How Different Are Voluntary and Compulsory Liquidation Insolvency Proceedings?

How Different Are Voluntary and Compulsory Liquidation Insolvency Proceedings?

Liquidation is an insolvency process, where the liquidator is hired to close the company affairs. It is of two kinds voluntary and compulsory. It is crucial to get familiar with the difference between voluntary and compulsory insolvency proceedings. They can have an extremely distinctive implication for the business and its directors.

Compulsory liquidations

Creditor/s force liquidation on your company after they get an approval on a court petition they filed for a wind-up. The official receiver takes over, the bank accounts get sealed, and the investigation starts to detect the cause of insolvency. If assets need to be realized, a liquidator gets appointed.

The proceeds from selling the assets cover the liquidation cost. The remaining funds are distributed among the creditors. Nevertheless, creditors hardly receive their total owed amount. The official receiver investigates the director’s behavior to uncover wrongdoing evidence if any.

Voluntary liquidations

Voluntary liquidation begins when the company owners and directors decide to shut the business as creditors cannot be paid. The directors schedule a meeting with the creditors and shareholders to pass the proper resolution. Even a liquidator gets appointed.

There is no involvement of the Official receiver in CVLs [Creditor’s voluntary liquidations] or MVLs [Member’s voluntary liquidations]. It is a quicker process in comparison to compulsory liquidation.

  • Solvent companies use the MVL process. The proceeds of asset sales are shared among shareholders
  • Insolvent companies employ the CVL process. Proceeds after selling the assets are used to pay the liquidation cost and remaining is given to the creditors.

What kind of liquidation suits your business?

The key difference between CVL and compulsory liquidation is the decision of the process. Nevertheless, in both circumstances the company is insolvent. There is no possibility of turning around shortly.

Compulsory liquidation is not good. Waiting for creditors to file a wind-up petition suggests that company directors are ignoring or unaware of their financial status. If this is detected by the Official reviewer, then the director is held responsible for the accrued debts because they were aware of the insolvency but kept on trading. However, the process of liquidation is lengthy.

On the other hand, CVL is the best option because there are several benefits. It reveals that the director is taking proactive steps towards the creditor’s best interest. It is crucial during conduct investigation later. The process is quick.

The employees get compensation from redundancy payments office quickly [in compulsory liquidation it takes one year before employees can make a claim]. Director is in control and business winds up systematically. In CVL, the director can start a new business in the same niche.

Tips to avoid compulsory liquidation

  • Pay off the dues
  • Defend the creditor’s wind up a petition at court
  • Enter CVA or Company Voluntary Arrangement
  • Choose CVL proceeding before the hearing

If you are anxious about your company’s financial status, then contact The Insolvency Experts. You can get good advice on how to navigate the liquidation process or is your company really in an insolvency phase.

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