As a company enters liquidation through creditors? voluntary liquidation or CVL, it will cease trading and any assets will be sold. This process is typically used when the directors of a business recognise that the company has reached its financial limit and there is no chance it can be rescued.
In contrast, a compulsory liquidation is generally initiated when creditors’ voluntary liquidation or CVL a creditor submits a winding up petition against a company over unpaid debts. This can be a very stressful time for directors, as they will lose control of the decision-making process and their only option will be to have the court order a CVL.
A CVL is typically a quicker and less costly procedure than a Compulsory Liquidation, as the directors will not be forced into it by their creditors. This allows the directors to have more control over the liquidation, which will often result in a better return for the creditors of the business.
During the liquidation, a licensed Insolvency Practitioner will oversee the process and be responsible for selling the company’s assets and distributing them to creditors in accordance with the law. The IP will have wide-ranging powers to investigate director conduct and if necessary, may bring charges of wrongful trading against them.
The first priority will be to pay secured creditors, who hold a fixed charge over the company’s assets. This will usually be the bank or finance provider who holds the company’s mortgage over its premises. Following these, employees and HMRC will be paid on a ‘pari passu’ basis, which means they will receive the same percentage of their debt, as any other creditor. Any unsecured debts will be written off at the end of the liquidation process.
Directors will not be personally liable for any debts incurred by the company during its trading, as personal guarantees given by them are written off as well. However, if directors have guaranteed any borrowing from the company, lenders will expect repayment according to the terms of the agreement.
It is not unusual for a liquidator to purchase the company’s secured assets and use them as working capital to help support the company’s creditors. It is also possible for the liquidator to take over the running of the company, but this is not commonplace.
The main downside to entering a CVL is that all staff will be made redundant and the company will cease trading. However, in many cases, this will be a positive step for all involved as it will allow employees to get their redundancy payments sooner and start a new chapter of their lives. In addition, the government’s redundancy scheme will take care of any outstanding wages, leave and retrenchment payments in most instances, meaning staff will not be out of pocket.