solvent company’s assets, including all the property with the proceeds going to as many creditors as is possible.
At the end of the liquidation process, a company is completely dissolved and removed from the Companies House Register. It is also worth pointing that the Insolvency Service may, during the liquidation process, investigate the conduct of the company’s directors’ conduct for wrongful or fraudulent trading.
There are two types of liquidation; compulsory and voluntary. Let’s take a look at each type separately to determine the differences between them.
What is Compulsory Liquidation?
As the name suggests, a compulsory liquidation is forced on the company’s directors following the approval of a winding up petition in the Courts. Once the courts approve the petition, the official receiver will take over, freeze the company’s bank accounts and immediately begin investigations on the reasons behind the company’s insolvency.
If there are any assets to be recovered, a liquidator will be appointed and the proceeds from this asset recovery will cover the cost of the company’s liquidation. The creditors will get the remaining funds, if there are any, although it is highly unlikely that the proceeds will cover the full amount owed. At the same time, an investigation into the directors’ conduct will be carried out to find any evidence of wrongdoing on their part.
What is Voluntary Liquidation?
Voluntary liquidation, also known as Creditors Voluntary Liquidation (CVL) begins when the directors and owners make the decision to close the business because they are unable to settle their debts. The company has to be insolvent for this process to begin. To initiate a CVL there has to be a meeting of the shareholders and creditors. During the meeting, the company will pass the appropriate resolutions and appoint a liquidator. The main difference between this process and the compulsory liquidation is that the court of Official receiver will play no part in the voluntary liquidation process. It is also much quicker than a compulsory liquidation.
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Which One is best for Your Company?
The other main difference between a compulsory and voluntary liquidation is whether the process was an internal decision (made by the directors) or it was forced on the company. In both scenarios however, the company has to be insolvent with no prospect for becoming profitable again.
Therefore the compulsory process is not an ideal situation for any business. The creditors choosing to initiate the liquidation process suggests that the directors have lost track of or are ignoring the company’s financial state. If the Official Receiver finds that this is the case, the directors will be held personally liable for the debts the company has incurred. This process will also take a very long time, further increasing the public scrutiny of the company.
There are several ways to avoid going through the compulsory liquidation process. They include the following;
- Pay your debts
- Defend the petition when it’s presented in court
- Choose to enter a Company Voluntary Agreement (CVA)
- You can also choose a CVL before the hearing begins although this can only be done if the petitioner withdraws their petition.
