Voluntary vs Compulsory liquidation

What is the difference between voluntary and compulsory liquidation?

When it comes to company liquidation, there are two primary forms:

1.voluntary

2.compulsory

Although both entail the formal closure of a limited company, they differ significantly in initiation and liquidator appointment.

Adding to the complexity, there are two types of voluntary liquidation: Creditors’ Voluntary Liquidation (CVL) and Member’s Voluntary Liquidation (MVL). While both fall under voluntary liquidation, they serve distinct purposes.

CVL is used to close insolvent companies—those unable to meet their debts—while MVL is for solvent companies with more assets than liabilities, allowing for-profit extraction.

This article focuses on the insolvent voluntary liquidation process, CVL. However, if your company is financially sound, you may consider MVL, details of which can be found here.

 

(i) Voluntary Liquidation (CVL):

Unlike compulsory liquidation, voluntary liquidation via CVL is initiated by the directors and shareholders of an insolvent company. This option is often chosen when the company faces mounting creditor pressure and financial distress.

In contrast to compulsory liquidation, where the insolvency practitioner is imposed, in CVL, directors select and appoint the practitioner themselves. A significant advantage of opting for CVL is the ability to choose when to close the company, thus minimising further losses for creditors. Waiting for creditor-initiated winding-up proceedings can be prolonged and costly, with some creditors reluctant to pursue this route while the company remains operational and pressure continues to mount.

CVL provides relief from creditor demands and demonstrates responsible action on the part of limited company directors.

 

(ii) Compulsory Liquidation:

As the term implies, compulsory liquidation is imposed upon a limited company by an external entity. If you fail to settle a creditor’s debt exceeding £750 within 21 days of their formal request for payment, they have the right to petition the courts to forcibly wind up your company. This threshold has been temporarily increased to £10,000 as per the Government’s measures from 1st October 2021 to 31st March 2022.

However, in practice, pursuing a winding-up petition (WUP) is a serious and costly measure for a creditor, typically considered as a last resort after exhausting all other avenues for payment recovery.

Once a WUP is served on your company, you have a brief window to act if you intend to salvage your business. The WUP is advertised in the Gazette after a seven-day notice period, giving you an additional seven days to settle the petition by paying the debt in full or arranging an alternative payment plan. Failure to do so results in the petition being heard in court, and unless compelling evidence is provided, a winding-up order is issued, leading to compulsory liquidation.

Once a winding-up order is issued, your company’s closure is irreversible. An Official Receiver or insolvency practitioner is appointed to manage the liquidation process. Assets are sold to repay creditors, and the company is formally struck off the Companies House register, ceasing to exist legally.

 

Voluntary vs. Compulsory Liquidation – Is Waiting for Winding Up Advisable?  

As the director of a financially troubled limited company, you have legal duties and responsibilities towards your creditors. One of these is ensuring you act in the best interests of creditors once you realise your company is in financial difficulty. This involves taking steps to maximise returns and avoiding actions that could make their situation worse.

By waiting for creditors to take legal action instead of seeking help and advice proactively, you increase the risk of being accused of wrongful or fraudulent trading. These are serious offences that can result in fines, personal liability for company debts, and even disqualification from serving as a director in cases of severe misconduct. 

In a CVL (Creditors’ Voluntary Liquidation), you’ll have the opportunity to discuss the liquidation process with the insolvency practitioner who will act as the liquidator. This should make the process less stressful as you’ll have a better understanding of what to expect and the timeline involved.

 

Read More: 

• How can I stop a compulsory liquidation
• A company which owes me money has gone into liquidation
• Can a 50% shareholder liquidate a company
• Creditors’ Voluntary Liquidation process
• What actions can a liquidator take to recover company assets

 

Planning Your Next Moves

If you’re a director of a limited company facing the prospect of liquidation, or if it’s already on the horizon, Vanguard Insolvency is here to assist you. Our licensed insolvency practitioners can guide you through your options and clarify their implications for you and your company, both presently and in the long term.

With offices located across the country, professional assistance is always within reach. Contact our team today to schedule a complimentary consultation with one of our licensed insolvency practitioners, without any obligation.