Compulsory Liquidation vs Creditors Voluntary Liquidation. What is the Difference?

Sometimes the difficulties we experience within a company can only lead to one thing: closure. And when it comes to the inevitable, it is the directors responsibility to owe a duty of care to the company’s creditors. So, whilst both Compulsory Liquidation and Creditors Voluntary Liquidation are both insolvency processes, it is hugely important to know the difference between them both, for the implications as you as a director and for your company.

What is Compulsory Liquidation

Compulsory Liquidation (or ‘winding up’) occurs when a company can no longer afford to pay their bills or settle debts. This results in creditors taking legal action and forcing the company to liquidate and recover monies due to them. In most instances, Compulsory Liquidation is instigated by the creditor of the company by issuing a ‘winding up’ petition (WUP) in court, and if successful the company is forced into liquidation and its assets sold to repay outstanding debts. Most of the time an Official Receiver (government official) will take the place as liquidator to freeze bank accounts and handle recovery, however in certain situations an insolvency practitioner can replace the Official Receiver.

When does Compulsory Liquidation occur?

Creditors can only issue a ‘winding up’ petition in court if your company owes them over £750, and demonstrates the company cannot pay within 21 days of formally requesting a payment. However, as a temporary measure arising from the Coronavirus Pandemic, the limit between 1 October 2021 and 21 March 2022, has been increased to £10,000. This process can be an extremely serious and expensive step for the creditor, so a WUP is considered as an absolute last resort.

However, once a WUP has been served to your company you have a short window and nothing can be done to reverse this. Furthermore, Compulsory Liquidation is a very public process. The petition is advertised in The Gazette and the court hearing is a public hearing.

What is Creditors Voluntary Liquidation (CVL)

Creditors Voluntary Liquidation or CVL is appropriate where a company is insolvent, not capable of being rescued and the business is no longer considered viable. And unlike Compulsory Liquidation, it is not forced upon, but rather instigated by the company directors’ with the assistance of an insolvency practitioner. Due to being voluntary, the courts are not involved, and there is no Official Receiver appointed. Instead, the duty of the liquidator (insolvency practitioner) is to realise the company’s assets for the benefit of the company’s creditors, as well as investigate the directors’ conduct for disqualification purposes. This is all done to avoid consequences with stakeholders.

If you wish to voluntarily close in a tax-efficient manner and time to prepare for the future, then CVL is a good route to take and we can take you through these steps. Whilst liquidation isn’t ideal for any business, it allows the company director to fulfil their statutory obligations with regard to their creditors. At the end of the day, the director of the company can prioritise their interests and reduce overall financial losses.

What is the difference between them?

The predominant difference between Compulsory Liquidation and CVL, is CVL is more commonly used by directors, whereas Compulsory Liquidation is utilised by creditors. As a CVL is instigated by shareholders and directors of a company, it allows more control from liquidation as well as all the affairs in order. Compulsory Liquidation on the other hand is handled by the Official Receiver and is forced upon you.

What is the best route for you? Should I wait to be wound up?

It is always better for directors to take the initiative where they believe liquidation is inevitable, in order to safeguard company creditors and for protection. Not doing anything can worsen your position. And as a director of a company there are certain legal obligations and responsibilities towards creditors. There are many risks concerned if Compulsory Liquidation has been called upon to you, for instance:

  • Credit rating may be badly affected
  • Unprofessional view taken upon banks, accountants and solicitors
  • Accused of wrongful or fraudulent trading

On the flip side, a CVL gives you time to discuss liquidation with an insolvency practitioner, such as ourselves at Connect Insolvency.

Overall, if you are concerned about your company finances and are considering liquidation, our team of licensed insolvency practitioners are here to help and talk you through your options.

Our 3 Rescue Options For You

If you are experiencing financial difficulties, obtaining early professional advice is essential. Of course, reasons for experiencing financial difficulty can be wide ranging, and whether you are struggling to make payments, suffering bad debts or experiencing the loss of a major contract, you shouldn’t have to do it alone. We are here to help, and depending on the severity of the situation, we can offer a few different options to give you or your company the best possible chance of avoiding formal insolvency. Read on if you are here to take back control of the situation and put the worry behind you.

Here at Connect Insolvency, we have three rescue options: Administration, Company Voluntary Arrangement (CVA) or Informal Arrangement/ Time to Pay. The right option for you however will all depend on the seriousness of your situation. Here we will take you through them.

Administration

Going into administration is when a company is put under the management of a licensed insolvency practitioner, and takes control of the company’s affairs from its directors. It is a powerful process for gaining control, allowing the company time to reorganise its affairs or realise its assets in a more orderly fashion than a closure option. However, to be able to go into administration, the proposed administrator has to be satisfied that the current objectives can be achieved:

  • Rescue the company
  • Achieve a better result for the company’s creditors
  • Distribute the proceeds to preferential creditors

Administration is one of the first options to consider before Company Voluntary Arrangement or liquidation, and whilst the administrator will take over management they will do it in the best interests for your company.

Company Voluntary Arrangement (CVA)

If your situation is a bit more serious, then Company Voluntary Arrangement may be the way forward for you. It is seen as the best rescue tool for a company that is viable for going forward, but burdened with debt. Often referred to as a CVA, it allows the directors of a company to remain in control and put forward a proposal to its creditors, addressing the problems and highlighting that you will be able to pay off debts in the future. The proposal will be considered by both the company and its creditors. It is typically agreed for the company to make monthly contributions of any agreed amount and period. In a nutshell, the company is in a legally binding agreement with the creditors, paying off its debts over a certain period of time. This can last anywhere from 3-5 years. There can be multiple benefits of CVA, for instance:

  • Stop pressure from Tax, VAT and PAYE
  • You do not have to say your company is in a CVA with your customers
  • Improves cash flow quickly
  • Not publicly announced

Informal Arrangement. Time to Pay

Last of all, the Time to Pay arrangement will only be accepted if HMRC is satisfied with a proposal you have negotiated. In other words, a debt repayment plan for your outstanding taxes and debt. The proposal should support evidence that the business is able to pay off the debts in time, as well as a steady cash-flow, a viable business model and no previous history of not making tax payments. Here at Connect Insolvency we can help you assess whether your proposal is viable, assist in drafting the proposal and also negotiate with creditors such as HMRC on your behalf. If successful, it will be agreed that you can pay back debts and taxes over 6-12 months. However, not all businesses will be accepted, and it is understandable that HMRC is not willing to offer payment plans to high risk businesses.

So, give us a call or get in contact with one of our team members if you feel that one of these options is suited for you. Many companies suffer through financial difficulties, and we strive to be the best insolvency practitioners Newcastle has to offer and help you through this hard time.