A voluntary liquidation is an independent self-induced wind-down and liquidation of a business which has just been formally approved by its shareholders. Such a decision is taken by the leadership of a company when they feel that the business has no longer any commercial reason to continue running. It is not prompted by a regulatory body (necessarily). When a business is in trouble, there are various options open for the management team. They can choose to do nothing or to carry out the winding-up procedure.
The concept of voluntary liquidations can be a bit confusing because, as the name suggests, it is done voluntarily. So, what happens during such voluntary liquidations? A winding-up petition has to be filed with the High Court. Once the petition has been made, the court will take over from there. The process will involve an investigation into the reasons for the company’s failure and also into the financial situation that has caused it.
There are two types of voluntary liquidation: active and passive. In the first, all the directors of the company are notified that their membership has ended and that they have no further duties to the company. A winding-up order is made. In the second, only those directors who have authorised the wind-up are involved. Usually, the company secretary is also invited to take part in the discussions with the administrator.
If a winding-up order is made, then the company is obliged to go into voluntary liquidation. A winding-up order made by the court will involve a massive amount of money being paid out to the shareholders of the company. Therefore, if you are a director of the company, you should immediately stop all proceedings and come to terms with the winding-up order. Your company may be able to continue running while the winding-up order is being carried out, but you will not get any of your money back.
As a voluntary liquidator, your job is to find alternative assets for the company to use in order to pay off its debts and to keep it going. If the debts of the company cannot be reduced, the voluntary liquidator will make an impartial analysis as to whether the value of the assets of the company can be found to pay off the creditors. The value of the assets is evaluated with the assistance of an external expert. Once the valuation is completed, the voluntary liquidator will make an objective recommendation as to how much, if anything, can be done to help the company to pay off its debts. If the value of the assets is too low, the company can be encouraged to go into voluntary liquidation.
However, if the valuation gives the voluntary administrator the opinion that there is still enough value in the assets of the business to pay off the creditors, then he or she will go ahead with the voluntary administration order. For this to happen, two other crucial factors must be met. First, the creditors must be told about the exact amount they will be entitled to. Second, all necessary court documents must be submitted so that the court has a clear picture of the events leading up to the voluntary administration.
A company cannot go into voluntary administration unless it has completely run out of cash. This means that even if you manage to settle your debts with the company, you will not be able to keep the company going if you do not have sufficient cash. Another common reason for a company to enter administration is failure to pay employee pensions and insurance claims. When a company is in debt, it has no choice but to seek advice from an employment solicitor to see what action, if any, is available to resolve the crisis. In this situation, the employee can make a claim for sick pay, dismissal benefits, redundancy payments and other compensation.
Once a company enter into voluntary liquidation, its directors are typically instructed to sell all assets of the business to pay off its creditors. If you are faced with the prospect of voluntary liquidations, there are several things you can do to prepare for it. First, ensure that your company is covered with a CVA (Canterbury Waiver) – this is a document from the Plantation, Ownership and Transfer Scheme that sets out how company directors can transfer the shares of the firm after it has been put into voluntary administration. You should also ensure that all loans, overdrafts, stocks, and assets are registered in your name. Finally, set up a limited company and register it with Companies House.