There is often some confusion about the term creditors voluntary liquidation, which we is due normally to the term ‘voluntary’.
Creditors voluntary liquidation is a liquidation process that is commenced by the directors of an insolvent company. This is why it is referred to as voluntary, as opposed to the process of compulsory liquidation which is where a liquidation is forced upon a company by a creditor owed money.
Why would a company volunteer to go into liquidation?
Directors of companies have certain duties to the company and to creditors. When the company is in a solvent situation, then these duties are predominantly to the shareholders of the company. However, once a company passes the point of insolvency, the directors’ duties are primarily to the creditors of that company.
- this means that if directors continue to trade while increasing debts to creditors, without the reasonable belief that they are going to be able to be repaid in full, then they are breaching their duties to creditors of the company or companies in liquidation, and may in due course be personally liable to creditors.
- therefore, a responsible board of directors will keep a very close eye on the financial and solvency situation of their company, in particular by maintaining up to date management accounts so that they are fully aware of the financial situation of the company at all times, and if it becomes apparent that the company is unable to avoid insolvent company liquidation, then they will take action to proceed to creditors voluntary liquidation asap.
The effect of company voluntary liquidation on a company or companies in liquidation
Once it is decided that a company should go into liquidation, then at the point of liquidation a liquidator is appointed over the company or companies in liquidation, who will oversee the liquidation process. In almost all cases trade will immediately cease for the company or companies in liquidation.
The role of the liquidator is to liquidate assets by way of liquidation sales. The liquidator will then use the proceeds of the liquidation sales to repay creditors according to a statutory repayment priority order. Any surplus is be distributed to members, although in an insolvent creditors voluntary liquidation surplus is not usual.
At Francis Wilks & Jones we frequently act for directors who have reached the responsible conclusion that their company is insolvent and decide to liquidate my company. Contact our team of experts at Francis Wilks & Jones to discuss your company’s financial situation, and consider the best options for you, if you suspect your company should go into liquidation.