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Difference Between Compulsory and Voluntary Liquidation

Liquidation is a formal insolvency process in which a liquidator is appointed to 'wind up' the affairs of a limited company.

There are a variety of reasons why a business might enter liquidation and this process can be instigated either by the company director(s) (voluntary liquidation) or by a creditor (compulsory liquidation).

Insolvent Liquidation

Compulsory liquidation occurs when a company cannot afford to pay its debts and a creditor or multiple creditors take legal action in pursuit of the money owed.

Voluntary liquidation generally happens under very similar circumstances with the key distinction being that an insolvent company’s directors decide to take their business into liquidation before the point at which they are forced to do so by creditors.

In both cases, liquidation is a consequence of being insolvent and having no realistic prospect of a viable business going forward – thus ruling out other formal insolvency procedures such as administration.

Types of Voluntary Liquidation

There are two forms of voluntary liquidation, which are described respectively as Creditors Voluntary Liquidations (CVLs) and Members Voluntary Liquidations (MVLs).

A CVL is a voluntary process but one that is essentially an admission on the part of a company’s directors that their business is no longer sustainable and is in fact insolvent. 

An MVL is quite different and it can function as a way for cash to be generated through the voluntary liquidation of a particular company. However, an MVL can only be pursued when a business is solvent and able to meet its liabilities. If your business is unable to pay its debts, a CVL is the only form of voluntary liquidation available as an option.

Why enter Liquidation Voluntarily?

An MVL is a means through which a company might be voluntarily liquidated to close a company in a tax-efficient manner. Often this will be when the directors of a group of companies decide that a particular aspect of their operation should be discontinued and liquidated despite its being solvent and viable.

But entering a Creditor’s Voluntary Liquidation can also be beneficial for a company and its directors. Among the main advantages of entering a CVL rather than waiting to be forced into liquidation are that a company can prepare more thoroughly for what the future might bring and directors are considerably less likely to stand accused of acting improperly. 

Director Duties

Acting as a director of a financially distressed company will often create dilemmas and deciding whether or not to enter liquidation voluntarily can be a very tough call to make. However, directors have a responsibility to admit as much when their company is insolvent and there are potentially very serious ramifications for anyone found guilty of operating a business they knew to be insolvent.

This often means that entering voluntary liquidation is a prudent course of action if you are leading a business that is unable to pay its debts and which will inevitably be rendered insolvent at some point in the future.

Even honest mistakes can be interpreted as misconduct when liquidation is entered on a compulsory basis and the result can be directorial disqualifications, fines and potentially the prospect of directors becoming personally liable for company debts once their actions have been investigated.

If you have any queries about the various liquidation processes or you would like further clarification on the distinction between voluntary and compulsory liquidation, you can contact any Begbies Traynor office around the UK. Our insolvency experts will be happy to help and offer a free initial consultation.

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