Compulsory liquidation vs voluntary liquidation – What’s the difference?
What is a Compulsory liquidation?
A Compulsory Liquidation (“WUC”) is the name given to a liquidation which is undertaken through the Courts.
The company itself, its directors, shareholders, and the Company’s creditors are entitled to apply for an order of the Court that the company is placed into WUC, also referred to as being “wound up”.
As a creditor, the usual minimum requirement is that the Company must owe you £750 or more and you must be able to demonstrate that the company cannot pay you. However, between 1 October 2021 and 31 March 2022 this limit has increased to £10,000, although this can be the amount owed to a collection of creditors seeking to wind the company up, as opposed to an individual creditor. This is a temporary measure arising from the Coronavirus Pandemic, and the amount, or duration of this limit may be increased or decreased as the Pandemic proceeds.
The procedure is predominantly used by creditors to place a company into liquidation where they have exhausted all other avenues to recover monies due to them.
What is a voluntary liquidation?
A Creditors’ Voluntary Liquidation (“CVL”) is different from a WUC as it is a director led process. In a CVL the company’s directors will have identified, usually following advice from an insolvency practitioner, that the company is insolvent and taken steps to formalise the position and place the company into liquidation. This is done to avoid consequences to all stakeholders should the directors be deemed to be trading the company whilst insolvent, as the directors have a fiduciary duty to act appropriately when they identify the company is insolvent.
The voluntary liquidation (“CVL”) process involves meetings of both the shareholders and creditors of the company, who may appoint a liquidator of their choosing. This is also referred to as an Out of Court process, as shareholders and creditors can appoint the liquidator without the Court’s involvement.
What is the difference between Compulsory liquidation and voluntary liquidation?
The primary difference between WUC and CVL is that the CVL is the most commonly used director led process, whereas a WUC is predominantly utilised by creditors to force a liquidation where the directors, whether through intent or ignorance, do not seek to place the company into liquidation.
Other key differences are that in a compulsory liquidation it is the duty of the Orifical Receiver to investigate the affairs of the directors and the company and report on conduct, even if a private sector liquidator is appointed to deal with other matters in dealing with the liquidation. In a CVL it is the responsibility of the liquidator to undertake this work.
In a WUC all asset realisations must be banked into a government operated bank account, and the proceedings are subject to various charges which are applied to the account automatically and are drawn from realisations.
In a CVL, the liquidator may use any bank of their choosing, provided they operate an appropriate interest bearing account, and therefore has the commercial ability to mitigate banking fees and these realisations do not suffer the costs of the Insolvency Service.
What does compulsory liquidation mean for a company?
If a Court has made an order that the company be wound up and enter into WUC, immediately upon the making the order the directors and all employees are made redundant by operation of law. The Directors lose all power to act on the companies behalf. Prior to the making of a WUC order, the Court requires that the petition to wind the company up be advertised.
Whilst creditors petitioning for the winding up of the company will usually withhold this advert until later in proceedings, to maximise the ability of the company to make repayment to them, once this advert has been circulated in the London Gazette the company’s bankers will, barring oversight, immediately freeze the company’s accounts and deny access to the funds held to ensure that they are not party to challengeable transactions in the subsequent liquidation.
It is an expensive and potentially difficult process to apply for an order of court providing for the company’s bank accounts to be unfrozen once the bank has placed a stop on the account.
In practical terms, as the funds are frozen, the company will have no ability to make payments to suppliers, staff and so forth, and will effectively be unable to conduct any significant trading.
Following the commencement of the WUC, the Official Receiver will be appointed. The Official Receiver is a government officer who is effectively a liquidator. It is also possible that the Court may order a private sector liquidator to be appointed simultaneously, particularly where creditors have sought this as part of the winding up petition.
For the purpose of this article, where an action in a WUC can be undertaken by either the Official Receiver or a private sector liquidator they will be referred to as the liquidator.
Upon appointment the liquidator will immediately seek to take control of the company’s assets, and will look to dispose of any perishable goods, such as food stock, before it becomes unfit for sale. The liquidator will also ensure that the company’s trading premises are closed down, their website turned off and so forth to ensure that customers cannot accidentally place orders with the company.
