To cease a Community Interest Company (CIC) with debts will typically involve it going into creditors voluntary liquidation or perhaps compulsory liquidation. Attempting to dissolve the company without first going into liquidation could be met with objections from unpaid creditors.
Although CICs are a special type of limited company designed to benefit the community, when they are insolvent, the interests of creditors tend to supersede the other interests the company may have. When a CIC faces insurmountable debts, directors’ duties dictate that they must act in the interest of creditors.
Recognise Insolvency Of The CIC
The first step is to determine whether your CIC is insolvent. A company is insolvent if:
- It cannot pay its debts as they fall due (cash flow test), or
- Its liabilities exceed its assets (balance sheet test).
If a CIC is unable to meet its obligations, it must avoid trading while insolvent if liquidation is inevitable.
Cease Trading Immediately
If a CIC is insolvent with reasonable prospects of avoiding liquidation, it should stop trading immediately to prevent worsening the position for creditors. Continuing to trade while insolvent could lead to accusations of wrongful trading.
Speak To An Insolvency Practitioner (IP)
A director of a CIC cannot liquidate the company themselves. Only a licensed Insolvency Practitioner can be a liquidator and wind up the CIC through formal liquidation.
Creditors Voluntary Liquidation Of A CIC
If the director considers it necessary to wind up a CIC with debts it cannot discharge and pay, then the use of the creditors voluntary liquidation (CVL) procedure is likely to be appropriate.
As a result, the directors must:
This will be followed by a decision procedure, which can either be a virtual meeting or deemed consent vote of creditors to confirm the appointment of the Liquidator.
Liquidator Takes Control
Once appointed, the Liquidator will take over the management of the company. Their responsibilities include:
- Realising any company assets,
- Investigating the company’s affairs (including director conduct),
- Distributing funds (if any) to creditors in accordance with insolvency law,
- Ensuring the CIC’s dissolution is registered with Companies House.
CICs have an asset lock, so any surplus funds (after paying creditors and costs) must be transferred to another asset-locked body or used for the community purpose, as required by Regulation 23 of The Community Interest Company Regulations 2005.
CICs also have a dividend cap by virtue of Regulation 22 of The Community Interest Company Regulations 2005, which caps the dividend at 35% of the company’s distributable profits. A liquidator undertaking investigations may, in the event of an unlawful dividend, have to consider clawing the same back from shareholders as part of the winding up process.
Inform The Regulator
The Office of the Regulator of Community Interest Companies should be notified of the liquidation.
Closure And Dissolution Of The CIC
Once the liquidation is complete, the CIC will be dissolved and removed from the register at Companies House. Directors are generally discharged from their duties at this point unless misconduct is found during the Liquidator’s investigation.
Compulsory Liquidation
It is possible, in the alternative, to petition the court to wind up the company for it to be placed into compulsory liquidation. However, this is more typically a procedure adopted by creditors rather than the directors, who may wish to have greater control of the CIC in the build up to liquidation.
More Information
For more information, check out our guide on wind up of a Community Interest Company (CIC).
