Compulsory vs. Voluntary Company Liquidation: What’s the Difference?

Has your business been going through harsh times?

If so, you’ve likely thought about eventual company liquidation. You might want to liquidate your company to get out before things get tougher.

Or, you might wish to liquidate your company because you’ve got no other choice!

So what’s the difference between compulsory liquidation and voluntary liquidation? What should you know about preparing for either scenario?

Here’s what you need to know about this possible scenario for your company:

What Is Company Liquidation?

This is the process when you finalize your company’s affairs to sell it or close it down.

Liquidation involves selling all the company’s assets including property. It can also include paying off any debts owed to creditors and/or vendors.

Once you complete the liquidation process you have to inform the company registrar. The company will then get listed as “closed” on official records.

This can be a rather lengthy process depending on how many assets your company has. As such, you might want to consider hiring a business attorney to assist you with liquidation.

How Compulsory Liquidation Works

This type of liquidation occurs when your creditors put pressure on your company to close. It’s often due to excessive debts, bankruptcy, or any other financial obligations that you can’t fulfill.

Often, your creditors will file a petition in a local court. If the petition gets accepted, then an Official Receiver takes over your company.

They’ll investigate the creditor’s complaints and will work to distribute any remaining funds to the creditors. They’ll then hire a liquidator to close your company.

You’ll lose access to your company during this process. You’ll then be informed once the procedure is completed. This can hurt your reputation as an entrepreneur so you want to try to avoid it at all costs!

How Voluntary Liquidation Works

If you do need to liquidate your company, you want to ensure that it’s a voluntary process.

You might want to hire a professional service such as to assist you with voluntary liquidation. This is when you can’t fulfill all your financial obligations to your creditors.

With the assistance of a liquidator, you’ll prepare an agreement with your shareholders, creditors, and vendors. You don’t have to worry about getting a court involved with this procedure.

This process is a lot more efficient than compulsory liquidation. It’s also the ideal situation for entrepreneurs as it doesn’t tarnish your reputation. After you complete the liquidation process, you can close your company.

That’s How Company Liquidation Works

Now you know the basics of company liquidation and can decide if it’s the best way forward to your struggling business.

You have to try to avoid compulsory liquidation if you can. This requires the court to get involved and you’ll lose control over your business.

If you opt for voluntary liquidation you can negotiate a deal with your shareholders and creditors. You don’t have to worry about the court getting involved and you’ll just need a service to assist you with the process.

You can find more tips on company liquidation on our blog!