Liquidation is not always forced upon a business. The directors of both solvent and insolvent companies may wish to choose it as a course of action.
Below, we’ll explore what creditor’s voluntary liquidation means and the process under UK law.
Creditors Voluntary Liquidation: Definition
A Creditors’ Voluntary Liquidation (CVL) is the most appropriate way to voluntarily liquidate an insolvent company.
While the name implies the action is instigated by creditors, this is a misnomer. Rather it is directors who begin the process, bringing it to the shareholders for a vote.
The Creditors’ Voluntary Liquidation process must be carried out by a licensed insolvency practitioner.
Once the insolvent company has been liquidated the debts are wiped out along with the limited company itself.
Below is the process for conducting a Creditors’ Voluntary Liquidation.
(1) Appointing an Insolvency Practitioner (Liquidator)
Once you have discussed the possible liquidation with an insolvency expert to make sure it is the right decision for you, the next step is to appoint a liquidator. In a Creditors’ Voluntary Liquidation, the shareholders will appoint and pay for an authorised insolvency practitioner to act as the liquidator.
The process of actually appointing (engaging) a liquidator takes no more than an hour or two. This appointment will then need to approved by the creditors at the creditors’ meeting.
This usually takes place three weeks after the initial engagement.
(2) The Meeting of Directors
The directors must hold a meeting to confirm that the company is insolvent and that steps are being taken to place the company into a CVL.
A meeting of the company directors can be called straight away. This process can take place particularly quickly if it’s a small company with only a handful of directors.
(3) Consent to Short Notice
If 90 percent of the company’s shareholders sign a ‘Consent to Short Notice’, the shareholders’ meeting can be called and held immediately.
If the shareholders do not agree, a notice period of 14 days will need to be given before the shareholders’ meeting can be held.
(4) The Shareholders’ Meeting
The shareholders’ meeting will normally take place immediately before the creditors’ meeting. If the shareholders agree to the liquidation, they can then confirm the directors’ choice of the liquidator.
(5) The Creditors’ Meeting
After the shareholders’ meeting, there must be a creditors’ meeting, which is often held on the same day.
Creditors must receive a statutory minimum of 7 days notice of the meeting, although within 14 days is considered to be better practice. Often creditors will receive 3-4 weeks’ notice.
(6) Company’s Assets are Liquidated
At this point, the liquidation of the company can go ahead. From start to finish the time it takes to complete the CV sale of assets can vary dramatically depending on the complexity of the case.
However, in the vast majority of cases (around 80 percent), we would expect the process to take between 2-3 months. In more complex cases it can take as long as 12-24 months.
Appointment of a Liquidator in a CVL
Once the decision to liquidate has been made a liquidator must be selected for any Creditors’ Voluntary Liquidation. 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.
Once appointed, the liquidator has significant powers at his/her disposal, including potentially investigating the company directors’ for wrongful trading if there is sufficient evidence.
Advantages and Disadvantages of a CVL
Here we outline the advantages and disadvantages of a Creditors’ Voluntary Liquidation process.
- Directors benefit from more control than a compulsory process
- Less risk of wrongful trading
- Creditor pressure is instantly removed
- Directors have the possibility to buy back assets
- Directors conduct will be investigated
- CVL’s are publicly advertised
- Personal guarantees will be called in by finance providers
- Very little chance of shareholder returns
Creditors’ Voluntary Liquidation Timeline
A CVL is a fast-paced and deadline-driven procedure. The first step is to call a shareholders’ meeting. Shareholders must be given 14 days’ notice of the meeting. However, the meeting can be held at shorter notice if 95% of shareholders are in agreement.
The day after the shareholders’ meeting where the company was wound up and a liquidator was nominated, the company directors have seven days to deliver a notice to creditors, requesting their vote on the resolutions passed.
The decision date or meeting on these resolutions should be no earlier than three days after the notice is delivered and no later than 14 days after the shareholders’ meeting.
Creditors’ Voluntary Liquidation Costs
Trying to identify the cost of a Creditors’ Voluntary Liquidation 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
A typical small business liquidation in the UK would cost between £5000 qnd £7000.
Who Pays the Insolvency Practitioner?
We tacked the subject of liquidators fees in detail here, but in principle the fees can be either a percentage of the assets sold, or a time-based charge. This cost is raised either way out of the assets of the insolvent company and the IP is paid after the secured creditors.
Rights of Employees
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.
Creditors’ Rights & Duties in a CVL Process
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
Creditors are paid by order of priority as a dividend from the sale of the company assets.
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.
What Happens to Directors in a Creditors’ Voluntary Liquidation?
Director’s should be aware that once a liquidator has been appointed, the directorial conduct in the period leading up to the insolvency will be under scrutiny.
If it is found that the director did not act in the best interests of creditors, or behaved in a manner not strictly legal, he may face accusations of wrongful trading, and there is the potential to be held personally liable for part or all of the company debts.
If you’re a company director, we can also advise you on where liquidation would bring with it director’s redundancy payment.
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