The term ‘liquidation’ does not always mean the same thing. It is very useful for business owners to understand the difference between compulsory and voluntary liquidation as sometimes, businesses have no choice but to compulsorily liquidate. In circumstances where a court ordered instruction to wind up is in place, some companies find this an incredibly difficult and challenging process.
A voluntary liquidation is somewhat different, as company directors are, with the agreement of company shareholders, able to decide to voluntarily liquidate the company. A Creditor’s Voluntary Liquidation (CVL) or Members Voluntary Liquidation (MVL) may take effect, depending on how solvent the business is.
How are a CVL and MVL different?
Regardless of which type of voluntary liquidation procedure is pursued, a liquidator is appointed to oversee the winding up of the business.
Under a voluntary liquidation, company directors (in consultation with shareholders) elect to wind the company up. In contrast, if a court provides a winding up order, the business has no alternative but to liquidate.
A MVL allows the business to openly declare its state of solvency and the debts that it has. A provisional liquidator is then appointed and will establish the value of the company’s assets as well as arrange for the appropriate disposal of assets to repay creditors.
However, under the CVL arrangement, the liquidation process is considerably more involved. It requires the appointed liquidator to carry out a thorough investigation and detailed analysis of the affairs of the company. The findings that are generated, together with their evaluation, are presented to creditors in a meeting that is facilitated by the liquidator.
Following this, the assets of the company are disposed. Funds that come from the sale of assets are then used to pay off the company’s creditors. Completion of the liquidation process to a degree that is acceptable to creditors subsequently clears the company’s directors of any liability.
What about compulsory liquidation? How is it different?
A creditor who has not been paid is likely to file a petition to have a company wound up and this is the usual circumstance in which compulsory liquidation occurs.
Collectively, company directors may petition the courts to have the company wound up – it is important, however, to note that one company director cannot do this alone – the petition must be agreed and be presented by the group.
When a court orders a winding up process, the order is provided to company directors. It is possible for the company to petition the courts following issue and receipt of the winding up order, so long as this is done within the time prescribed by law.
Petitions can prove to be expensive for both parties and it is most commonly recommended that companies explore other possibilities before taking up this option.
Compulsory and voluntary liquidation are quite different. While both involve the winding up of an insolvent company, the circumstances under which they are carried out are quite different. While no business owner or director likes to think that their business will one day be wound up, understanding the different types of liquidation can prove advantageous.