In contrast to Compulsory Members Voluntary Liquidation is undertaken voluntarily. Either the shareholders of a company initiate voluntary proceedings or the company directors undertake them. The legal formalities differ in each case, but in either case, the services of a licensed insolvency professional will be employed.
Voluntary Liquidation For Members
Voluntary Liquidation occurs when the shareholders in a company agree that they want to wind up a business in which they hold shares even though the company has enough assets to pay its debts. The company is still solvent, but for other reasons is considered to be unviable. At the winding-up hearing, a court order will be sought and when it is obtained, the insolvency practitioner will be appointed. The company directors will need to provide proof that the company is solvent and can pay off its creditors within 12 months. In some cases, they must pay these debts with interest, in others as of the time of the formal declaration of liquidation.
Creditors Voluntary Liquidation
Creditors voluntary Liquidation occurs when the company shareholders determine that a company in which they hold shares does not have enough assets to repay its creditors. This is the most common way that companies liquidate. In this instance, the directors and/or shareholders make the decision to liquidate. They then appoint a licensed insolvency practitioner to assess and appropriate the company assets and distribute them to its creditors.
Why would a company voluntarily liquidate?
There are three main reasons for a company to choose to liquidate. The first and most common reason is that the company is simply insolvent. It can no longer pay its debts. Secondly, a company may choose to liquidate when its shareholders and/or directors determine that the business is no longer viable. This may happen when, for instance, their product becomes outdated but they don’t have the assets to retool and compete in the marketplace. Thirdly, the directors may no longer wish to continue to trade. This can be for a variety of reasons.
Whatever the reason for Voluntary Liquidation, it is vitally important for those seeking it to employ the services of an insolvency expert before they take this step.
The Effect of Voluntary Liquidation on Creditors
Creditors have more involvement in a Creditors Voluntary Liquidation (CVL) than they do in a Members Voluntary Liquidation (MVL). The liquidation process can have some disadvantages for creditors, such as the fact that in some cases a creditor may not be able to take action against a company without the permission of a court once a company is in liquidation.
A Creditors Voluntary liquidation may be beneficial to creditors due to the fact that regular meetings will be held, in which creditors can, along with an appointed liquidator, ask questions regarding the company’s affairs. Creditors can also disagree with the choice of liquidator and can opt to choose an alternative liquidator if they wish.
With the right liquidator, creditors will receive the amounts that they are owed, allowing the company to be brought to an end. The liquidation process will not be complete until the company’s assets have been valued and sold and the creditors have been paid. Creditors can Members Voluntary Liquidation petition to the court in order to force the company to be liquidated compulsorily, but this is a costly procedure and some creditors may wish to opt for alternatives.
Some creditors may agree to receive payments through procedures other than liquidation. Some companies may be able to make an informal arrangement with creditors, allowing the creditors to be paid off and the company to continue operating. However, informal arrangements can prove to be a disadvantage to some companies due to the fact that some creditors may not accept reduced payments and can pull out of the arrangement at any time. In this case, the best option would be for the company directors to try and set up a formal arrangement so that they are able to continue paying off creditors at the agreed amount.