The liquidator will undertake an initial interview with the directors to identify urgent matters, and thereafter undertake a full interview with the directors to further their investigation work. The Official Receiver will also conduct a separate interview as regards the directors’ conduct.
Whilst in both a CVL and WUC a company will cease trading upon insolvency, as a CVL is a director led process, there is more scope for it to be a managed closure, ensuring key orders are completed where they are of benefit to the company’s creditors. In a WUC this process is more abrupt and usually triggered by the advertisement of the petition to wind the company up.
Thereafter, as with a CVL, the liquidator will work to realise assets for the benefit of creditors.
What is the process of compulsory liquidation?
The company, its directors, shareholders or a creditor must petition the Court that a company be wound up.
Prior to presenting the petition, the petitioner must demonstrate the company is unable to pay them. There are usually two steps to demonstrate this is the case. Firstly, a creditor may seek a judgement from the Court in respect of the debt. Once the Court has granted a judgement (usually a County Court Judgement and referred to as a CCJ) the creditor should take steps to enforce the judgement. This is most commonly done by instructing High Court Enforcement Officers (“HCEO”) (colloquially referred to as bailiffs). If the HCEO is unable to recover funds due under the judgement through the avenues available to them, this would constitute evidence that the judgement is “unsatisfied” and would serve as evidence to the Court that the company cannot pay its debt to you.
The alternative process is to serve a Statutory Demand on the company. Assuming this is properly served, the company has 18 days to object to or settle the amount demanded. If they fail to do so in this time frame, after 21 days have expired this unsatisfied statutory demand can be used as evidence that the company cannot pay its debt to you.
Judgements are usually preferable where the company has obvious assets, such as a stock, and a statutory demand is usually better utilised where the creditor is seeking to move quickly to liquidation, or the company has no or limited physical assets.
Once the creditor has obtained a judgement or the Statutory Demand has expired, they would file a petition to wind the company up. As noted above, normally the debt must be greater than £750, although currently this debt must be more than £10,000 due to the ongoing Coronavirus Pandemic.
A petitioning creditor will need to pay Court fees of £302 and a petition deposit of £1,600 to lodge the petition. The deposit will be refunded to you if sufficient asset realisations are achieved in a subsequent liquidation. It is also repaid by the company where they negotiate a withdrawal of the petition.
The Court will require the petitioner to serve the petition upon the Company, and will set a hearing date, usually two to three months after the date of the petition. You will also be required to advertise the petition, although it is usually recommended that the advert be delayed to allow the Company the maximum opportunity to settle your indebtedness in exchange for the withdrawal of the petition. Once the petition is advertised, the company’s bank account will likely be frozen, thus reducing any ability to settle the company’s indebtedness.
Ultimately, at the hearing of the petition if your debt remains unpaid, it Is likely the Court will order the company be wound up. The court may allow the hearing to be adjourned if the company’s representatives can provide a compelling reason for the court to do so, which can be demonstrated to be of potential advantage to creditors generally.
As there are a number of statutory steps and requirements to be met, most creditors usually opt to instruct solicitors to assist with petitioning for a company to be wound up, to ensure the petition is valid. As such their fees will also need to be met.
Who can start the process of compulsory liquidation?
The WUC process can be commenced by the company, its directors, shareholders and its creditors.
Additionally, the Secretary of State may also petition for the winding up of a company when it has been sufficiently evidenced that it would be in the public interest for the company to be wound up. A Court will make such an order if they consider the basis of application to be just and equitable.
How much does compulsory liquidation cost and who pays?
There is a mandatory Court fee of £302 and a deposit of £1,600 that must be paid in order to file a petition. In practice there will be additional costs in respect of seeking a judgement and or serving a statutory demand, serving the petition, advertising the petition and so forth. It is therefore best to seek advice on the overall costs of issuing a petition to wind up, elements of which may be dependent on the level of debt.
Why would a creditor want my company to be liquidated?
If you have failed to pay a creditor, and they have been unable to secure payment by way of enforcing a judgement or a statutory demand, they will have limited options to compel you to pay. As the ramifications of advertising a petition to wind up are so severe, if you are unable to pay the creditor, or agree a deferral of the hearing, they will be obliged to lodge the advert which will in turn almost certainly freeze the company’s bank account, severely restricting trade.
