Compulsory Winding Up or Creditors’ Voluntary Liquidation

Creditors Voluntary Liquidation advice from an Insolvency Practitioner in Cardiff and Newport

When the finances of a distressed company require it to be wound up there are two direct paths to achieve that aim, each with its own implications. These are the Compulsory Winding Up and the Creditors’ Voluntary Liquidation options. In this article, we aim set out the differences between these two processes, with a particular focus on the benefits of opting for the more proactive approach, the Creditors’ Voluntary Liquidation.

Compulsory Winding Up:

Compulsory Winding Up is typically instigated by creditors that have exhausted other means of debt recovery. It is often pursued by HM Revenue and Customs chasing outstanding tax debt or the company’s bankers or suppliers using the last mechanism available to them to collect payment. The creditor brings their legal action to Court and makes the case that the company has an outstanding debt that it is unable to pay. If the Court is satisfied it will make an order for the immediate liquidation of the company, known as Compulsory Winding Up. The directors lose control of the company and the Court appoints an Official Receiver who can take control of the company assets, cease any ongoing trading, lay off the employees and investigate the causes of the liquidation.

The period leading up to the Court order can be protracted, with an aggrieved creditor’s solicitor chasing payment at each step, knowing that liquidation will often mean they receive partial payment at best. This can be a stressful time for the directors. During this period, where a company is insolvent and should reasonably anticipate entering liquidation, the actions of the directors are under particular scrutiny. Previously they had run the company to benefit the shareholders. Now they must preserve the company assets, ensure creditors are treated equally and avoid the many legal pitfalls that can find them personally liable to pay their own funds into the liquidation.

During the liquidation process the Official Receiver will call the directors and senior management to their offices for interview as part of an investigation into the causes of the liquidation. A major part of these investigations is to review the final period of trading prior to liquidation. The aim is to identify transactions contrary to the interests of the creditors as a whole, such as paying one creditor in preference to another, disposing of assets at less than market value or unwisely continuing to trade and increasing the debts. Finding these types of transactions and activities can result in the Official Receiver bringing a claim against the directors personally.

Creditors’ Voluntary Liquidation:

Creditors’ Voluntary Liquidation is a collaborative and controlled approach in which the directors work with an Insolvency Practitioner from an early stage. The process starts with a call to the Insolvency Practitioner for an overview of the company’s options. Different processes are explored, for example the prospect of the company entering a ‘debt management plan’ in the form of a Company Voluntary Arrangement, entering Administration or trading on without an insolvency option.  

If the decision is taken to proceed with the Creditors Voluntary Liquidation the Insolvency Practitioner works in collaboration with the directors and shareholders. The Insolvency Practitioner provides professional advice at each stage, drafts the necessary documents, and can liaise with the creditors, employees, accountant, landlord and other interested parties. When the company enters liquidation the creditors can no longer make demands for payment from the company and will only communicate with the Insolvency Practitioner, as the appointed liquidator.  

The directors play a pivotal role in the decision-making process and the timing of the liquidation. By taking control of the process at an early stage the liquidation can be timed to benefit the company and the interests of the directors.

Benefits of Creditors’ Voluntary Liquidation:

  1. Professional Advice and Guidance at the Critical Time. The directors work with the guidance of the Insolvency Practitioner from an early stage. The insolvency legislation contains many legal pitfalls for directors in the final period of trading, creating recovery actions against directors where transactions or activities have taken place that are contrary to the interests of the creditors as a whole. By taking early advice and with the guidance of an Insolvency Practitioner these claims can be avoided.
  2. Employee Claims are Paid at an Earlier Stage. The company must enter liquidation before the claims of the employees are paid by the Redundancy Payments Service, including the claims of directors employed by the company.  Waiting for a creditor to take action against the company can take many months, leaving the employees out of pocket if the company has ceased trading.  
  3. The Company Pays for the Liquidation. The value in the assets is often lost when a company is making losses – invoicing may be collected and the money used to pay the bills, the bank balance turns from positive to negative, stock levels are run down due to lack of funds. By reviewing the company at an early stage the directors will often find there is sufficient value in those assets to cover the cost of the liquidation and maybe a return to the creditors. These assets would be collected in by an Official Receiver in any case, so it is better to use this value to fund the services of an Insolvency Practitioner and act under their professional guidance from an early stage.
  4. Preservation of Reputation: Opting for Creditors’ Voluntary Liquidation  allows directors to demonstrate responsibility and integrity in addressing financial challenges. A proactive approach can help preserve the reputations of the directors, an important consideration if they intend to trade again in the same industry.
  5. Efficiency and Timeliness: Creditors’ Voluntary Liquidation tends to be more efficient compared to Compulsory Winding Up. Directors work with the Insolvency Practitioner to expedite the process – enhancing the value realised from the assets while reducing the impact on the directors, employees, creditors and stakeholders.

While both Compulsory Winding Up and Creditors’ Voluntary Liquidation are mechanisms for addressing insolvency, the latter offers directors a more proactive, controlled and lower risk approach. Choosing Creditors’ Voluntary Liquidation enables directors to actively participate in shaping the outcome, preserve relationships with relevant parties and avoid potential claims that can arise from the insolvency legislation. In times of financial distress, making the right choice can make a significant difference.

Contact Whiteoak Morris for confidential advice from an Insolvency Practitioner.

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