Compulsory Liquidation Vs. Creditors Voluntary Liquidation (CVL)
For all intents and purposes, regardless of whether an insolvent company is placed into a CVL (Creditors Voluntary Liquidation) or a compulsory liquidation, the outcome is the same; the company must cease to trade and the company will enter a liquidation process. In both processes, the assets will be sold and the affairs of the company and the conduct of the directors will be reviewed.
There are however many differences between the two processes, and we have summarised a few below.
The Process Of Placing The Company Into Liquidation
When a company enters a creditor’s voluntary liquidation, the process is instigated by the board of directors who follow the guidance of a licensed insolvency practitioner. A company can be placed into CVL with as little as 14 days’ notice to ensure that the position of creditors is not worsened. For more information on how to place a company into voluntary liquidation, click here.
In contrast, a compulsory liquidation requires a creditor to apply to Court for the company to be wound up. When the petition is served, the Court set a hearing date to consider the application. This is often weeks after the petition is served and at the cost of the creditor. This can cause catastrophic difficulties for the company and its ability to trade after a petition is served can be hindered.
Who Deals With The Liquidation?
A company can be placed into a CVL process with the assistance of a licensed insolvency practice, like us. Once instructed, the Insolvency Practitioner will assist the directors in convening a meeting of shareholders and a decision of creditors to place the company into liquidation and to appoint a Liquidator. Typically, the Insolvency Practitioner instructed by the directors will become the Liquidator.
In a compulsory liquidation, the case is passed to the Official Receiver (a government department) to administer. The Official Receiver is immediately appointed as Liquidator but can decide to pass the liquidation to an external Insolvency Practitioner if they deem it appropriate or if it is requested by creditors.
Costs
The cost of placing a company into CVL is often agreed in advance with the company directors. If the company has assets, the Liquidator will seek a resolution from creditors for these costs to be paid as an expense of the CVL. If the company has no assets, sometimes the directors will be asked to cover these costs. The cost of placing a company into CVL can range from £3,000 to £10,000 plus disbursements and VAT depending on the size and complexity of the case. If you would like us to quote on your CVL, please use our online quoting tool.
Once appointed, the Insolvency Practitioner will also ask creditors to vote upon the basis of their remuneration for dealing with the liquidation process. If there are no assets realised, these costs are not paid.
In contrast, the costs of placing a company into compulsory liquidation are paid by the petitioning creditor. They will seek to recover their costs as an expense of the liquidation if there are sufficient funds to pay them. The Official Receiver charges a ‘general fee’ and an ‘administration fee’ upon their appointment totalling £11,000 which is paid from first realisations.
The Official Receiver in their capacity as Liquidator will also charge a fee equivalent to 15% of all assets realised. If the job is then subsequently passed to an external Insolvency Practitioner, there will be an additional layer of costs to be paid.
As such, the costs of a compulsory liquidation can be significantly higher than those incurred in a CVL.
Implications For Creditors
Creditors are often placed in a worse position when a company enters a compulsory liquidation, as opposed to a CVL, due to:
- Their financial position worsening from the date the Winding Up Petition is served until the date the company is placed into liquidation.
- Them having to pay the costs of the Winding Up Petition.
- The increased costs of the liquidation process reducing the prospect of a return to creditors.
Implications For Employees
When a company is placed into an insolvency process, it enables former employees to lodge claims with the Redundancy Payments Service for any statutory employment entitlements. This could result in significant payments to them from the National Insurance Fund.
The ability of a company to trade is significantly hindered when a winding up petition is served. It could then be weeks or even months until the company is actually placed into liquidation. Therefore, the compulsory liquidation route may delay employees being able to claim what is due to them.
In a CVL, the Insolvency Practitioner will advise the former employees of their rights immediately and guide them on how to lodge claims with the Redundancy Payments Service. The process of placing the company into liquidation is quicker and so is the timing of the payment to employees.
Implications For Directors
A director has a statutory duty to act in the best interest of creditors when a company is insolvent. When a Liquidator is appointed they have a duty to review the conduct of the directors and consider whether they fall foul of the various provision set out within insolvency legislation, including wrongful trading and fraudulent trading provisions.
There is a perception that when the directors have taken the process of placing a company into liquidation into their own hands (i.e. a CVL), they have done what they can to ensure that the position of creditors does not worsen. Due to the delays in placing a company into compulsory liquidation, there is a greater chance that a wrongful trading or fraudulent trading action will succeed. This could result in personal liability for the directors.
Notwithstanding the above, dealing with the prospect of being wound up in Court is a long and stressful process. If there is a suggestion that a creditor may issue a winding up petition against your company, you should speak to us immediately to understand your options. There are various statutory options that can save your business. Ultimately, if a liquidation is required, a CVL process is faster, we (the Insolvency Practitioner) take on the burden of liaising with your creditors and the whole process can be initiated ‘out of court’.
If you would like some more information in respect of differences between a CVL and a compulsory liquidation process, please contact us. We are here to help.
