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Compulsory vs Voluntary Liquidation ‐ what’s the difference?

It was recently reported that in 2014 HMRC applied to shut down 3,000 businesses due to unpaid tax bills. Of the 3,000 winding up petitions served, HMRC were successful in closing 1,887 firms. Many of these firms will have allowed the action to take place whilst others would have sought to avoid this, possibly by initiating their own insolvency solution such as a Company Voluntary Arrangement (CVA) or Creditors Voluntary Liquidation (CVL).

When it comes to a company entering liquidation there are some important differences between the compulsory and voluntary routes, not least for the directors of the company. In summary:

A compulsory liquidation is forced upon an insolvent company by creditors seeking a winding up order from the Court. Once the order is made the company will cease to trade and the directors will be required to attend an interview with the Official Receiver, who is responsible for in investigating the background and circumstances leading up to the insolvency. A Liquidator (an Insolvency Practitioner) made also be appointed if the company has assets to recover – such assets will be used firstly to pay the costs of the liquidation, with any remaining funds being distributed to the creditors of the company.

A voluntary liquidation, known formally as a Creditors Voluntary Liquidation (CVL) occurs when the directors/owners of a company make a decision to close down the business and move on. This process involves the calling of meetings of shareholders and creditors to pass the appropriate resolutions and appoint a Liquidator, who is always an insolvency practitioner. Neither the Court nor the Official Receiver plays any role in a voluntary liquidation.

When would a creditor seek a Compulsory Liquidation?

HMRC will, given time, seek a compulsory liquidation in all cases where a company has not paid what is due to HMRC. This is primarily to ensure that the liability doesn’t increase further, as well as to make sure that an investigation takes place – this is why HMRC will often oppose an application to strike-off a company at Companies House, since they will want to ensure that the company is properly wound up and investigated. In contrast trade creditors and lenders will normally only consider winding up a company if they believe that it has sufficient assets to cover the costs of the winding up petition (which can be anything from £3,000 upwards), as well as provide some level of debt repayment through the Liquidation.

Any creditor who is owed £750 or more can apply for a winding up order against a company, although the lower limit is expected to be increased substantially later this year. Before applying to the Court for a winding up order a creditor needs first to make a formal demand (usually called a “Statutory Demand”) which is served on the company at its registered address. If the company does not respond to the formal demand (usually within 21 days) or come to an agreed arrangement to pay then the creditor can proceed to petition for a winding up order.

How can a Compulsory Liquidation Be Stopped or Avoided?

There are a number of ways for a company to avoid being taken into compulsory liquidation:

  1. By paying the debt owed to the petitioning creditor in full before the court hearing
  2. By defending the petition at Court, on the basis that the debt isn’t actually owed or perhaps on a technicality
  3. By successfully entering into a Company Voluntary Arrangement (CVA) with creditors
  4. By choosing to go into a Creditors Voluntary Liquidation (CVL) before the court hearing

If a Statutory Demand or winding up petition has been issued, then a company still has time to avoid compulsory liquidation, but it will need to act very quickly.

Why Choose a Voluntarily Liquidation rather than wait for a Compulsory Liquidation?

On the face of it, if a company is insolvent with no prospect of turnaround or recovery, then it might be tempting to sit back and wait for HMRC or another creditor to petition for the winding up of the company.

However there are some good reasons why the company’s directors should consider a voluntary liquidation instead:

  • By taking positive action the directors are properly fulfilling their role and obligations as officers of the company – this will reflect more positively when it comes to investigations into their conduct
  • In a voluntary liquidation the directors remain in control of the process and timings, and can ensure that the company is closed down in an orderly manner
  • To some extent directors will be able to influence the choice of Liquidator (although any proposed Liquidator will need the approval of creditors)

Bridgewood can help a company through the voluntary liquidation process, and make it as simple as possible, based on the following four key steps:

  1. The directors of the company discuss matters with an Insolvency Practitioner – all options are considered so that they can make an informed choice
  2. The company provides to the proposed liquidator details of its financial affairs including its assets and liabilities, so that the impact of liquidation can be properly assessed and a report prepared for creditors
  3. Meetings of shareholders and creditors are held and resolutions passed to take the company into liquidation and to appoint the Liquidator
  4. The liquidator takes control of the company. Any assets are realised into the liquidation and the affairs of the company leading up to the liquidation are investigated and reported on

There may be the opportunity for the directors to purchase the assets from the liquidator, possibly under a “pre-packaged” sale, and continue to trade through a new company

If one of your clients is facing compulsory liquidation, or appears to be insolvent, and wants to look into the options open to them, then we can be contacted on 0115 871 2921 or by email aftab.zahoor@bridgewood.co.uk

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