Both creditors’ voluntary liquidation (CVL) and compulsory liquidation. also known as compulsory winding up (CWU) only apply to insolvent companies (i.e. unable to pay their debts as they fall due) and where there is no reasonable prospect of the company recovering from its financial position. In short, they apply to situations where continued trading is no longer feasible and/or it will expose the company and its creditors to worsening position over time.
CVL is a proactive process driven by company directors with the professional support of an expert Licensed Insolvency Practitioner (IP). Supported by the IP, the directors implement a structured and practical plan to cease trading in the least disruptive way possible. Thereafter resolutions are passed to wind up the company voluntarily (i.e. place it into CVL) and a liquidator is appointed, who is usually the IP who has independently supported the company to this point, subject to approval of shareholders and creditors. Prior to which a report is presented which explains the circumstances.
Once a liquidator is appointed, the directors’ powers cease and the liquidator works to realise the company’s assets and consider the actions of the directors in the period leading up to liquidation.
“Compulsory” reflects the fact that this process is forced upon the company by a stakeholder in circumstances where the directors have not taken appropriate steps to deal with the company’s insolvent position.
A petition is presented to the court, usually by a creditor who has exhausted their recovery options in respect of an unpaid debt, leaving them no alternative but to seek a court order to force the company to cease trading and be put into compulsory liquidation.
The Official Receiver (OR), an official within the government’s Insolvency Service, is then appointed to realise assets and investigate the directors’ conduct in a similar way to a liquidator in a CVL. In certain circumstances the liquidation may be passed out to an independent IP if creditors and/or the OR feel they are better placed to deal with the asset recovery aspect of the liquidation.
In a CVL, the directors are proactive in seeking the assistance of an IP. Accordingly, they can select an IP who they feel is best placed to advise them in relation to their company’s circumstances. With appropriate support and guidance, this allows them to exert some control over the way in which a company ceases to trade and enters into liquidation. In our experience, ceasing to trade in a structured way, even in the most difficult of circumstances, minimises the adverse impact on the company’s creditors and other stakeholders.
As the CWU process is typically driven by an unpaid creditor and forced upon a company, it can add additional stress and complexity as directors are often put on the ‘back foot’ in dealing with the company’s affairs. This may well result in a poorer outcome for the company and its creditors.
One of the duties of a liquidator is to consider and report to the Secretary of State any adverse conduct by the directors in the period leading to liquidation. By seeking advice from an IP and commencing the CVL process, the directors will be seen to have taken appropriate steps to deal with the company’s insolvent position, rather than neglecting their responsibilities. The CVL process gives directors the opportunity to present a report to shareholders and creditors explaining the background circumstances and mitigating steps taken.
The early involvement of an IP is also likely to highlight any potential areas that may cause concern to stakeholders, which can then be discussed with a view to reaching a pragmatic solution that will be acceptable to creditors. This opportunity is not a natural outcome of the CWU process.
In our experience, stakeholders accept that trading carries risk and that hindsight is 20/20. Key is that they are reassured that reasonable decisions were made in the run up to liquidation and where issues have arisen, the directors demonstrate a commitment to rectifying the situation.
In a CVL scenario, the supporting IP will provide advice on a strategy to preserve/sell company assets for the benefit of creditors. This can include a sale to connected parties (including directors, employees and shareholders). They are often willing to pay the highest price as they understand the circumstances and can more easily recycle value.
Connected party sales may involve a ‘pre-pack’. This refers to a scenario whereby the sale of a company’s assets is considered, negotiated and agreed in principal prior to liquidation. Full details of the proposed sale (including asset values, independent valuations, details of those involved, purchase price and settlement details) are disclosed to creditors prior to completion. If the sale represents good value, on appointment, the liquidator will complete the sale.
When a company ceases to trade, its assets diminish in value, especially those of an intangible nature such as goodwill, contracts and intellectual property. As CVLs take place over a relatively short period, the recoverable value of assets is likely to be greater than when compared to a CWU scenario.
What should be noted however is that CWU does represent an effective tool when dealing with unscrupulous directors who actively seek to enter into transactions which prejudice a company and its creditors. The presentation of a winding up petition restricts an unscrupulous director’s ability to dissipate assets.
Concerns regarding personal liability or personal guarantees provided by directors can be discussed with the IP in advance of a CVL.
The costs of a CWU can be much higher, principally due to the addition of petitioning costs and Secretary of State fees, which are not charged in a CVL.
A CVL usually takes 2-3 weeks to be put in place, whereas a CWU can take many weeks, if not months, during which time the directors expose themselves to an increased risk of criticism and possible personal liability should the position worsen.
A CWU is preceded by the issue of a winding-up petition. Banks monitor the existence of winding up petitions and once aware, often freeze bank accounts pending the outcome of the petition. For an unprepared company, this will be catastrophic and can result in an abrupt end to trade. This is extremely stressful and will be financially detrimental to the company and its stakeholders as a whole when compared to a planned and well managed CVL alternative.
Prior to a CWU, a winding-up petition will be advertised and will result in the company’s bank accounts being frozen pending liquidation.