Regardless of the type of Liquidation, both processes will be overseen by an Insolvency Practitioner (IP) or an official receiver.
An insolvent company’s property, assets, and holdings will be sold during both types of Liquidation, with proceeds being used to settle debts to creditors.
So, whether the Liquidation is voluntary or compulsory, the end result is the same: creditors are paid as much as possible, and the company then ceases to exist after it is struck off the Companies House register.
(You might also find this post looking at how to liquidate a company helpful).
What happens in a Compulsory Liquidation?
Compulsory Liquidation is the process used by a creditor (someone who is owed money by a business) to force an insolvent company into Liquidation – in an effort to make it pay back what it owes to them.
Sometimes known as Winding Up, Compulsory Liquidation is a procedure under the Insolvency Act and is usually led by a creditor pursuing the company for money.
A company’s insolvency usually is evident if it cannot pay its creditors on time. But, first, the dissatisfied creditor will present an application to wind up the company.
It’s worth noting that even after the Compulsory Liquidation process has started, there may still be enough time to implement Creditors Voluntary Liquidation. However, this is initiated by its directors rather than by its creditors.
At Future Strategy, we will outline all the options available and let you decide which is best for you and your business.
What happens in a Creditors’ Voluntary Liquidation (CVL)?
A Creditors Voluntary Liquidation (CVL) is a formal procedure voluntarily implemented by the directors of a company deemed to be insolvent.
A CVL could be the only course of action if a company doesn’t have enough money to pay all its debts, and it is one of the most common ways for directors and shareholders to deal voluntarily with insolvency.
A CVL is typically started by directors, who agree to convene meetings of shareholders and creditors and discuss placing the company into Liquidation.
Once this course of action has been agreed upon, the company’s directors will bring in an Insolvency Practitioner (IP) to deal with the CVL.
Once appointed by members and creditors, the IP has three main objectives:
• To realise the assets of the company.
• To agree claims of creditors of the company.
• To investigate the affairs of the company and the directors’ conduct.
A CVL is appropriate when the company is deemed insolvent and when it does not appear viable, even after restructuring.
Contact the Future Strategy team now if you think your company might require a Creditors Voluntary Liquidation.
When should a Company initiate a Creditors’ Voluntary Liquidation (CVL)?
When a company is in too much debt to recover through recovery procedures such as financing, administration, or a Company Voluntary Arrangement (CVA), it may be that a CVL is the only viable course of action.
Once you know your company is insolvent, it’s crucial to take swift action to avoid making your position with creditors worse.
After all, the company’s debt will only increase the more you postpone the process, therefore leaving directors at greater risk of being held personally reliable.
Directors aren’t usually held liable when a limited company cannot settle debts, but they might be made to contribute the company’s assets if they are found guilty by the court for wrongful trading.
What happens next?
It’s undoubtedly a stressful time for directors of a company facing the prospect of Liquidation, either through forced or voluntary means.
You can avoid most of this stress if you appoint an experienced IP to handle the process on your behalf.
Contact the Future Strategy team today if you face possible compulsory liquidation and want to know more.
Further Reading On Liquidation and Limited Companies:
Some more great resources to help you manage your business: