When a limited company enters a liquidation process many often fail to distinguish what type of liquidation it is or understand what the difference between a compulsory & voluntary liquidation is.
The short version is that a company may either be placed into liquidation voluntarily (i.e. a voluntary liquidation) or be forced into liquidation (i.e. a compulsory liquidation). We’re going to take a look at these two different types of Liquidation and explore the practical differences between the two processes.
As the name would suggest, voluntary liquidations are carried out when the Directors of a company choose to close the business of their own volition. There are, however, two types of voluntary liquidation, one for solvent companies and the other for insolvent companies. The process of closing down a solvent company is known as a ‘Members Voluntary Liquidation’, or ‘MVL’, while the closing of an insolvent company is called a Creditors Voluntary Liquidation, or ‘CVL’. You’ll find a break down of both below.
Solvent – Members Voluntary Liquidation (MVL)
When a limited company is no longer required, maybe due to the company fulfilling its purpose or the owners looking to retire, the directors can instruct a licensed insolvency practitioner to place the company into a members voluntary liquidation process. This is otherwise referred to as a ‘solvent liquidation’.
The role of a Liquidator in an MVL process is to realise the assets, pay off any creditors and then distribute surplus funds to shareholders in the most tax-efficient way before applying for the company to be dissolved. Sometimes company directors prefer to simply make a striking off application instead. For more information please read our previous article, MVL Vs Strike Off – Which is Better for Solvent Companies?
Insolvency – Creditors Voluntary Liquidation (CVL)
If a limited company is unable to pay its liabilities as they fall due, i.e. insolvent, the directors have a duty to act in the best interests of creditors. If this applies, it would be appropriate for a director to seek professional advice, from an insolvency practitioner, for example, to understand their options.
Sometimes it may be possible to implement a rescue procedure and save the business, however, sometimes it is necessary to cease to trade and seek to place the company into a creditors voluntary liquidation.
The role of a Liquidator in a CVL process, broadly speaking, is to realise the assets of the company, investigate the financial affairs of the company and the conduct of the directors, and ultimately maximise the prospect of a return to creditors pursuant to insolvency legislation.
Despite a CVL being the most appropriate option to close an insolvent company, sometimes directors opt to apply for a striking off instead. This may be due to the company or its directors having insufficient funds to pay the costs of placing a company into CVL. For more information please read our previous article, CVL Vs Strike Off – Which is Better for an Insolvent Company.
In contrast, when a company is placed into compulsory liquidation the decision is taken out of the hands of the directors.
A company is placed into a compulsory liquidation when a creditor applies to Court for a company to be wound up using a Winding Up Petition. A Winding Up Petition is not ordinarily received ‘out of the blue’, it will often follow attempts from creditors to collect the debt, the issuing of CCJs, High Court Enforcement Officer (bailiff) visits, or the expiration of the period set out within a statutory demand. For more information on this process and the implications of receiving a Winding Up Petition, please read our article entitled – Winding Up Petitions – Why Urgent Action is Required. A company enters compulsory liquidation when the Court grants a Winding Up Order.
There are similarities in the situations that might lead to either a CVL or Compulsory Liquidation, as well as some subtle differences in the consequences of each. We often get asked what the practical differences between the two are, so we’ll be taking a closer at the differences between a CVL and a Compulsory Liquidation in our next article.