Reviewed: 22nd August 2013
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.
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