Voluntary V Compulsory Liquidation
When a company becomes insolvent – and does not have the prospect of recovery – there are two ways the business can come to a close: voluntary or compulsory liquidation.
Voluntary liquidation occurs when a director decides to close the business with the help of an insolvency practitioner, typically in an effort to uphold their duties to company creditors. Compulsory liquidation, on the other hand, takes place when directors continue trading until the court forcibly winds them up.
In this guide, we’ll be looking at the processes of each kind of liquidation, along with any potential risks and benefits.
Contents
Compulsory Liquidation
Compulsory liquidation takes place when a company’s creditor (such as a bank or HMRC) applies to the court to have the business forcibly liquidated.
Some directors allow their company to go through this route either to avoid paying professional fees or in the hopes that their company can still be turned around. However, doing so can leave directors exposed to further legal and financial issues down the line.
What's the Process of Compulsory Liquidation?
Winding-Up Petition Is Issued
If a creditor is owed any amount over £750, they can apply to the court to have the company “wound up”. This involves closing the company and selling its assets to help repay creditors what they’re owed.
A Winding-Up Order Is Made
Once a petition is made, it will take around 6-8 weeks for the court to come to a decision. If they agree the business should be liquidated, they’ll issue a winding-up order. This results in the company’s immediate closure.
The Liquidation Begins
Once the order is made, the control of the company and its assets are stripped from directors and handed over to the appointed liquidator. The liquidator will seek to sell all assets to repay company creditors to the fullest extent.
Director Conduct Is Investigated
During the liquidation process, the appointed liquidator will also be looking into the conduct of directors to look for any signs of wrongdoing. If they find evidence to confirm this, it can have serious consequences for directors. The expense of the compulsory liquidation process invites more scrutiny.
What Are the Legal Risks of Compulsory Liquidation?
Compulsory liquidation opens up an investigation into the conduct of the company’s directors. The liquidator will try and establish whether or not the director has acted dishonestly or irresponsibly.
The investigation will try and find out:
- If the company has been trading while insolvent
- If the directors have paid themselves an unreasonable salary
- If the directors have sold assets for less than market value
- If the directors have hidden assets
Typically – as the directors have allowed the company to continue trading until the point it was forcefully closed – evidence will be found to support accusations of wrongful trading. This is where a company trades while insolvent, usually making the position of creditors worse.
- Hefty fines
- Can be made personally liable for company debts
- Disqualification from future directorship for up to 15 years
If your company can’t pay its debts when they fall due, or its liabilities are greater than its assets, it is technically insolvent. This changes a director’s legal duties, meaning they must act in the interest of company creditors, not shareholders.
Voluntary Liquidation
Voluntary liquidation is the most popular form of company closure in the UK. It allows company directors to uphold their duty to company directors. This safeguards directors from any legal and financial fallout, offering them a safe exit from the business.
The liquidation is overseen by an insolvency practitioner, in a process known as a Creditors’ Voluntary Liquidation, or CVL.
What's the Process of a Voluntary Liquidation?
Discuss Your Situation with an Insolvency Practitioner
The first step to any voluntary liquidation is discussing your situation with an insolvency practitioner. Our team can assess your situation, evaluating whether your business is insolvent, and if liquidation is the right answer for you. If it’s decided a CVL offers the best outcome, the proceedings will begin.
Directors’ Board Meeting Held
In this meeting, the company’s directors must collectively resolve to liquidate the company – if you’re the only director, this is pretty straightforward. You then officially appoint a liquidator – who must be a licenced insolvency practitioner – to oversee the process. The insolvency practitioner will then deliver a 14-day notice of intent to the company’s creditors, shareholders, and employees.
Shareholders’ Meeting Held
In order for the liquidation to go ahead, a vote needs to be held by shareholders. Shareholders – representing at least 75% of the company’s shares – need to vote in favour.
Creditors Come to a Decision
This isn’t an opportunity for creditors to reject the liquidation; instead, it is an opportunity for them to have their say on your choice of liquidator. Typically creditors approve through deemed consent, choosing not to comment.
The Liquidation Begins
Once all parties are in agreement, the liquidation process begins. Control of the company is handed over to the liquidator who then sells all of the company’s assets to repay creditors. The business is closed and directors can move on to their next venture.
What Are the Benefits of Voluntary Liquidation?
One of the biggest advantages of a creditors’ voluntary liquidation is that it helps to safeguard a director’s personal interests. The process allows directors to uphold their duty to creditors, by stopping trade and securing their position.
In turn, this helps to protect you from any allegations of misfeasance, wrongful trading, or fraudulent trading. Directors found liable for these charges risk becoming personally liable for company debts – which can result in personal bankruptcy – or disqualification from future directorship.
Another benefit of a creditors’ voluntary liquidation is that the professional fees are usually covered entirely by the proceeds of the liquidation itself. This means you shouldn’t have to pay out of your own pocket to fund the procedure. You should also be able to enjoy the protections of limited liability, making the CVL procedure very cost-effective.
Speak to an Expert Today
If you’re struggling with corporate debt, you should contact an insolvency practitioner as soon as possible.
To see what we can do for you, get in touch to book a free consultation today.
