What is Voluntary Liquidation?
Voluntary liquidation is a process decided by directors and shareholders to wind up a company that no longer has a viable future or the ability to continue trading. Voluntary liquidation falls into two categories, Creditors’ Voluntary Liquidation and Members’ Voluntary Liquidation:
Creditors’ Voluntary Liquidation (CVL)
Creditors’ Voluntary Liquidation (CVL) is a formal process in which an insolvent company decides to liquidate its assets. A CVL typically happens when a company is unable to pay its debts and cannot continue trading. The company’s directors decide to liquidate the company, however, the process involves the creditors’ input to ensure their interests are met.
Members’ Voluntary Liquidation (MVL)
A Members’ Voluntary Liquidation (MVL) occurs when the shareholders and directors of a solvent company make the decision to enter liquidation. MVLs typically occur when directors are looking to retire or sell the company, but the company has debts that it needs to repay to shareholders. To move forward with Members’ Voluntary Liquidation, the director(s) must provide a declaration of solvency to confirm that the company is capable of repaying its liabilities.
What is Compulsory Liquidation?
Compulsory liquidation is a formal legal process ordered by the courts after the company’s creditor(s) have issued a winding-up order. This process is typically a result of the company being insolvent and unable to pay its debts.
What Does Compulsory Liquidation Mean For a Company?
When a company is forced into compulsory liquidation, it is legally required to cease trading and begin liquidating its company assets. A court-appointed insolvency practitioner will take control of the company, selling assets in an attempt to raise funds and pay off creditor debts in priority order.
Once the liquidation process is complete, assets have been sold and all creditors have been repaid, the company will be formally dissolved, struck off the Companies House Register, and cease to exist.
Due to compulsory liquidation being a court-ordered process, the company’s financial difficulties and reason for liquidation are public, which can lead to negative publicity for the company and damage to the reputation of the director(s).
How Is Compulsory Liquidation Different to Voluntary Liquidation?
Compulsory and voluntary liquidation differ in several ways, including who initiates the process, who controls it, and the circumstances of the company’s closure.
Initiation
One of the key differences between voluntary and compulsory liquidation is who initiates the liquidation process. In compulsory liquidation, a court initiates the process after creditors have requested a winding-up petition. Differently, voluntary liquidation is initiated by the directors and shareholders for many reasons from insolvency to retirement and the selling of the company.
Reason
Compulsory liquidation occurs when a company is insolvent and unable to pay its debts and the creditors of the company petition for the company to be liquidated. Voluntary liquidation can happen due to insolvency in a CVL or when a company is solvent in an MVL.
Timeframes and Costs
The process of compulsory liquidation has a much longer timeframe and is more costly, due to its complex nature and being court-supervised. Alternatively, voluntary liquidation is a much faster and simpler process, resulting in much lower costs.
Impact on Directors
Directors of the company may face legal consequences for any misconduct or mismanagement that has contributed to the company going into compulsory liquidation. On the other hand, with voluntary liquidation, directors are typically less likely to be liable, unless wrongful trading has occurred in CVL.
What Should A Director Do If Their Company Has To Be Liquidated?
If a company is entering liquidation, the director(s) must act responsibly, working with the licensed insolvency practitioner to provide all required information and documentation. The director must cooperate to the best of their ability to help ensure the company is wound up properly.
The director should be open and honest with creditors and employees about the liquidation process, protecting their interests and giving no preferential treatment. If the company is solvent at the time of liquidation, the director must provide a declaration of solvency to the insolvency practitioner. This document shows that the company has the funds to repay its creditors in the process of closing the business.
Alternatively, if the company is insolvent, the director must cease trading immediately to avoid any wrongful trading and fulfil their legal duties to minimise personal risk. The director should also be prepared for the possibility of personal liability and should seek a professional’s expert advice to help them be transparent, cooperative, and compliant.
