Can a Creditors’ Voluntary Liquidation (CVL) Help my Business?
A Creditors’ Voluntary Liquidation is the most appropriate way to liquidate an insolvent company. Once a company has recognised it is officially insolvent, the company directors have no choice but to act in the best interests of the creditors. In comparison with compulsory liquidation whereby the closure of the company is forced by a winding up order, voluntarily instigating a CVL allows the directors to retain more control.
Only a licensed insolvency practitioner can liquidate an insolvent company. Once the insolvent company has been liquidated the debts are wiped out along with the insolvent company.
Can you explain the Voluntary Liquidation Process?
When a company becomes insolvent legislation takes over. The Insolvency Act 1986 provides the legal framework for the closure of an insolvent company. As the company is a legal entity in its own right the debts belong to it not the directors.
Certain aspects of the CVL must be advertised in the London Gazette – such as the details of the company, where the creditors meeting will be held; the proposed and appointed liquidators and the contact details; Resolutions for the Winding up; distribution for creditors (Dividend) and the Date of the Final Meeting.
Generally the process to start the liquidation is initiated by the shareholders who call a meeting to pass a Special Resolution. The resolution proposed will be to close the company [Wind down] via a Creditors’ Voluntary Liquidation.
The shareholders vote on the resolution and there must be a majority in favour of the resolution.
Once the board resolution has been passed a liquidator is approached and engaged to act on behalf of the company’s creditors [Not the directors].
The liquidator calls a Meeting of Creditors, presents a Statement of Affairs, and gains formal appointment by them to act on their behalf.
The time it takes to complete the liquidation depends very much on the circumstances of the particular case. That includes the size of the business, the nature of the assets involved and the complexity of the creditors’ claims. Once the company’s assets have been realised and the proceeds have been distributed amongst the creditors, the company will be closed down and the liquidator will be released from office.
How to Select and Propose a Liquidator?
A meeting with the shareholders must be called to obtain the shareholders’ approval (Minimum 75%). Without a majority approval the liquidation cannot proceed. Once the decision to liquidate has been made a liquidator must be selected. An insolvency practitioner becomes a liquidator when retained to act for the creditors of the insolvent company.
A director has to act in the best interests of the company so selecting the correct insolvency practitioner who will become the liquidator is a very important decision. The liquidator can be proposed by the director but is approved by the creditors. In addition others may propose their own liquidator.
How Much does Voluntary Liquidation Cost?
Trying to identify the cost can be problematic. The challenge is that the costs are driven by a lot of variables which produce a very wide range of supposed costs.
First it is important to understand some of the basics. The fees and costs charged are controlled by one of the following:
- Set by law and is on a sliding scale dependent on the work involved
- Set by the court
- Set by the creditors committee if there is one
The director/s can negotiate a fixed fee for the liquidation itself but if it is not it will be based on an hourly time cost. There are some hard costs for the liquidator to bear especially if there are assets to dispose of or debts to be chased. The nature of the assets themselves can sometimes cause an immediate cost where livestock is concerned for example.
Typically, though, in addition to the above, the costs are built around the following:
- The time properly spent by the liquidator and his staff
- The complexity of the case
- Any exceptional responsibility borne by the liquidator
- The effectiveness with which the liquidator carries out his duties
How to Communicate with Companies House?
In the vast majority of cases it is the liquidator not the director who will communicate with Companies House.
There are exceptions of course:
- Filing the shareholders agreement to go ahead with the liquidation
- Ensuring the latest accounts are filed at Companies House
- Avoiding being compulsory striking off from Companies House
The director may well be fulfilling his/her duties as an officer of the company but this will not normally be related. A CVL involves a report on the directors so it is important to ensure as much of this work has been completed beforehand.
What are the Rights of Employees during Creditors’ Voluntary Liquidation?
Clearly a CVL threatens the continuity of the business and the jobs of the employees who work there. For this reason, TUPE regulations (Transfer of Undertakings Protection of Employment Rights) were introduced to ensure employees are not disadvantaged by the transfer.
Why is a Shareholders Meeting Required?
A shareholders’ meeting is required for many reasons.
The process is normally instigated by the directors of the company. Whilst the director has the right to instigate the Creditors’ Voluntary Liquidation (as he/she is accountable) the shareholders hold the voting rights to enable the decision. The shareholders must pass a special resolution agreeing to voluntarily liquidate the company.
What are the Creditors’ Rights?
While the name may suggest otherwise, a creditor cannot instigate a CVL. The creditors, however, do have rights throughout the insolvency process.
The creditors are also entitled to see a list of all creditors of the company and to view a summary of the Statement of Affairs at the Meeting of Creditors. They are asked to vote to approve the Liquidator and can even create a committee to control liquidation costs
What are the Creditors’ Duties?
The ‘duties of creditors’ are rights as opposed to an obligation. As a creditor you may have lost substantial amounts of money so it is in your interest to get involved. In order to become a creditor in the first place you must first register as a creditor and complete a Statement of Claim with the liquidator. This may require proof such as unpaid invoices and evidence of goods delivered for example.
Once you are registered as a creditor you will be invited to a Meeting of Creditors and notified at least 7 days before the meeting takes place. The meeting will be geographically convenient for the creditor majority. At the Meeting of Creditors you can:
- Vote on the appointment of the liquidator
- Ask questions of the liquidating company director/s
- View a sworn Statement of Affairs [A list of the company assets and liabilities]
- View a history of the liquidating company up to its liquidation
- View a summary of all claims of all creditors
If you cannot attend the Meeting of Creditors or, do not want to attend, you can vote by Proxy on the liquidators’ appointment. A report of what happened at the Meeting of Creditors will be sent within 28 days of the meeting taken place.