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In a voluntary liquidation, liquidation is initiated voluntarily by the directors. A resolution is passed by the shareholders, and a qualified insolvency practitioner is appointed. A compulsory liquidation is a court-based procedure forced on the company and the Liquidator is either the Official Receiver or a qualified Insolvency Practitioner.
You are insolvent when you cannot pay debts as they fall due, or when your total assets are worth less than your total liabilities. The first is often referred to as ‘cashflow insolvency’ and the latter is often referred to as ‘balance sheet insolvency’. Even if a business is profitable, it does not necessary preclude the possibility of it being insolvent. A company can be insolvent because of a shortage of cash even while profitable, for instance when customers fail to settle their debts to the company, or when the company over-invests in marketing or equipment at the wrong time. These factors may mean that the company is unable to repay debts as they fall due, even though the business is otherwise healthy. It is imperative to seek proper advice from an insolvency professional at the first sign of warning that the business may be insolvent. Continuing to trade in the hope that things will eventually level out, is an all too common but highly detrimental mistake that directors make, and could result in being accused of wrongful trading, running the risk of financial ruin as they become personally liable for the debts of their business.
It is imperative that you recognise that it is YOUR DUTY as a director to take action to minimise the loss to creditors of your company. You must seek advice from a licensed insolvency practitioner at the first sign of warning to avoid further difficulty, who will be able to tell you what the best course of action will be. If it appears that cash-flow problems will be manageable in the long term and it is just for the time being that you are unable to repay creditors, you may be able to arrange additional financing like taking out a loan, chasing debtors, or selling assets which are non-essential to the business. It is also possible in some cases to come to a compromise agreement with creditors by revising terms of payment. Creditors will normally be more inclined to agree this when they are aware that the alternative may be an insolvency procedure in which they receive less or nothing at all. You should investigate all alternatives which are available and take appropriate steps before creditors take legal action against you.
Members' Voluntary Liquidation: This happens when the company is solvent. The shareholders place put the company into liquidation, and the assets within the company are distributed to shareholders. Creditors' Voluntary Liquidation: This happens when a company is insolvent. It entails a process whereby company shareholders decide to put the company into liquidation, but assets are insufficient to cover debts of the company. Compulsory Liquidation : This is what happens when the court issues a ‘winding-up order’.