Liquidation serves as a mechanism for winding up a company’s affairs, ensuring that its assets are distributed among creditors. There are two primary types of liquidation: voluntary and compulsory. Each has distinct processes, implications, and circumstances that dictate their use.
Voluntary Liquidation
Voluntary liquidation occurs when a company’s shareholders or directors decide to wind up the business. This decision is typically made when the company is no longer viable, either due to financial difficulties or other strategic reasons. There are two main types of voluntary liquidation:
1. Members’ Voluntary Liquidation (MVL): This is applicable when the Company is solvent, meaning it can pay its debts in full within a specified period, usually 12 months. In an MVL, the shareholders pass a resolution to liquidate the Company, appoint a liquidator, and the Liquidator’s role is to realise the Company’s assets, settle creditors, and distribute any remaining assets to the Shareholders.
2. Creditors’ Voluntary Liquidation (CVL): This occurs when the Company is insolvent, meaning it cannot pay its debts. The Directors of the Company recognise this situation and call a meeting of creditors to discuss the Liquidation. Here, a liquidator is appointed to manage the winding-up process, ensuring that creditors are paid as much as possible from the Company’s assets.
Compulsory Liquidation
In contrast, compulsory liquidation is imposed by the Court. This process is initiated when a creditor files a petition, typically due to the Company’s failure to pay its debts. A court order is required to commence compulsory liquidation, and it usually involves:
– Petition Filing: A creditor, or sometimes the Company itself, files a petition with the Court to have the Company wound up. This can be due to unpaid debts exceeding a certain threshold.
– Court Hearing: A hearing is conducted where the Court assesses the Petition. If it finds the Company insolvent and unable to pay its debts, it will issue a winding-up order.
– Liquidator Appointment: Once the Order is granted, the Court appoints an official receiver or a licensed insolvency practitioner as the Liquidator, to take control of the Company’s assets and manage the liquidation process.
Key Differences
1. Initiation: The primary difference between voluntary and compulsory liquidation is how they are initiated. Voluntary liquidation is initiated by the Company itself through its shareholders or directors, while compulsory liquidation is initiated by a court order following a creditor’s petition.
2. Company Solvency: Voluntary liquidation can involve both solvent (MVL) and insolvent (CVL) companies, whereas compulsory liquidation is only applicable to insolvent companies.
3. Control: In a voluntary liquidation, the Company’s directors have a say in the process, often leading to a more controlled and organised winding-up. In compulsory liquidation, the process is conducted under the supervision of the Court, which may result in a more rigorous examination of the Company’s affairs.
4. Cost and Time: Voluntary liquidation is generally seen as a more straightforward and cost-effective process compared to compulsory liquidation, which can involve lengthy court proceedings and additional legal fees.
Conclusion
Understanding the distinctions between voluntary and compulsory liquidation is crucial for directors and stakeholders facing insolvency issues. Voluntary liquidation offers a controlled approach for winding up a business, while compulsory liquidation serves as a legal remedy for creditors seeking to recover debts from an insolvent company. Each scenario presents unique challenges and outcomes, emphasising the importance of seeking professional advice from an insolvency practitioner to navigate these complex processes effectively.
FAQ’S
Q: What are my duties as a director of an insolvent company?
A: When a company is insolvent a director’s duties change, and they must act in the best interests of the Company and its creditors. A full summary of a director’s duties can be found here.
Q: Can I be personally liable for my company’s debts?
A: In short, no. Legally speaking, you are a separate entity from your company, however, there are certain circumstances where personal liability can occur. Click here to find out more.
Q: Are there any other options for my company?
A: Depending on the viability of the Company, yes. The Directors may consider a Company Voluntary Arrangement or CVA or, if the problems are around debts due to one creditor (for example, HMRC) then a Time to Pay Arrangement(TTP) may be a good option. Click here for full details.
Should you wish to explore any of the matters in this article in more detail or seek a bespoke solution for your company, call 03303 411 285 for a free, confidential, no obligation conversation about your options.
