What Happens at a Creditors’ Meeting?
A creditors’ meeting takes place to allow voting on whether a proposal for a recovery plan or liquidation can go ahead, to provide details, if necessary, on the company’s insolvency and on what the next steps will be.
In most cases, creditors’ meetings are held remotely. As of 6 April 2017, a change in the law meant that physical meetings did not need to be held. Instead, details may be provided of a remote meeting to be held by other means, such as Skype or Microsoft Teams.
In a majority of cases, few creditors choose to attend. The meeting is an opportunity for the insolvency practitioner to provide a statement of affairs, which provides information on the company’s financial situation. However, prior to this, some creditors, such as employees, will already have received information about the business being insolvent, their unpaid salaries and benefits due and if they need to make a claim for these.
Unsecured creditors may also feel there is little point in attending a meeting because they will already have made extensive efforts to be paid and there may be little left when assets have been disposed of and the secured creditors have been paid off. There is no compulsion for creditors to attend – only a nominated director and the insolvency director are required to be there.
An official meeting does, however, allow creditors to question directors as to why the company has collapsed. The meeting is a formal event that demands professionalism – if any creditors become unruly, the insolvency practitioner will ask them to leave the meeting. Further, it is rare for a creditors’ meeting to last for a long time – typically they are completed within around 45 minutes.
Can Creditors Request a Face to Face Meeting?
If creditors want an in person meeting, they still have the right to request this – the law states this can occur if at least 10% of creditors, either by number or value, or at least 10 individual creditors, make a formal request for the meeting.
There a number of routes that can be taken to liquidate – or rescue – a business and these are:
Creditor Meetings in Creditors’ Voluntary Liquidation
A creditors’ voluntary liquidation (CVL) is where an insolvent business is placed into liquidation with the agreement of shareholders. There is no statutory declaration of insolvency.
A CVL requires a meeting of creditors and this is sometimes called a Section 98 meeting, after the relevant section of the Insolvency Act 1986.
Once it has been agreed to enter liquidation, a meeting will be agreed for between 9 and 21 days’ time. The creditors’ meeting is usually held after the shareholders’ meeting ends and if not, should happen within a maximum of 14 days. It is the shareholders who agree that the company should be placed into liquidation and not the creditors. The shareholders also appoint the liquidator.
At the meeting, the creditors can vote if they want to accept the insolvency practitioner who is already appointed, of if they wish to select another.
They can also set up a liquidation committee – similar to that which can be established in a compulsory liquidation, to act as a conduit between the insolvency practitioner and all creditors.
Creditors are able to vote if they have submitted a proof of debt and lodged a proxy if needed. A majority in value of those present and voting, in person or by proxy, is required to pass a resolution.
Value refers to the amount of money they are owed. The chair calculates this after checking the proofs of debt and proxy forms which are submitted.
In the case of a members’ voluntary liquidation, if the liquidator later forms the opinion that the company is insolvent and will be unable to pay its debts in full, he must summon a meeting of creditors to convert the MVL into a CVL. Such a creditors’ meeting is held under sections 95 and 96 of the Act and has the same effect as a section 98 meeting.
Creditor Meetings in Company Voluntary Arrangement
A company voluntary arrangement (CVA) is a legal agreement to pay back creditors over an agreed period of time and to allow the business to keep trading, subject to the approval of creditors.
Details of the CVA are circulated to the creditors and at least three weeks should elapse before the official meeting can take place, which is to ensure there is sufficient time to consider the proposal. The meeting is usually held by video conferencing.
The meeting is held by the insolvency practitioner who will provide details of the CVA. It is likely that at least one director will also be present. Creditors are able to ask questions on the plans and they should have been provided with forecasts for up to five years.
At least 75% of creditors are required to vote in favour of the CVA. A second vote is then taken without ‘connected’ creditor participation and this requires 50% or more vote for acceptance of the CVA to pass.
If they agree to the CVA, creditors lose their right to take legal action against the company to recover their debts. They have to weigh up whether it is better to accept often lower payments of the CVA compared to what they are owed against possible compulsory winding up, where they may receive little if any return.
If there are requests to modifications to the plan, then these must be voted on, again subject to the 75% majority vote. It is common for HMRC to put forward modifications to ensure it can maximise its return.
A shareholder meeting will also be called by the insolvency practitioner and this will require 50% of shareholders to agree to the CVA.
Once the CVA proposal has been accepted, the insolvency practitioner is required to produce a report within four days. This details what was covered in the meeting and how the voting went. The report is sent to all unsecured creditors and also to the court – it then be becomes legally binding on all parties.
Creditor Meetings in Administration
This is primarily aimed at ensuring the company is rescued. A moratorium is granted once the business files a notice that it will be appointing an administrator and a second moratorium will be put in place after the appointment until the company exits administration. This shelters the business from legal action to recover debts as these could disrupt and end the recovery process.
An initial meeting of creditors should be called within 10 weeks of entering administration and with at least 14 days’ notice given and providing details of the plans. This is according to section 23 of the Insolvency Act 1986.
It may not need to be held in person – although if there is a request by more than 10% of creditor for this, a physical meeting needs to be held. Creditors are able to approve or reject proposals and put forward modifications. The proposal will be passed if a majority of creditors vote in favour. Should proposals be rejected, a decision is made by the courts on how to proceed.
If the proposals are voted in, a creditors’ committee may be established to help the administrator.
The insolvency practitioner will refer these back to the court
Creditors are only able to vote if they have submitted a claim to the administrator before the meeting.
A simple majority by value of those present and voting in person or by proxy is required for the approval of the administrator’s proposals.
Creditors may also choose to form a committee, where three to five individuals agree to represent all creditors. After the meeting has taken place, a progress report should be sent to creditors and the court with a progress report at least in six months.
The administrator also has the power to call a meeting of creditors at any time and he has a duty to do so if requested by 10% in value of the creditors or if required by the court.
Creditor Meetings in Compulsory Winding Up
A compulsory winding up occurs when a petition is presented at court, often by a creditor such as HMRC. Often, the Official Receiver will be appointed as the liquidator, although creditors may later choose another insolvency practitioner. When a winding-up order has been made, the Official Receiver is often appointed as the liquidator. Within 12 weeks, but only if the Official Receiver believes it is worthwhile, creditors should be invited to a meeting where they have the option of selecting another liquidator – a majority vote is all that is required.
But, even if the Official Receiver decides not to hold a meeting, they will be forced to do so if 25% (in value) of creditors request this.
At the first meeting, the liquidator’s appointment is the only resolution, along with whether an appointment of a liquidation committee should be set up.
Creditors may only vote at their meeting if they have lodged a proof of debt and, if relevant, a proxy.
The Official Receiver (or other appointed insolvency practitioner) is required to hold further meetings if requested by 25% of (in value) of the company’s creditors.
Under section 168 of the Insolvency Act 1986, the liquidator may also from time to time summon general meetings of creditors and contributories to discuss matters relating to the winding up, or they may be directed to do so by a members’ resolution or by 10% in value of the company’s creditors. Section 195 of the Insolvency Act 1986 also allows the court to direct meetings of creditors or contributories to be held, if views of creditors are needed.
During the liquidation, a liquidator may also be removed by an order of the court or by a general meeting of the creditors.
When the winding-up is complete, a liquidator. who is not the Official Receiver, will call a final general meeting of creditors under section 146 at which the creditors consider the liquidator’s report and determine whether or not he should be released from office by a vote.
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The primary sources for this article are listed below, including the relevant laws, and acts which provide their legal basis.