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Differences between voluntary and compulsory liquidation

Posted on: Wednesday 13th March, 2019

Differences between voluntary and compulsory liquidation

If you find yourself at the stage in life where your business is due to face closure as a result of burdening debt and creditor pressure, or it has naturally reached finality due to director retirement, the closure process will vary, as well as your right to claim redundancy pay.

The factor which will determine your eligibility for redundancy pay is whether your business is viable or has no prospect of recovery. In order to qualify, your business must be insolvent and facing liquidation. If you are actively forced out of work as a result of compulsory liquidation, a formal insolvency procedure, you will qualify for redundancy pay.

If the business voluntarily enters into liquidation, you will not be eligible for redundancy pay as you actively opted to close the business down, putting yourself out of a job. If you are pondering upon the possibility of liquidation, you will not be eligible unless the business has actively started the liquidation process.

Compulsory Liquidation – Compulsory liquidation is typically ordered by the court through a winding up petition and invoked by a creditor to recover outstanding debt. Unless terms are successfully renegotiated with creditors, this will eventually result in the liquidation of your business. In order for creditors to successfully issue a WUP, debt should be over £750 and a County Court Judgment is typically issued prior to this.

A licensed insolvency practitioner will facilitate the liquidation process and realise assets to repay creditors. If your business has entered liquidation, you will be able to claim director redundancy within 12 months from the date the business entered into liquidation. It is advised that you act as soon as possible as by delaying the claim; your statutory entitlements may be affected.

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What are my options for voluntary liquidation?

Members’ Voluntary Liquidation - A Members’ Voluntary Liquidation (MVL) is a voluntary procedure for solvent businesses which are able to continue trading. A MVL is a formal closure process for businesses with profitable prospects. It is typically used as an exit tool which allows the business to close down in a tax efficient manner if it holds over £25,000 in profit.  If you hold under this amount, you may consider dissolving the business after taking advice from a licensed insolvency practitioner. In order to successfully carry out a MVL, you will be required to settle liabilities with creditors and HMRC within 12 months.

As the MVL procedure is voluntary action for a solvent business, you will not qualify for redundancy pay.

Creditors’ Voluntary Liquidation – A Creditors’ Voluntary Liquidation (CVL) is a formal insolvency procedure to voluntarily wind up the company. Although the action is voluntary, a CVL would typically be used by businesses subject to financial difficulty, with no real prospect of recovery. Insolvency is tested for by carrying out two essential tests, the cash flow and balance sheet test. This measures whether your business assets outweigh liabilities, and if the outflow of cash dominates the inflow of cash; all of which are warning signs of insolvency.

The prospect of claiming director’s redundancy pay is not widely known, which means you may lose out on an average claim of £9,000 per director. Redundancy pay is even sometimes used to fund the liquidation process if you are out of pocket. For more information, get in touch with the team at Redundancy Claim UK. We are able to arrange a free same-day meeting to discuss your redundancy claim and any other statutory entitlements which may be due.


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