Before we weigh up the advantages, let’s remind ourselves of the main differences between a Creditors’ Voluntary Liquidation (CVL) and compulsory liquidation:
What is a Creditors’ Voluntary Liquidation?
Creditors’ Voluntary Liquidation is a solution for companies and Limited Liability Partnerships (LLPs) that are in financial difficulty, are unable to pay their debts, and where, despite the best efforts of the company directors, there is no chance of recovery.
As licensed insolvency practitioners we help directors to stop trading in a safe and structured way, communicate the situation to those affected, and manage the steps involved in placing the company into CVL. As appointed liquidators, we then sell company assets to pay those who are owed money (known as ‘creditors’) so that all those affected can move on and start afresh.
What is Compulsory Liquidation?
In a Compulsory Liquidation, an application is made by an interested party (known as a petitioner), and the Court then orders that the company cannot continue. The petitioner is likely to be a creditor who is owed money and has been unable to secure payment.
If the debt is genuine and the company does not pay, this indicates that the directors may be trading whilst unable to pay its debts (known as Wrongful Trading), which is an offence. If the directors have failed to seek professional advice from a licenced insolvency practitioner, the Court will step in and force the Company to cease to trade and enter Compulsory Liquidation.
When the Court orders s company to enter Compulsory Liquidation, The Official Receiver (OR) becomes the liquidator. The OR is a civil servant working on behalf of the government’s Insolvency Service. The OR will deal with the initial stages of the compulsory liquidation process. This involves the realisation of company assets on behalf of those owed money and investigations into the behaviour/actions of the directors of the company. However, aspects of the asset recovery process may be passed out to an independent insolvency practitioner to deal with at the request of the creditors or the OR. The directors will not have control or a say over who will oversee the process in a Compulsory Liquidation.
Advantages of CVL over Compulsory Liquidation
CVL is perceived as a more proactive and positive solution
CVL is a process instigated by directors seeking support and professional advice from a licenced insolvency practitioner, rather than a Compulsory Liquidation which is forced upon a company by the Court when directors fail to act.
CVL demonstrates responsible and proactive behaviour by company directors. By seeking early advice and acting on it, directors will be less likely to act inappropriately (often by accident), or potentially worsen the position of creditors and therefore will dramatically reduce their risk of possible personal liability or disqualification from being a director in the future.
More control and better outcomes
As the CVL process is commenced by directors, they have more control and influence over the process. They have the chance to select their insolvency practitioner and work with them to develop and implement the best strategy to cease to trade and enter the CVL process, with an aim to minimise disruption and cost to all those affected including customers, employees, suppliers, lenders, landlords, HMRC, directors and shareholders.
Overall, this leads to less stress, more structure, enhanced asset recoveries and better outcomes in a CVL process when compared to Compulsory Liquidation.
Better communication between directors and company creditors
During the CVL process, licensed insolvency practitioners help directors prepare a report that is circulated to creditors. The report explains the company’s history, challenges faced, mitigating steps taken by directors, key reasons for its failure and a summary of assets and liabilities.
The report gives directors the opportunity to be open about the facts with creditors, explain why a CVL is the right solution, and allow those affected to raise any questions they may have. In our experience, this goes a long way in building trust and understanding, especially where emotions may be running high.
Reduced risk of director disqualification and personal liability
In both a CVL and compulsory liquidation, there is a review of the conduct of the company directors in the period leading to liquidation to determine whether there was any inappropriate behaviour.
In our experience, directors who act proactively and engage early with an insolvency practitioner are far less likely to act inappropriately, especially in the unfamiliar and stressful period just prior to business failure. Having the support and guidance of a professional insolvency practitioner will result in better decision making and outcomes. All of this reduces the risk of unfit behaviour and therefore the risk of disqualification of being directors again in the future. It also reduces the risk of the director needing to personally compensate the company for losses incurred as a result of unfit conduct.
Compulsory liquidation is usually a result of directors failing to take early action and seek advice. Without seeking advice early on, it is more likely that mistakes will be made, which increases the risk of director disqualification and personal liability. In a compulsory liquidation, directors will face the prospect of detailed questioning during a lengthy interview with the Official Receiver.
Buy-back of assets and restart
When a company goes into CVL, those involved may want to start a new company of similar trade. We can provide professional advice around ‘starting again’ with a successor company in the right way, with appropriate disclosure to company creditors. This includes how to buy back key company assets, taking over staff and contracts and even the re-use of the company name and trading style. This opportunity may not exist with a compulsory liquidation, or at the very least will be considerably delayed.
A CVL usually takes 2-3 weeks to be put in place whereas a compulsory liquidation can take several months. During this time the directors can risk incurring personal liability for wrongful trading/misfeasance and must continue to face the stress of dealing with aggressive communications and actions by creditors. A winding-up petition will be advertised and result in the company’s bank accounts being frozen without notice.
Employees can claim from the NI fund in liquidation. However, in CVL we work with directors and employees to prepare and submit claims much quicker, which results in them receiving their full entitlements much quicker.