A Compulsory Liquidation is usually instigated by an unpaid creditor of an insolvent company who is owed more than £750. It is a court-led process, meaning the dates and deadlines are set by the court, not the directors in the domain by way of an advertisement in the London Gazette. By comparison, a Voluntary Liquidation allows more control by the company being liquidated as it is usually instigated by the shareholders and directors of that company.
What is a Voluntary Liquidation?
Voluntary Liquidation can refer to one of two processes, a Creditors’ Voluntary Liquidation (CVL), when the shareholders and/or directors of an insolvent company decide to liquidate the company, or a Members’ Voluntary Liquidation (MVL), which is used when the shareholders of a solvent company decide to liquidate the company. Neither type of voluntary liquidation, whether CVL or MVL involve the courts and they both allow the directors and shareholders more control over the liquidation process.
How to Assess Which Type of Voluntary Liquidation is Appropriate
MVLs are only appropriate if the company involved is ‘solvent’. However, the broad test is that a company will be insolvent if it cannot pay its bills as and when they become due or its liabilities are greater than its assets on its balance sheet. A solvent company is unlikely to be subject to a compulsory liquidation, so for the remainder of this article, we will outline the differences between a Compulsory Liquidation and a CVL.
Why is a Compulsory Liquidation so serious?
A Compulsory Liquidation is instigated by an unpaid creditor of the company (who must be owed more than £750 in unpaid debts) filing a winding up petition with the courts. The winding up petition will be served on the debtor company and will also be advertised publicly in The Gazette. The courts will hold a hearing to establish if the company is insolvent, and, if they establish that it is, will issue a winding up order that will lead to the debtor company being liquidated. This is a very serious process. Other than being able to prove that the debtor company is not insolvent and can pay the creditor, or that there is a valid reason (i.e. dispute) why the debt hasn’t been repaid, then there is very little that the directors of a company subject to compulsory liquidation can do to stop the process once a creditor has filed the winding up petition. The debtor company has no control over the timing and cannot prepare the company for the liquidation (i.e. by slowly winding the company up to ensure it’s in the best possible financial position prior to the liquidation). In addition to this, Compulsory Liquidation is a very public process. The winding up petition is advertised (which will lead to the company’s bank accounts being frozen) and the court hearing is a public hearing. Get more information about liquidation and what it means for your company.
Why is a Creditors’ Voluntary Liquidation a Better Option?
If a company is insolvent and has to be liquidated, a CVL will allow the directors and shareholders of the company to have more control over the timing of the liquidation. The directors are able to try and prepare the company as much as possible for the winding up prior to its commencement and by doing so, can extract maximum value for creditors. CVLs are not carried out through the courts and an Insolvency Practitioner will be appointed to commence the process and then goes on to become the liquidator of that company. As part of the liquidation, the liquidator will also have to undertake an investigation into the directors’ behaviour prior to the liquidation. If they deem the directors to have behaved outside of the scope or contrary to their director’s duties, it can lead to the directors being banned from acting as a director for a period of up to 15 years. In taking the more pro-active approach of a CVL, it can be easier for the directors to show that they have acted in the best interests of the company and the creditors.
Contact The Insolvency Experts for advice
If your company is being threatened with compulsory liquidation, you should think about alternative options available to you before a creditor forces your company to be liquidated. The Insolvency Experts can advise on a range of company rescue options, such as a Company Voluntary Arrangement (CVA) or Administration, as well as a Creditors’ Voluntary Liquidation (CVL) if winding the company up is the best option. For more information or to get advice on the best process for your company facing insolvency, you can contact The Insolvency Experts online, or alternatively call us directly on 0300 303 8284. .