What is Voluntary Liquidation, and How Does it Work?

Voluntary liquidation refers to the action taken by a company when they want to close down or dissolve its affairs without engaging in court proceedings.

Voluntary liquidation is of two types, which are Members’ Voluntary Liquidation and Creditors’ Voluntary Liquidation. Let’s look into both of them.

Creditors’ Voluntary Liquidation?

Creditor’s voluntary liquidation happens when a company, on its own, begins the liquidation process following its insolvency. It is often taken once the directors have exhausted all options to get out of their financial issues.

The first step in this voluntary liquidation is the replacement of the director with a liquidator who is chosen by the shareholders upon the agreement of the creditors who are aware of the company’s financial situation. However, the directors are required by law to support the liquidator in the process.

The liquidator is expected to investigate the reasons behind the failure of the company and present a report on the performance of all the directors in the company.

Every twelve months from the same date the liquidation started the liquidator is expected to present shareholders and creditors with a report on the liquidation process.

Reasons for Creditors’ Voluntary Liquidation

A company can be placed on Creditors’ Voluntary Liquidation for the following reasons:

One such reason is that the company is in serious debt, can’t meet up to its liabilities, and creditors are seeking payment. If the company is unable to pay rent and the landlord begins a legal process to claim the company’s assets. Another reason could be upon the receipt of a wind-up notice from creditors due to debt, as well as a failure to pay taxes. If the company’s liabilities exceed its assets, it could also move towards Creditors’ Voluntary Liquidation.

Advantages of Creditors’ Voluntary Liquidation

  • Shareholders and directors can determine the timing of the winding up before creditors start taking action;
  • The company can enable a quicker and potentially more orderly path into liquidation;
  • Possibility of company directors buying back assets provided this is done at market value.

Disadvantages of Creditors’ Voluntary Liquidation

  • In the case of personal guarantees, creditors can make claims that you’ll have to pay personally.
  • To continue using the assets, you’ll generally have to buy them back at fair market value;
  • Your integrity and reputation might be affected.

Members’ Voluntary Liquidation

A member’s voluntary liquidation is a process that is initiated when some shareholders want to close a company even when it isn’t insolvent.

One primary difference between members’ voluntary liquidation and creditors’ voluntary liquidation is that in the case of the members’ voluntary liquidation, the company is solvent.

The directors will also need to sign a document to the fact that the company can pay its creditors within 12 months. The company must also follow suit to pay all creditors within the stated timeframe.

Pros of Members’ Voluntary Liquidation

  • The company undergoes proper closure via a professional liquidator;
  • Shareholders can receive dividends in a potentially tax efficient manner;
  • Solvent companies with directors who want to retire can explore this means.

Cons of Members’ Voluntary Liquidation

  • Creditors must be paid in full within a year for this option to be available;
  • Directors risk being sanctioned in cases of false declaration of solvency;

Significant debts can frustrate the process and leave the company with no option but to then go into Creditors Voluntary Liquidation.