The Difference?

Closing a limited company is never an easy choice. Whether you’re dealing with financial trouble or simply want to shut the business down, it’s important to understand your options. The two main routes are voluntary and compulsory liquidation. Both bring a company to an end, but the way they work, and what they mean for directors is very different. This guide will explore voluntary vs compulsory liquidation and give you the answers you are looking for.

In this article, we’ll explain the key differences between voluntary and compulsory liquidation. We’ll also look at the types of voluntary liquidation available, the steps in the liquidation process, and what directors need to consider when a company is insolvent.

What Is Liquidation?

Liquidation is a formal insolvency process used to close a limited company. During the liquidation process, a liquidator is appointed to take control of the business. They sell the company’s assets, pay its debts where possible, and remove the company from the register at Companies House.

When this process is complete, the company no longer exists. It’s important to know that liquidation is not the same as selling or walking away from a company: it’s a legal and structured way to close it properly.

There are two main types of liquidation: voluntary and compulsory. The key difference is who starts the process — the company or someone else.

What Is Voluntary Liquidation?

Voluntary liquidation means the company itself chooses to close down. The directors and shareholders decide that the company should stop trading and go into liquidation. A licensed insolvency practitioner is appointed to manage the process, and the courts do not need to get involved.

This type of liquidation is often used when the company is insolvent and can’t pay its debts. But it can also be used when the business is still financially healthy, but no longer needed.

There are two main types of voluntary liquidation: creditors’ voluntary liquidation (CVL) and members’ voluntary liquidation (MVL).

Creditors’ Voluntary Liquidation (CVL)

A CVL is used when a company is insolvent, meaning it cannot pay its debts on time or owes more than it owns. It is the most common type of liquidation for businesses in financial distress.

The CVL process starts when the directors realise the business cannot continue. They hold a board meeting and call a vote to place the company into liquidation. If enough shareholders agree, a licensed insolvency practitioner is appointed. A meeting with creditors follows, where they are told about the company’s position and approve the appointment of the liquidator.

By starting a CVL, directors show that they are taking action early and acting in the best interests of creditors. This reduces the risk of legal trouble, like accusations of wrongful trading. A CVL is also usually less stressful and gives more control over the timing and outcome.

Members’ Voluntary Liquidation (MVL)

An MVL is only available when a company is solvent, meaning it can pay all of its debts in full. It is often used when directors want to retire, close a group company, or release cash in a tax-efficient way.

To begin an MVL, directors must sign a Declaration of Solvency, confirming the company can pay its debts within 12 months. Once approved, the company appoints a licensed insolvency practitioner as the liquidator. Creditors don’t need to be involved, as all debts will be paid.

The remaining funds are then shared among shareholders, and the company is closed and removed from Companies House.

What Is Compulsory Liquidation?

Compulsory liquidation is a court-led process that usually starts when a creditor is owed money and hasn’t been paid. If the debt is £750 or more, the creditor can send a winding up petition to the court asking for the company to be forced into liquidation.

If the court agrees, it will issue a winding up order, and the company will be officially placed into liquidation. At that point, control of the company passes to the Official Receiver, who may later pass the case to a private licensed insolvency practitioner.

Once a winding up petition is made public, often by being listed in The Gazette, the company’s bank accounts are usually frozen. The business must stop trading, staff are dismissed, and the directors lose all control. Compulsory liquidation is a serious legal process and can have long-term consequences.

Voluntary and Compulsory: What’s the Difference?

While both types of liquidation result in a company closing, they are very different in how they start and what they mean for directors.

In voluntary liquidation, directors take action before things get worse. They stay involved in the process, choose the liquidator, and help plan the best way to wind things down. It’s a private, planned process that shows directors are behaving responsibly.

In compulsory liquidation, the court takes over. The process begins when a creditor asks the court to step in. Directors no longer have any say, and the company is investigated in more detail. It’s public, stressful, and usually more damaging.

One of the biggest risks of compulsory liquidation is the investigation into the directors’ conduct. If the company is insolvent and directors have not taken proper steps, they could face serious consequences, including being held personally responsible for debts or banned from acting as a director in the future.

Why Acting Early Is Important

If your company is facing financial pressure, it’s vital to act early. Once you know your company is insolvent, your duty shifts from shareholders to creditors. That means you must avoid doing anything that could make the situation worse for those owed money.

Taking early action with a creditors’ voluntary liquidation shows that you understand your duties and are handling the situation properly. It also gives you more time to plan, which can lead to better outcomes for everyone involved.

Delaying action could mean creditors take matters into their own hands, leading to compulsory liquidation, a route that often results in greater costs, loss of control, and more intense scrutiny.

What Happens in the Liquidation Process?

Whether voluntary or compulsory, the liquidation process involves several straightforward steps. Below is an outline of what happens in both types.

In Voluntary Liquidation:

1. The board agrees to close the company.
2. Shareholders vote to wind up the company.
3. A licensed insolvency practitioner is appointed.
4. In a CVL, creditors are informed and given the chance to vote on the liquidator.
5. The liquidator sells company assets and pays creditors as much as possible.
6. Final paperwork is filed, and the company is removed from Companies House.

This process is quicker, more flexible, and often more respectful to creditors and staff.

In Compulsory Liquidation:

1. A creditor serves a formal demand or applies for a court order.
2. The company fails to pay the debt.
3. The creditor files a winding up petition with the court.
4. If approved, a winding up order is made.
5. The Official Receiver takes control of the company.
6. Company assets are sold, creditors are paid, and investigations are carried out.
7. The company is struck off the register.

In this route, the directors have no say once the court is involved, and the company’s end is often sudden and disruptive.

Risks for Directors in Compulsory Liquidation

In every liquidation, the actions of directors are reviewed. However, in compulsory liquidation, this review is more detailed and can lead to more serious outcomes.

The Official Receiver or liquidator will look at how the business was run. If there’s evidence of wrongdoing, such as taking money out of the company unfairly or trading when the business couldn’t afford to pay its debts, directors can face fines or legal claims.

They could also be disqualified from acting as a director for up to 15 years. Taking early advice and acting through a CVL can help reduce the chance of these outcomes.

Which Option Is Right for Your Company?

If your limited company is still solvent, a members’ voluntary liquidation (MVL) may be the best choice. It allows you to close the business neatly and release any remaining funds to shareholders.

If your company is insolvent, a creditors’ voluntary liquidation (CVL) is often better than waiting for compulsory liquidation. It shows you’re taking responsibility and helps you plan the process in a way that reduces harm to creditors, staff, and your own position.

At Campbell Crossly & Davis, we help directors understand their duties and choose the right course of action. Our team of licensed insolvency practitioners will explain your options, guide you through the process, and help you avoid costly mistakes.

Conclusion

Knowing the difference between voluntary and compulsory liquidation can make all the difference when your business is facing difficulties. Taking control early through a CVL helps protect creditors, maintain your professional standing, and avoid harsh legal consequences. Waiting too long can result in court action, frozen bank accounts, public hearings, and a far more stressful experience.

If your company is struggling to pay its debts or you’re worried about a winding up petition, now is the time to act. We’re here to support you.

Get in touch with Campbell Crossly & Davis for straightforward, confidential advice. Whether you need help starting the CVL process, exploring a members’ voluntary liquidation, or just understanding your next steps, we’ll guide you every step of the way.