Differences between Compulsory and Voluntary Liquidation

Voluntary liquidation (CVL) and compulsory liquidation represent two distinct approaches to winding up a limited company.

But from a director’s perspective, one is a significantly preferable scenario.

Compulsory liquidation brings with it minimal control and maximum scrutiny for those who’ve been running the company. Where possible, choosing a voluntary process before compulsory winding up is imposed is to be recommended, as I will explain.

What is the Difference Between Voluntary Liquidation and Compulsory Liquidation?

What is Voluntary Liquidation?

Voluntary liquidation is a deliberate decision taken by a company’s directors or shareholders to close down the business. This decision is made either when the company is solvent and can settle its debts within a specified period, typically 12 months, or if the company is insolvent and unable to meet its financial obligations.

The process is designed to allow the company to manage its closure in a structured and orderly manner, ensuring that creditors are paid off to the extent possible and that any remaining assets are distributed among the shareholders according to the company’s articles of association or as per legal requirements.

 Types of Voluntary Liquidation

There are two primary types of voluntary liquidation:

  1. Members’ Voluntary Liquidation (MVL): This occurs when the directors and shareholders decide to liquidate a solvent company. An MVL is undertaken when the owners believe that the company has served its purpose or they wish to retire and there is no one to take over the business. Prior to initiating an MVL, the directors must swear a Declaration of Solvency, confirming that the company can pay all its debts, including interest, within a maximum of 12 months from the start of the liquidation process.
  2. Creditors’ Voluntary Liquidation (CVL): This process is chosen when a company is insolvent, meaning it cannot pay its debts as they fall due. In a CVL, the company’s directors must call a meeting with the shareholders and creditors to discuss the company’s financial situation. The decision to proceed with a CVL is typically taken to avoid the directors being accused of wrongful or fraudulent trading by continuing to operate when the company is insolvent.

>>Read our full article on the Advantages and Disadvantages of a Creditors’ Voluntary Liquidation

What Does Compulsory Liquidation Mean?

Compulsory liquidation, by contrast, marks the forced closure of a company, instigated not by its directors or shareholders but by an external party, typically a creditor or the court. This process is initiated when a company fails to pay its debts and is deemed unable to continue its business operations. It represents a legal mechanism to ensure that the assets of the insolvent company are fairly and equitably distributed to its creditors.

Compulsory liquidation has significant implications for all involved. For directors, it can lead to investigations into their conduct and potential disqualification from holding directorial positions if misconduct is found.

For employees, it means the loss of employment. For creditors, although it offers a route to recover owed monies, they may not receive full repayment, depending on the company’s asset realisation.

Compulsory Liquidation Means Forced Closure

Compulsory liquidation is an extremely serious situation for a business, marking its forced closure in a manner that leaves directors little room for manoeuvre.

This process is not only a clear indicator of severe financial distress but also publicly exposes the company’s failure, impacting the directors’ professional reputation and future opportunities. The public nature of compulsory liquidation, with details published in The Gazette, further amplifies its consequences.

Why Would You Choose a Voluntary Rather than a Compulsory Liquidation?

Choosing voluntary liquidation over compulsory liquidation can provide several advantages for a company facing insolvency. Here are some key reasons why a voluntary liquidation may be preferable:

  1. Control and Timing: In a voluntary liquidation, the company’s directors initiate the process themselves, allowing them to maintain some control over the timing and pace of the liquidation. This can help minimise disruptions to ongoing operations and provide more time to plan an orderly wind-down.
  2. Reputation and Credibility: By taking proactive steps to address financial difficulties, directors can demonstrate responsible management and maintain credibility with stakeholders. A voluntary liquidation is often viewed as a more transparent and cooperative approach compared to being forced into compulsory liquidation by creditors.
  3. Avoiding Allegations of Wrongdoing: When creditors initiate a compulsory liquidation, directors face an increased risk of allegations of wrongful or fraudulent trading. These accusations can lead to severe penalties, including personal liability for company debts and potential director disqualification.
  4. Choice of Liquidator: In a voluntary liquidation, directors can engage with an insolvency practitioner they choose early on, ensuring a clear understanding of the process, expectations, and timelines. This proactive approach can reduce stress and uncertainty compared to compulsory liquidation, where the process may be more adversarial.

It’s important to note that while a voluntary liquidation offers these advantages, it is still a serious step that should be carefully considered in consultation with professional advisors.

Get Advice on Voluntary or Involuntary Liquidation

Whether you’re considering the orderly wind-down of your business or facing potential compulsory liquidation due to creditor pressures, seeking expert advice is crucial in mitigating the impact on all parties involved.

For comprehensive advice on voluntary and compulsory liquidation, Company Debt offers a wealth of resources and professional support. With a team of experienced insolvency practitioners, Company Debt can provide tailored advice based on your specific circumstances. We can help you understand the nuances of each process, including the legal requirements, potential outcomes, and strategic considerations to protect your interests and those of your creditors.

  • Phone: You can speak directly with an insolvency expert by calling us on 0800 644 6080. This initial consultation is free and can help clarify your options and the best course of action.
  • Email: For those who prefer written communication or need to provide detailed information about their situation, email us at info@companydebt.com. An advisor will respond promptly to discuss your enquiry further.