A petition to wind up can therefore be a significant tool for a creditor to ensure they are paid, particularly as the creditor has no visibility on your other liabilities.
If you wish to avoid a winding up petition against your company you should enter negotiations with creditors regarding late payments of sums due. It is also likely that if the company is generally distressed you should seek advice from an insolvency practitioner to avoid the risk of trading whilst insolvent.
How long does compulsory liquidation take?
The majority of WUCs take around 12 months to conclude. This period usually affords the liquidator sufficient time to dispose of the company’s assets, agree creditor claims and make a distribution to creditors, conclude the company’s tax affairs and fill the necessary closure paperwork.
Liquidations predominantly run beyond 12 months where there is complexity with the assets. Examples to be considered here are claims that the liquidator may wish to litigate, which can run for a number of years depending on the defences raised and the availability of the Courts to hear the claim.
If the company subject to WUV was in construction, it may be entitled to receive a number of retentions from customers, and the liquidation may have to remain open whilst the liquidators await the expiry of the retention period, as it is unusual for these debts to be repaid early.
Can compulsory liquidation be stopped?
Yes, you can stop the company being wound up. Where the petition is without merit or is in respect of genuinely disputed debt, you are able to make application to Court for the petition to be dismissed.
Where the creditors claim is valid, creditors will usually agree to withdraw the petition if their debt and their costs are settled. Where these sums are significant, they may be willing to accept a significant payment towards these and await the balance, although usually a strict timetable would be agreed to, and indeed there is no obligation on the petitioning creditor to accept an offer other than one of full and final settlement of all debts and costs in a single payment.
If you believe you can challenge or settle a claim that has resulted in a winding up petition, it is imperative you seek urgent advice to ensure that the necessary steps can be taken in good time prior to the hearing to minimise disruption to the company.
What does compulsory liquidation mean for directors?
The Official Receiver will review the conduct of the directors to establish if they have committed any offences under the Companies Act 2006 or Insolvency Act 1986. If so, they will likely seek for the director to be disqualified as acting as a director.
This disqualification process is often done with the consent of the directors, as in exchange for conceding to the restrictions, the directors may be disqualified for a significantly shorter period of time. Where no offences have been committed, no action will be brought by the Official Receiver.
The other consequence for the director is they will need to repay any outstanding directors loans, repay any dividends they have drawn (if they are shareholders) when the company’s reserves were insufficient to pay those dividends, return any company vehicles of which they had use, and may be subject to actions in respect of any antecedent transactions they caused company to become party to, such as preferences, where one creditor is proved over others. The director will also lose their income from the company.
It is therefore important that once the director has concluded their company is insolvent, that they consider their own affairs and the consequences the insolvency will bring, and formulate an appropriate plan. It should be noted that adverse effects on directors personally does not overrule their responsibility to take steps to place the company into liquidation.
What are the different types of liquidation?
There are three types of liquidation. Compulsory Liquidation, which is the Court led insolvent liquidation process, Creditors’ Voluntary Liquidation, which is a director led insolvent liquidation and Members Voluntary Liquidation, a director led solvent liquidation, primarily utilised to obtain tax relief through BADR on final shareholder distributions to members.
How is liquidation different from winding up?
Liquidation and winding up are the same processes. Both terms are used to describe the process.
Which type of liquidation is best for you and your company?
If your company is solvent, an MVL be the right process for you.
If your company is insolvent, it is likely that a CVL is the best liquidation process, as it is an out of Court procedure.
If you consider your company needs to be liquidated, you should seek advice from an insolvency practitioner who will guide you to the correct procedure, as dependant on your circumstances, liquidation may not be the best solution available to your company.
How can you avoid being liquidated compulsorily?
The most straight forward way to avoid a compulsory liquidation is not to default on your payments to your creditors. Where this happens because of one off circumstance, early engagement with the creditors in question will likely yield more engagement with repayment terms and similar. You should also be careful not to propose repayments you cannot stick to – most creditors would rather have lower payments and be wholly repaid than an offer of larger payments which are regularly late or missed.
If your creditors are hostile to you, you should approach an insolvency practitioner, who may be able to help you facilitate an informal agreement without an insolvency process with your creditors.
For further information and impartial advice, feel free to give us a call on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk