Compulsory vs. Voluntary Liquidation: What You Need to Know

01 Dec 2020
Compulsory vs. Voluntary Liquidation: What You Need to Know

For businesses of all types, it is essential to learn the difference between compulsory and voluntary liquidation. While both types are insolvency proceedings, they have separate implications for your business.

What is the liquidation process?

Liquidation is an insolvency process where all the insolvent company’s assets are sold so that creditors will receive the proceeds. At the end of the liquidation, the company will be dissolved. Also, there will be an investigation into the director’s conduct and for possible fraudulent activity.

What are the types of voluntary liquidation?

As previously mentioned, the two main types of liquidation are compulsory and voluntary. There is also company liquidation, but we will focus here on compulsory and voluntary and the differences between these two processes.

What is compulsory liquidation?

If your company has acquired severe debt that it cannot pay, it will be at risk for a statutory payment demand. This is the final notice that your company receives to pay back its creditors before legal action is taken.

If your business does not respond to this demand or creditors do not receive payment, the creditor can then file a winding-up petition, which gets sent to the High Court. As a result, your company could end up being forced to be liquidated.

Out of all the kinds of liquidation, compulsory is the least preferable. It is an undesirable form of liquidation because it exposes your company or directors if wrongful trading occurred.

However, stopping a winding-up order is possible when you work with a qualified solicitor who can help you. Since this process can be quite challenging, many businesses that receive a winding-up petition will enter into an administration.

How to Avoid Compulsory Liquidation

If you want to avoid compulsory liquidation, there are several steps you can take. First, you should pay the debt if possible. You can also defend the court petition or enter a Company Voluntary Agreement (CVA). If you decide to join a CVA, choose it before your hearing, and with permission from the petitioner.

What is voluntary liquidation?

Voluntary liquidation is the process that starts when the owners and directors of a company have to close their business because they can’t pay back creditors. For this to occur, the company itself must be insolvent. To ensure the company is insolvent, a meeting must take place between the shareholders and creditors. During this meeting, they must come to the necessary resolutions and find a liquidator.

Also, the Court or Official Receiver is not involved in a voluntary liquidation. It is a much faster process than compulsory liquidation as well.

Which of the two types of liquidation is best for your business?

The most significant difference between compulsory and voluntary liquidation is that it depends on whether or not the process began due to the director. However, in both circumstances, the company will become insolvent with no hope of turning things around.

Compulsory liquidation is the least preferable process, as it reflects poorly upon the director. It shows that they were either oblivious or ignoring their business’ financial situation, making them liable for the debts. The process also takes much longer, so many people opt for voluntary liquidation.

Voluntary liquidation has the following benefits:

  • It shows that directors were acting with the creditor’s interests in mind, and will have a favourable outcome in a future investigation.
  • The process is quicker, so employees can obtain compensation from redundancy payments, whereas it can take up to a year in a compulsory process.
  • Directors can have a better handle on the process and close the business in a more organized fashion. This can be beneficial if they decide to start another company in the same industry.

Overall, many companies prefer voluntary liquidation if they have to go through either of the two processes.

If you own or run a business and are concerned about its financial state, you will want to work with a qualified team, such as Michaels Global Trading, who can make sure you dissolve your company in the best way possible. We can also provide you with unique advice for your company and suggest what avenues to take.

Our boutique firm has been helping companies of all sizes better manage their inventory and assets so that they don’t run into trouble during the liquidation process. Our professional liquidation services are of high quality, and we offer transparency when working with your business. We know that honesty and integrity are integral components when working together to form a mutually rewarding partnership. When you work with Michaels Global Trading, you can expect timely communication and for us to listen to your needs.

If your company has reached the liquidation process and you want to know more about what you can do, don’t hesitate to call us at 888-471-5066. We will ensure that the liquidation process runs smoothly, and we can help you achieve your goals.

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