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.