Compulsory Vs Voluntary Liquidation

1. Compulsory Vs Voluntary Liquidation

2. When a business entity becomes insolvent, it may have to go through Creditors Voluntary Liquidation (CVL), but there will be specific cases where it may have no other choice but to go for compulsory liquidation for the simple reason of it being in receipt of winding up order from the courts. Compulsory liquidation is, in all intents and purposes, an extremely challenging process for limited companies. On the other hand, company directors retain the prerogative to liquidate their company under VL, and this is undertaken with the approval of company shareholders. Depending on the solvency of the business entity, a Creditors Voluntary Liquidation or Members Voluntary Liquidation will take place.

3. A liquidator is designated in both types of liquidation procedure. Under voluntary liquidation, the company directors are given the option to choose, with the necessary clearance from shareholders, to liquidate the business entity. When the court issues a winding up order, the business entity is left with no other recourse but to liquidate. Under the Members VL, the business entity will declare its state of solvency and a provisional liquidator will set the value of company assets and oversee the disposal of the same in order to pay off the company's creditors.

4. On the other hand, under the Creditors Voluntary Liquidation, the voluntary liquidation process shall involve comprehensive investigation of the overall state and general affairs of the company by the appointed liquidator. Findings as well as results of such investigation and evaluation are then presented by the liquidator in a meeting with creditors. The company assets are disposed and the sales proceeds are used to pay off the creditors of the company. The company directors are cleared of any liabilities once the liquidation process is completed to the satisfaction of creditors.

5. Compulsory liquidation happens when a creditor files a petition to wind up the company. Likewise, company directors may petition the courts, though this must be group initiated and can not be done by just one company director. The company directors will also receive winding up order that is issued by the courts. The company can petition the courts after the winding up order has been issued; however, this must be made within the time prescribed by law. Petitions can be costly for both parties, and it is recommended that the company explore other alternatives before resorting to this option.