Why Choose Voluntary Rather Than Compulsory Liquidation
Why choose voluntary rather than compulsory liquidation? A question many company directors ask.
Being confronted with an insolvent liquidation is a problematic situation for a company director.
Serious consideration is required, particularly if you wish to set up a new company.
As a director, you must act responsibly and look after your primary concern? The creditors of the company.
Remember, limited liability will only apply if you abide by the rules.
It can be tempting to stand back, allowing a creditor of the company to commence liquidation by presenting a winding-up petition to the court.
However, directors like to maintain some control by voluntarily appointing a liquidator, utilising an insolvency process referred to as a ‘creditor’s’ voluntary liquidation’.
Choosing a creditor’s voluntary liquidation only applies to an insolvent company. However, if the company is solvent, then a Members’ Voluntary Liquidation (MVL) is the option. Additionally, directors should consider choosing a licensed Insolvency practitioner to act in a voluntary liquidation.
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% approval of the shareholders, to consider liquidation and commence the insolvency process with a licensed insolvency practitioner.
Calling a meeting allows directors to fully explain the situation to shareholders and receive any valuable input relating to the process. It also shows shareholders that you are proactive in dealing with their company’s difficulties.
For further detail on creditors voluntary liquidation, please read ‘what is a creditors voluntary liquidation‘ and ‘commencing the process of liquidation‘.
Once you have accepted, your business requires liquidating. You then planned time rather than an unplanned enforced liquidation to prepare.
Directors may then curtail creditors losses or capitalise money on stock and assets quickly, generating therefore a greater return.
However, compulsory liquidation can take place at any time, and as soon as the company begins, complete control remains in the ultimate control of the appointed liquidator.
Appointing the Liquidator
If you undertake a creditors’ voluntary liquidation, the company’s directors can choose the liquidator (they must be a licensed insolvency practitioner).
As the liquidator takes control of all the company’s property on the appointment, directors should choosing 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 a Liquidator is appointed, one of their primary duties remains to investigate the management conduct of the former directors.
Therefore, HBG Advisory can’t stress how important it is that company directors seek help as early as possible to avoid claims of misconduct by the directors.
IMPORTANT! You understand your Director’s duties & responsibilities.
Suppose you and any other directors take steps to put the company into liquidation at an early stage of the company’s insolvency. In that case, the liquidator is less likely to criticise the directors for practising best endeavours to protect the creditors. Many directors believe trading on 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 company director of a financially distressed company can be demanding. Often you feel your world is imploding with creditors of the business chasing forcefully for payment. In addition, you may face liability over guarantees you may have given to the company. If this applies, be careful how you act, especially treating your guarantee in favour of another creditor. For further expanded reading, please view ‘Directors Liabilities‘.
Once a liquidator is appointed. Creditors of the business refer all queries to the liquidator, not the directors legally. This differs from compulsory liquidation over the timing, as creditors using pressure do not stop until the compulsory liquidation commencement.
Restricting Reputational Damage
- Insolvent liquidations remain advertised in the public domain. However, creditors’ voluntary liquidations usually attract 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 voluntary decision is also 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 creditors’ voluntary liquidation (CVL) allows directors to improve the companies position before liquidation commences, hopefully improving returns for creditors of the company 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 if your actions remain acceptable to raise misfeasance claims or other acts of directors misconduct. 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, and a Pre-Pack Liquidation may be best?
However, directors may purchase assets with a compulsory liquidation. However, it’s a much longer and more complex process.
Care is needed when choosing your new company name.
A Quicker Process to enter liquidation.
Upon agreeing with the proposed Insolvency Practitioner, the creditors’ meeting is convened around 14–21 days under a Creditors’ Voluntary Liquidation. Whereas in compulsory liquidation, the process is considerably longer.
CVL is a Cheaper Alternative
The fees for compulsory liquidation are generally higher, payable to the Secretary of State, not required in a Creditors’ Voluntary Liquidation.
For further reading on compulsory liquidation, please read ‘what is a compulsory liquidation‘.
Why Choose Voluntary Rather Than Compulsory Liquidation? Help is at hand.
If you remain uncertain about any of the points raised on this page. Please contact HBG Advisory, as detailed at the foot of this page, for advice on ‘How do I liquidate my company‘.