What Is The Difference Between Compulsory Liquidation And Voluntary Liquidation (“CVL”)? The key difference between Compulsory Liquidation and Voluntary Liquidation is in a Compulsory the process is usually started by a creditor and controlled by the court, whereas in a CVL the directors initiate the process, not the court. There is no difference between the key purpose of both forms of Liquidation which is to realise assets to enable a distribution to be made to creditors.
Liquidation is separated by two types of procedure: Compulsory Liquidation and Voluntary Liquidation. Both Compulsory and Voluntary Liquidation procedures involve the appointment of a Liquidator to oversee and control the process. Liquidation is the orderly winding up of a company’s affairs where trading has ceased. It is a formal legal process approved by Part IV of the Insolvency Act 1986.
This article concentrates on insolvent companies. For consideration of the difference between solvent and insolvent Voluntary Liquidation, you can explore that in our article Difference Between Members And Creditors Voluntary.
Who Initiates The Compulsory Or Voluntary Liquidation?
In a Compulsory Liquidation, the process is usually initiated by a creditor that is owed money by them issuing a Winding Up Petition to Court to obtain the Compulsory Order. Directors and Shareholders can also deploy this procedure but it is certainly not the norm. They will normally use the Creditors Voluntary Liquidation procedure.
In a Voluntary Liquidation, it is the Directors who will start the process. Whilst the creditors might act as the trigger for the Directors to go and see an Insolvency Practitioner and take advice on going into Liquidation; it is a process that requires the Directors to get the ball rolling.
How The Compulsory Or Voluntary Liquidation Is Implemented
In a Compulsory Liquidation once the Winding Up Order has been made by the Court in the first instance the Official Receiver (a civil servant employed by the government agency called the Insolvency Service) is appointed as the Liquidator to wind up the company. It is possible for creditors to replace the Official Receiver with An Insolvency Practitioner as the Liquidator.
In a Voluntary Liquidation, the Directors will nominate an Insolvency Practitioner to be the Liquidator and in most cases, that person will be approved by the creditors at a Decision Procedure to vote on that person to be appointed.
Loss Of Control Of The Company
In a Compulsory Liquidation, the Directors lose control of matters early on. In comparison with a Creditors Voluntary Liquidation, it is not until the company goes into Liquidation that the Directors lose their powers.
In a Compulsory Liquidation, Section 127 of the Insolvency Act 1986 intrudes to in effect stop any disposition by the Directors of a company’s assets without applying for a Validation Order from the Court. This does not apply in a Voluntary Liquidation leaving the Directors with greater freedom to decide what they do with the assets of the company right up to the point of Liquidation. However, Directors will still have to have proper regard for the Creditor Duty if they deal with the assets.
Risk Of Directors Being Investigated
There appear to be some suggestions and or beliefs that Directors in a Compulsory Liquidation are at greater risk of being investigated. That is neither necessarily the case nor should it be.
An investigation of the conduct of Directors is undertaken in every insolvent Liquidation. It is the performance of Directors’ Duties that determines whether there will be any Director Disqualification Proceedings, not the type of Liquidation procedure that has been used.
In both types of Liquidation, the books and records of the company are to be obtained and reviewed along with obtaining responses to questionnaires from the Directors on matters such as the cause of the company’s failure. For more information on these, you can read the article What Investigations Does A Liquidator Undertake?
Cost Of Liquidation Procedure
In a Voluntary Liquidation, the fees for putting the company into Liquidation are usually paid either by the company itself or the Directors.
Whereas in a Compulsory Liquidation, the costs of the Winding Up Petition are usually paid for by the creditors instructing lawyers and then claimed back as an expense of the Liquidation. There is no guarantee the creditor will have those fees refunded.
Liquidation Expenses
In a Compulsory Liquidation, there will be additional fees for the Official Receiver that are not part of the Voluntary Liquidation process. Those fees will be banking fees but also the costs of the Insolvency Service itself. Those fees and expenses are set out in legislation and creditors have no control over voting on the same.
In a Voluntary Liquidation, there will be banking fees but the fees of the Insolvency Practitioner acting as the Liquidator will be a matter determined by creditors.
Is A Voluntary Liquidation Better For You Than A Compulsory One?
The answer to the question is a Voluntary Liquidation better than Compulsory Liquidation is it depends.
In many respects overall the two procedures can be similar but they might have different practical implications.
If there is no money in the company and the Director has no access to funds to pay for a Voluntary Liquidation then there often might be nothing else to do but wait for a creditor to wind up the company through a Compulsory Liquidation.
A Director who is looking to buy the assets of their company if it goes into Liquidation may find the process more streamlined and accessible if they have appointed a Liquidator in a Creditors Voluntary Liquidation compared to having to deal with the potentially lengthy delays that might arise from a Compulsory winding up process.
The Liquidation of a company is not meant to affect someone’s personal credit rating. However, it is always open for anyone looking to lend credit to another person to review their Companies House filing history.
Credit providers, customers and suppliers will all be able to see if you have had a company that went into Compulsory Liquidation. It then is a matter of perception. Some credit providers for example may look upon someone less favourably who has been pushed into Compulsory Liquidation as opposed to the Director who took positive steps to winding up the company via the Creditors Voluntary Liquidation route.
