Why Should I Choose A Voluntary Liquidation Before Being Forced into Compulsory Liquidation?

Being faced with putting a company into an insolvent liquidation is a difficult position for a director to find themselves in.

It can be tempting to bury your head in the sand and wait until one of the creditors forces the company into liquidation by presenting a winding-up petition to the court, it’s often better to take control and initiate a creditors’ voluntary liquidation.

You should note that a creditor’s voluntary liquidation is only appropriate when the company is insolvent. If the company is solvent and you are looking at winding it up via liquidation, a Members’ Voluntary Liquidation should be used.

So why should you consider a creditor’s voluntary liquidation over a compulsory liquidation?

Working with the Shareholders

A creditors’ voluntary liquidation requires a resolution with the approval of 75% of the shareholders before the process can begin.

This will give you the opportunity as a director to explain the situation fully to the shareholders and receive any valuable input they may have relating to the process. It also allows you to show the shareholders that you are taking a pro-active approach to the company’s problems, which might help with future relations.

Time to Prepare

As you are initiating the liquidation process, you will have the time to prepare for it.

This means the ability to take actions to reduce the scope of creditors losses or to capitalise money on stock and assets in a timely manner that is more likely to yield a better return for the company.

By comparison, a compulsory liquidation can come at any time and once it’s commenced, complete control of the company is handed over to the liquidator.

Appointing the Liquidator

If you undertake a creditors’ voluntary liquidation, the company’s directors are able to choose the liquidator (they must be a licensed insolvency practitioner).

As the liquidator takes control over all of the company’s property on appointment, the decision of which liquidator to appoint is an important one that should not be taken lightly.

In a compulsory liquidation, the court appoints an official receiver and the directors have no say at all in who this will be.

Protection for Directors

Liquidators are obliged to investigate the conduct of the directors prior to the liquidation.

If you and any other directors take steps to put the company into liquidation at an early stage of the company’s insolvency, the investigation by the liquidator is less likely to find you guilty of the types of misconduct for which you can be personally liable, or which might lead to you being disqualified to act as a director in the future.

The insolvency practitioner appointed as a liquidator will also be able to give you advice before the liquidation process starts as to how to prepare for any investigations.

Easing a Stressful Situation

When you are the director of a business that’s in trouble, it can be very stressful. You can find yourself in a situation where you are being chased by creditors on the phone, by letter and email to pay bills that the company cannot afford to pay.

Once you’ve appointed a liquidator, the creditors can only to speak to them, which could save you a number of unpleasant conversations and letters before a compulsory liquidation is forced upon the company.

Limiting the Damage to Your Reputation

Insolvent liquidations are all a matter of public record but creditors’ voluntary liquidations receive less public coverage than compulsory liquidations.

Compulsory liquidations are advertised in The Gazette prior to the court hearing where the winding up petition is heard. It is therefore very clear to the public that the company has been forced into liquidation by its creditors.

In contrasting, a creditors’ voluntary liquidation does not require a court hearing. The fact that the decision was a voluntary one taken by the directors and not a hostile one forced by a creditor may have reputational benefits for you and the other directors.

Appeasing Creditors

As discussed above, if you seek a creditors’ voluntary liquidation, you will have more time to prepare the company before it goes into liquidation, which could mean a greater return for the company’s creditors than if the process was forced through a compulsory liquidation.

A creditors’ voluntary liquidation will also mean that you have the opportunity to speak directly  to the creditors during the creditors’ meeting. You can talk them through the situation and your actions, which may make them less likely to want to levy accusations of misconduct against you.

You do not have this opportunity with a compulsory liquidation.

Purchasing Assets

If you are considering setting up a new company with the same or a similar trade to the insolvent company, you may want to consider buying some of the company’s assets in a pre-packaged sale. This is something you could discuss with the insolvency practitioner prior to appointing them as liquidator.

It’s possible to purchase assets in this way with a compulsory liquidation but it’s a much lengthier and trickier process.

A Quicker Process

Once the Insolvency Practitioner has been chosen, the meeting of creditors can take place in around 14–21 days under a Creditors’ Voluntary Liquidation whereas the process can be much longer in a compulsory liquidation.

A Cheaper Option

The fees for a compulsory liquidation are generally higher, in part as fees have to be paid to the Secretary of State – this is not required in a Creditors’ Voluntary Liquidation so overall the costs are lower.

Need Advice About Liquidation?

If you want to talk to a member of the team about a creditors’ voluntary liquidation and how it might solve your situation, call us on 0208 444 2000.

Useful Resources

Creditors’ Voluntary Liquidation

https://www.gov.uk/liquidate-your-company/creditors-voluntary-liquidation

Compulsory Liquidation

https://www.gov.uk/wind-up-a-company-that-owes-you-money/overview

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