When a company is indebted to creditors and has no reasonable prospect of being able to escape debt the only inevitable outcome is liquidation and dissolution. There are two ways a company can be liquidated and put out of business – voluntarily through a voluntary liquidation, or involuntarily in a compulsory liquidation forced upon the company by its creditors.
There are two types of voluntary liquidation – creditors' voluntary liquidation (CVL) and member's voluntary liquidation (MVL); however the latter can only be used when a company is in a solvent state (able to meet its financial obligations).
If you're eligible to initiate an MVL, which would require you to draft a sworn declaration of solvency, then you wouldn't have to worry about a compulsory liquidation, as creditors can only force a compulsory proceeding if you owe them an amount greater than £750 and have failed to comply with a demand for payment of the debt, or if they already have a County Court judgment against your company.
Therefore, if you're thinking about entering into liquidation voluntarily because your company is too indebted to recover then an MVL would not be of consideration, leaving only a CVL to be compared with the alternative option of waiting until creditors take you to Court for compulsory liquidation.
Most directors that are managing a failing business wonder why they should take the initiative to initiate a CVL voluntarily when they could simply wait for a creditor to start the liquidation process for them. After all, in a CVL you would have to cover the cost of paying the liquidator and you have to put forth the effort to start the process.
The main benefit that a CVL carries over a compulsory liquidation is that it gives you a better opportunity to prepare and provides better protection from accusations of misconduct. Although a CVL is a bit more costly from a director's perspective (considering the cost of liquidator's fees), if you wait for creditors to send your company into compulsory liquidation the financial and career consequences could be far more costly in the long-term, not to mention the extra hassle you'd have to deal with.
When you wait for creditors to bring you to Court you run a higher risk of being accused of wrongful or fraudulent trading, both of which are offences that are penalised by fines, personal liability for company debts, and even directors' disqualifications in severe cases of misconduct. In a CVL you'll have time to discuss the liquidation with the insolvency practitioner you'll be appointing as liquidator, which means you'll have the chance to prepare with their guidance, thereby minimising the possibility of making any mistakes that could be construed as misconduct.
If you have any questions about voluntary or compulsory liquidation please feel free to contact us for professional guidance. You can also call us on 0800 644 6080 for a free phone consultation. We'll discuss your case and help you determine a suitable course of action to either facilitate a recovery or simplify the winding up process.
16th January 2017 A construction business based in the Yorkshire city of Hull has been forced into administration after suffering sizable losses in recent quarters.
12th January 2017 A list of the 10 most curious and least persuasive excuses given by employers for failing to pay their staff the National Minimum Wage has been published by HM Revenue & Customs (HMRC).
6th January 2017 Colson Castors and Colson International has been entered into administration after being unable to maintain a viable financial position in recent weeks.
4th January 2017 The travel and package getaways company All Leisure Holidays has stopped trading and called in administrators after succumbing to financial crisis.
20th December 2016 The number of British businesses surviving by only paying off the interest amounts on their outstanding debts rose sharply in recent quarters.
Every day we help companies just like yours turn things around against seemingly impossible odds, regardless of your situation we can help. Find your nearest office today.