Why Is Voluntary Liquidation Preferable To Compulsory Liquidation?
When financial difficulties arise, business owners and company directors will be faced with tough decisions. If your company is in this position and unable to meet its financial obligations, liquidation is likely the next step.
There are two main ways to liquidate an insolvent business: voluntarily through a Creditors Voluntary Liquidation (CVL) or forcibly through compulsory liquidation. While both result in the closure of the company, voluntary liquidation provides significant advantages that can make the process smoother and less damaging, both for you as a director, and for other stakeholders affected by the process. Let’s explain further…
What Is Compulsory Liquidation?
First things first, it’s important that you understand the difference between the two processes we’ll be discussing in this article. Compulsory liquidation occurs when a company is ordered to wind up by the court, usually following a petition filed by a creditor, such as HMRC, due to unpaid debts. If the court grants a winding up order against your company, an Official Receiver takes control. You will lose any authority you hold over the business as a director and may be subject to further scrutiny while the company is liquidated under court supervision.
What Is Voluntary Liquidation?
In contrast, a voluntary liquidation process allows company directors to choose to wind up their company before compulsory liquidation may be initiated. There are two types of voluntary liquidation, but, for the purposes of this article, we are discussing Creditors Voluntary Liquidation (CVL) as this is the form of voluntary liquidation applicable when a company is insolvent.
If your business is struggling to pay its debts and there is no viable route to recovery, a CVL enables you to appoint a licensed insolvency practitioner to manage the closure. They will handle asset sales, distribute funds to creditors in the correct order, and ensure all legal obligations are met.
Advantages Of Voluntary Liquidation Over Compulsory Liquidation
While liquidation is never an easy decision, choosing to enter a CVL rather than waiting for a creditor to force compulsory liquidation can make a significant difference. Here’s why voluntary liquidation is the better option:
More Control Over The Process
One of the biggest benefits of voluntary liquidation is the ability to maintain a degree of control at an otherwise uncertain time. By choosing a CVL, you can appoint a chosen licensed insolvency practitioner rather than having an imposed Official Receiver. This typically results in a more structured winding-up process with greater transparency.
Reputation Management
Being forced into liquidation by creditors can severely impact your professional reputation and future business prospects. Voluntary liquidation, however, shows that you have taken responsible steps to address the company’s financial difficulties. This proactive approach can help to preserve your credibility and also reduce the risk of further scrutiny from regulatory bodies. While the appointed insolvency practitioner will still investigate director conduct in the CVL process, their ultimate aim is simply to find out what caused the insolvency, not immediately put the blame on directors.
More Favourable Outcomes For Creditors & Employees
In most cases, a CVL will lead to better financial outcomes for creditors and employees. Because the process is managed in an orderly manner, assets can be sold strategically to maximise returns and therefore give the best return to creditors. Employees may also receive redundancy payments and other entitlements once secured creditors are paid.
Lower Legal Costs
The compulsory liquidation process involves a number of costs, including court proceedings, additional legal expenses and even creditor disputes. This means that it can be a significantly more expensive way of liquidating a business when compared to voluntary liquidation.
Better Future Outlook
In certain circumstances, voluntary liquidation can provide an opportunity for company directors to restructure or restart under a different entity. If done correctly and within legal guidelines, a CVL may allow you to purchase company assets and operate the business under a different name. However, it is still important to note that there are strict guidelines regarding being a director of another company after liquidation which you must be aware of before taking any action.
Explore Your Liquidation Options With My Liquidation
If your business is struggling with insolvency, voluntary liquidation undoubtedly offers a better route to closure with greater transparency, control, and better outcomes for all involved. This means that it is crucial to act quickly and explore your options before the decision to opt for voluntary liquidation is taken out of your hands.
At My Liquidation, our licensed insolvency practitioners are on hand to provide you with expert guidance and support when faced with company insolvency. Don’t bury your head in the sand – get in touch with our team today to discuss your situation and take the first step towards a structured resolution via voluntary liquidation.
