How should I liquidate my company?

Voluntary Or Compulsory Liquidation 

Voluntary Or Compulsory Liquidation Of A Company. Written by John A Waller, Consultant.  Reviewed: June 28th, 2024.

This is a question many company directors ask.

Being faced with insolvency and liquidation is challenging for a company director. It requires careful consideration, especially if you plan to establish a new company. Directors need to understand that liquidating a limited company will result in its permanent closure and removal from the registrar at Companies House by the liquidator. As a director, acting responsibly and caring for the company’s creditors is essential. Being confronted with an insolvent liquidation is difficult for a company director.

It’s a situation that demands serious consideration, especially if you’re considering establishing a new company.

Directors must be aware that liquidating a limited company means the company will be closed permanently and removed from the registrar at Companies House by the liquidator.

As a director, your responsible actions and careful handling of the company’s creditors are paramount.

Remember, limited liability will only apply if you abide by the rules.

When directors face insolvency, carefully considering the available options is crucial. Some directors may allow a creditor to start the liquidation process by filing a winding-up petition in court, but this can be a mistake. Instead, directors can opt for a ‘creditor’s voluntary liquidation’ for insolvent companies, which allows them to maintain some control by voluntarily appointing a liquidator. A Members’ Voluntary Liquidation (MVL) is the appropriate choice for solvent companies. It’s important to understand that liquidating a company will result in its permanent closure and removal from the Companies House register by the appointed liquidator. Directors must handle the company’s creditors responsibly, as limited liability applies only when they abide by the rules.

Why consider a creditor’s voluntary liquidation rather than compulsory liquidation?

Handling Company Shareholders

A creditors’ voluntary liquidation (CVL) requires a shareholder resolution, which requires a minimum of 75% shareholder approval, to consider liquidation and commence the insolvency process with an IP.

Calling a meeting allows directors to fully explain the situation to shareholders and receive any valuable input relating to the process. Furthermore, this will demonstrate to shareholders that you are taking initiative concerning the company’s current difficulties.

For further details on creditors’ voluntary liquidation, please read ‘What is a creditor voluntary liquidation’ and ‘Commencing the process of liquidation’.

Preparation

Once you have accepted, your business will require liquidation. You then planned time rather than an unplanned enforced liquidation to prepare.

Directors may then curtail creditors’ losses or capitalise quickly on stock and assets, generating a greater return.

However, compulsory liquidation can occur at any time, and as soon as the company begins, complete control remains in the ultimate control of the appointed liquidator.

Voluntary Or Compulsory Liquidation – Appointing the Liquidator In  A CVL

If you undertake a CVL, directors can choose the liquidator (they must be an IP).

As the liquidator takes control of all the company’s property on the appointment, directors should choose the correct insolvency practitioner as the liquidator.

Compulsory liquidation requires the court to appoint the official receiver. However, this process excludes the directors from having a say on whom the court selects.

Protection for Directors

Once appointed, a Liquidator’s primary duty is to investigate the management conduct of former directors.

Therefore, HBG Advisory wants to remind company directors to seek help as early as possible to avoid misconduct claims. 

IMPORTANT! You understand your Director’s duties & responsibilities.

If you and any other directors take the initiative to put the company into liquidation at an early stage of the company’s insolvency, what would happen? In that case, the liquidator is less likely to criticise the directors for practising best endeavours to protect the creditors. Many directors believe trading may improve the situation. Sadly, if this is not the case, then shouts of misconduct and personal liability claims abound, even disqualification.

Acting as a director of a financially distressed company can be pressing. Often, you feel your world is imploding with creditors of the business chasing forcefully for payment. You may face personal liability over guarantees you may have given the company. Therefore, act carefully, especially when treating your guarantee in favour of another creditor. Understand your ‘Directors Liabilities‘.

Once a liquidator is appointed, the business’s creditors legally refer all queries to the liquidator, not the directors. This differs from compulsory liquidation over the timing, as creditors using pressure do not stop until the compulsory liquidation commences.

Voluntary Or Compulsory Liquidation Of A Company – Restricting Reputational Damage 

  • Insolvent liquidations remain advertised in the public domain. However, a CVL attracts less public censure.
  • Compulsory liquidations require advertising in ‘The Gazette‘ before the court hearing, a winding-up petition heard. Therefore, it is evident to the world that the company has been forced into liquidation by its creditors.

Whereas a creditors’ voluntary liquidation requires no court hearing, the decision is also made by the company’s directors and not orchestrated by an aggrieved creditor, saving credibility for those concerned in the future.

Placating Company Creditors

Opting for a CVL permits directors to improve the company’s position before liquidation commences, hopefully improving returns for creditors compared to compulsory liquidation.

A creditors’ voluntary liquidation also allows directors to speak to company creditors during the creditors’ meeting. Consequently, you can talk them through the situation and your actions, reducing the desire to raise misfeasance claims or other acts of director misconduct if your actions remain acceptable. This is vital if you wish to open a new company moving forward.

You do not have this opportunity with compulsory liquidation.

Purchasing Assets from your Company.

Suppose you are contemplating establishing a new company with the same or similar trade to the insolvent company. In that case, you may consider buying the company’s assets in a pre-packaged sale. 

Company directors may discuss this with the IP before commencing the liquidation. Would a pre-pack liquidation be best?

However, directors may purchase assets through compulsory liquidation, a much longer and more complex process.

Care is needed when choosing your new company name.

CVL remains a quicker process for entering liquidation.

Upon agreeing with the proposed IP, the creditors’ meeting is convened within 14–21 days under a Creditors’ Voluntary Liquidation. The process is considerably longer in compulsory liquidation.

CVL Is A Cheaper Alternative

The fees for compulsory liquidation are generally higher, payable to the Secretary of State, and not required in a Creditors’ Voluntary Liquidation.

Why Choose Voluntary Rather Than Compulsory Liquidation? Help is at hand.

If you have any questions or concerns about the points raised on this page, please do not hesitate to contact us. Please contact HBG Advisory, as detailed at the foot of this page, for advice on ‘How do I liquidate my company‘.

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