Insolvency. Administration. Liquidation. Words that send a shiver down the spine of many a company director.
But while insolvency and administration are surefire signs that a business has hit the rocks financially – the latter to the extent that the company has been taken out of the hands of its directors and put under the control of a professional insolvency practitioner – neither carry the sobering finality of liquidation.
With insolvency and administration, there is still a way out. There is still hope. But liquidation means game over. When all avenues for rescuing a business from the quicksands of debt have been exhausted, the only route left is to go under. Liquidation means a company’s finances have become so irreparably damaged that it is shut down.
The latest monthly insolvency statistics show that 1,827 businesses entered formal insolvency proceedings in July 2022. The overwhelming majority of these were liquidations – in total, 1,741 insolvent businesses were shut down that month.
But breaking down those figures further still, it’s noteworthy that the vast majority of these – 1,609 cases – were what are known as creditors’ voluntary liquidations, or CVLs. This was a 60% increase on the previous year, and on the number of CVLs seen pre-pandemic. The other 132 cases were compulsory liquidations.
So what exactly is the difference between a creditors’ voluntary liquidation and a compulsory liquidation?
Push or jump
Both processes end the same way – the business in question is shut down and any assets it has remaining are sold off to pay outstanding debts. But the key difference is how they are initiated.
A compulsory liquidation is an action brought by creditors against a business that persistently does not pay its bills. It’s the nuclear option of debt recovery – when all other avenues have failed, when solicitor’s letters, debt collection agencies, and even statutory payment orders have failed to recover monies owed, creditors can petition the courts to issue a winding-up order on the grounds that a company cannot pay its debts.
If the court finds in favour of the creditors and decides there are grounds to shut an insolvent business down, there is nothing the company’s owners or directors can do. The business will be legally ordered to cease trading, it will be struck from the company’s register and any remaining assets seized.
With a CVL, however, a company’s directors are very much on board with the process from the start. The name ‘creditors’ voluntary liquidation’ is perhaps a little confusing, as it suggests it is a process initiated by creditors. But it is actually a reference to the fact that the liquidation has to proceed in consultation with creditors.
This distinguishes it from a Members’ Voluntary Liquidation, which is a very different process not associated with insolvency that sets out a formal process for a limited company or partnership to cease trading. With an MVL, there is no need for consultation with outside parties, apart from an insolvency practitioner appointed to manage the process.
A CVL is initiated by a company’s directors and must have the support of 75% of shareholders by value of shares. It is usually used in circumstances where directors recognise or are advised that other insolvency procedures (such as administration or trying to negotiate a voluntary payment arrangement with creditors) would be both more expensive and ultimately futile.
There are no court hearings or legal wranglings, so is usually a swift, tidy process. As such, it offers a means for directors of stricken companies to control the winding down of a business in an orderly fashion.