The Difference between Voluntary and Compulsory Liquidation

Companies are liquidated for a number of reasons. Often this is due to insolvency – an inability to pay its debts – but sometimes it can be for other reasons. Therefore, the winding-up process, or liquidation, can be instigated in a number of ways.

If a company needs to be dissolved, it may go into either voluntary liquidation or compulsory liquidation depending on the circumstances.

Voluntary Liquidation

Voluntary liquidation is initiated from within the company. There are two types of voluntary liquidation, depending on the financial wellbeing of the company and its particular circumstances.

Creditors’ Voluntary Liquidation

If the company has become insolvent and can’t pay its debts, it may be subject to a creditors’ voluntary liquidation. Though instigated by the directors, it’s done in consultation with the creditors who are owed by the company. The board needs the agreement of 75% of shareholders (by value), before tabling a winding-up resolution.

Once that’s passed, an authorised insolvency practitioner is appointed to take charge of liquidating the company. A resolution has to be sent to Companies House within fifteen days, and advertised in the Gazette within fourteen days.

Members’ Voluntary Liquidation

A members’ voluntary liquidation is carried out when there is a need to wind up a company for reasons other than insolvency. It may be that the company is still viable, but the directors don’t want to run it anymore and there’s no one to take over.

To go down this route, you need to make a Declaration of Solvency, having reviewed the company’s assets and liabilities. There are various stages to this process, starting with a general meeting of shareholders to pass a resolution for voluntary winding up. After that, the procedure for appointing an insolvency partner, even though the company is solvent, and informing the relevant authorities is the same as for a creditors’ liquidation.

Compulsory Liquidation

Voluntary liquidation, though usually a reluctant act, is instigated by the company directors in response to trading difficulties or other problems. Compulsory liquidation is a different ball game, as it comes from a third party.

A petition is presented in the High Court by a creditor or some other party to wind up the company. The petition usually states the sum of money owed, and that the company can’t afford to pay. A judge then decides whether it’s appropriate to issue a winding-up order. The company has the opportunity to oppose the petition, however, if this is unsuccessful an official receiver is appointed.

What Happens After Liquidation?

Whether your company undergoes a voluntary or compulsory liquidation, the end result is the same. The company is dissolved and ceases to exist. Its assets are sold off to pay any outstanding debts, and the insolvency practitioner deals with any other liabilities and obligations.

If your company is at risk of liquidation, contact our friendly, empathetic team at Irwin Insolvency. We offer impartial advice on your options and talk you through the next steps.