What is the difference between voluntary and compulsory liquidation?

As an insolvency practitioner I am often approached by directors who have reached the conclusion that their company is not viable but simply do not know what to do next to get it wound up.  Directors often contact us saying that their company is “going bust” and that they need help with regard to what to do.  After acknowledging that the cash flow difficulties have reached an unmanageable stage, is there really much more to do though?

The answer is that the next decision is key.

After reviewing to ensure that the only option left really is liquidation, the important decision to make is whether compulsory or voluntary liquidation is the best route to take.  If the end result though is that the company is wound up does it really matter?  For the director that wishes to deal with matters in a timely matter and that wants creditors to get the best return it does.

Speed of appointment

Compulsory liquidation is a court process, and therefore there can be a delay between the decision to liquidate being made and the company entering into liquidation.  Obtaining a court date for the liquidation to be heard could take at least a month (or probably longer).  The court will then hear the petition and make an order if appropriate to place the company into liquidation.

difference between voluntary and compulsory liquidation

From that point the case is passed to the local Official Receiver being a government body which deals with liquidations.  This is likely to take at least another week.

In a voluntary liquidation the directors start the process, in theory they need to give up to 21 days notice to the shareholders that they wish to call meetings to put the company into liquidation.  In reality shareholders will often waive this and therefore the notice is reduced to just 7 days for creditors.  The company therefore could be in liquidation within a week.

But why would entering liquidation sooner be beneficial?

The liquidation process

Once an Official Receiver has been appointed in compulsory liquidation he will arrange for the director to be called in for an interview in order to establish what the assets of the company are.  If it is a simple case then the Official Receiver can start the process of realising those assets at that stage, if however it is complicated then the Official Receiver will pass the case out to an Insolvency Practitioner to deal with as liquidator.
With all of this the process of realising the assets is likely to have not started for many months.  If the company had perishable goods, perhaps which should have been kept in controlled conditions, it is likely by the time the process beings that these have spoiled and cannot be sold.

In voluntary liquidation the liquidator is appointed at the meetings of shareholders and creditors, which could be the following week since the decision has been made.  As such as a liquidator in this case I can start the asset realisations process in a matter of days.

Although unusual it is still possible to find a buyer for the business or the name in liquidation.  With only a short period of shut down this is much easier than if the company had been closed for several months and the customers had gone elsewhere.

Better return for creditors

Only recently I had this exact situation, there was a threat of a petition against the company but the director was confident that the assets could be sold as a part of an in-situ sale provided that it happened soon as the landlord also hadn’t been paid for some time.

The company was placed into liquidation the following week, and after keeping the landlord up to date we were able to achieve a business sale to an independent third party.  The landlord had a new tenant and therefore no claim in the liquidation, the assets sold for more than if they were sold off piecemeal and the creditors can now expect to receive a dividend, all of which would have been unlikely in compulsory liquidation as the landlord would likely have taken back possession of the property due to the delay.

Voluntary liquidation often leads to a better return for the creditors.  The collection from assets may well be higher, but as well as this the costs are likely to be lower than in compulsory liquidation.  Where there are assets, the percentage which goes direct to the Official Receiver, together with the statutory fees of compulsory liquidation often result in costs being much higher compared to voluntary liquidation.  As a result the return to creditors is often much lower, if anything.

How to decide which is right

In some situations compulsory liquidation may be best and I have assisted directors to complete the paperwork to start that process.  In cases though where the company has assets it is often better to opt for the voluntary liquidation route.  The only way to decide which process is the correct one is to get advice on the matter.