What Is Creditors Voluntary Liquidation Of A Limited Company?
It involves the end of the insolvent company and the distribution of the company’s assets to the creditors. This procedure enables directors to deal with unsecured limited company debts that are not personally guaranteed.
As a Director you may see voluntary liquidation as an appropriate exit from a stressful situation for you to liquidate your company; whilst addressing all of the creditors, appropriately. If the limited company has liabilities that it cannot afford to pay and you would like to move on without the stress of the company’s debts hanging over your head, this type of procedure may be an appropriate option. Although it should be seen as a last resort, liquidating a company via this route can be considered a reasonable decision. Apply for a CVL online here.
Creditors Voluntary Liquidation And How It Can Help
Creditors Voluntary Liquidation can help as follows:
- Enables Directors to face up to the company’s difficulties.
- Provides a complete solution once and for all to the company’s financial crisis.
- Draws a line in the sand on trading and therefore means no further liability could arise for a Director for any period of Wrongful Trading.
- Free up the Directors from the burden of company debt so they can move on to a conceivably better trading future elsewhere.
- Demonstrates that the Directors have been proactive and taken professional advice.
- It can be achieved at a relatively low cost.
- Employees can claim their redundancy entitlement and receive compensation from a government scheme.
- Legal action is usually halted.
- For creditors it could unlock claims against Directors producing enhanced returns previously unavailable.
What Is Voluntary About A Creditors Voluntary Liquidation? How can Creditors Voluntary Liquidation help?
The name Creditors Voluntary Liquidation is intended to explain that it is a process started by the Directors of the limited company, not by the insolvent company being forced into Liquidation. It is akin to the Directors jumping before they are pushed.
If the company was forced into liquidation it would go into Compulsory Liquidation which is where the Court orders that the company being wound up and the company has no choice in the matter. In the case of a Creditors Voluntary Liquidation, the company still has a choice in the matter.
However, many Directors consider it to be the right and responsible approach to be proactive for the overall benefit of the company and its creditors by ensuring that appropriate professional advice is taken. It will enable the processes of concluding the company’s activities are swiftly undertaken instead of waiting for creditors to take their own action themselves.
Creditors Voluntary Liquidation Procedure: What Is Creditors Voluntary Liquidation?
In order for a limited company to go into Creditors Voluntary Liquidation, a formal legal process needs to be followed fully and properly in accordance with the company’s Constitution. The company’s constitution is governed by its Articles of Association that control how it operates.
The company’s Articles will set out the rules concerning how the Directors can operate and how formal Meetings of the company’s shareholders are to be held.
Passing A Resolution Of The Board Of Directors
In the first instance in order for a company to go into Creditors Voluntary Liquidation a meeting of the Board of Directors of the company needs to be held. The Board of Directors of the company need to consider the financial position of the company, any advice that the Directors have received and then vote on a Board Resolution.
If the Board of Directors pass a resolution for the company to go into Creditors Voluntary Liquidation, then the company can hold a Meeting of the shareholders to see if they will agree to pass a resolution accordingly.
What Happens If the Board Of Directors Do Not Pass A Board Resolution?
If for any reason the Board of Directors do not pass a resolution for the company to be placed into Creditors Voluntary Liquidation then the company cannot follow the usual path into CVL.
The options available for the company are:
- The Shareholders call for a Meeting to be held.
- The Shareholders remove and change some of the Directors.
- To go into Compulsory Liquidation.
Can The Shareholders Break The Deadlock?
The shareholders can break the deadlock if they want the company to go into Creditors Voluntary Liquidation. They will typically be able to do this by first seeking to hold a Meeting of the shareholders under Section 303 of the Companies Act 2006. If however that does not happen then the shareholders may need to remove and replace some of the Directors so that the Meeting be convened.
Why Might Directors Be Reluctant To Go Into Creditors Voluntary Liquidation?
A Director might be concerned about going into Creditors Voluntary Liquidation if they fear financial scrutiny by the appointment of a Liquidator. They might be concerned about Wrongful Trading and the consequences of personal liability for some or even all of a company’s debts.
Holding A Meeting Of The Shareholders
If the company calls a Meeting of shareholders then in order for the company to go into Creditors Voluntary Liquidation it needs to pass a shareholders resolution that the company be wound up as a Special Resolution and an Ordinary Resolution to appoint an Insolvency Practitioner to be the Liquidator. A Special Resolution requires at least 75 of the shareholders with voting rights to approve it whereas an Ordinary Resolution requires more than 50% of the shareholders with voting rights to approve it.
For Creditors: How can Creditors Voluntary Liquidation help?
How can Creditors Voluntary Liquidation help? It can help explain to creditors who might have been somewhat in the dark as to why the company needs to go into liquidation and why they have not been paid.
Although at a Meeting of the company’s shareholders it can be wound up, the appointment of the Liquidator by the shareholders (sometimes referred to as the Members) must then be confirmed by the company’s creditors.
It is common practice to hold a procedure such as a Virtual Meeting or a Decision Procedure by written correspondence to enable creditors to vote on the appointment of the Liquidator.
Information To Be Provided To Creditors Before Voting On The Liquidator’s Appointment
It is a requirement for creditors to be provided with information to enable them to understand the company’s financial position.
The creditors must be provided with a Statement of Affairs showing details of the company’s assets, liabilities and details of its creditors and shareholders.
In addition, it is also necessary to provide the following information by virtue of Statement of Insolvency Practice Number 6:
- Where an insolvency practitioner is assisting in the obtaining of deemed consent or the convening of a decision procedure, the insolvency practitioner should take reasonable steps to ensure that:
a) the convener is made fully aware of their duties and responsibilities;
b) that the instructions to the insolvency practitioner to assist are adequately recorded;
c) the convener and /or chair is informed that it may be appropriate for them to obtain independent assistance in determining the authenticity of a prospective participant’s authority or entitlement to participate and the amount for which they are permitted to do so, in the event these are called into question.
- An insolvency practitioner should seek to ensure that the information available in advance of a deemed consent or decision procedure for the purposes of appointing a liquidator facilitates the making of an informed decision by those that are entitled to participate. Key information likely to be of interest to prospective participants (in addition to that required by statute), will commonly be:
a) the date of the instructions to the insolvency practitioner to assist in the deemed consent or decision procedure and by whom those instructions were given;
b) disclosure of any amounts paid by or on behalf of the company in respect of those instructions and to whom they were paid;
c) details of any prior involvement with the company or its directors that could reasonably be perceived as presenting a threat to that insolvency practitioner’s objectivity, or that of the nominated liquidator (if different);
d) a summary of the company’s relevant trading activity and financial history, which would typically include (but may not be limited to):
i) an explanation of the causes of the company’s failure;
ii) the name(s) and company number(s) of parent, subsidiary and associated companies;
iii) extracts from the company’s recent accounts (whether or not filed);
iv) an explanation of any material transactions conducted in the preceding 12 months, other than in the ordinary course of business.
e) By way of explanation of a statement of the company’s affairs;
i) a deficiency account reconciling the position shown by the most recent balance sheet to the deficiency in the statement of affairs;
ii) the names and professional qualifications of any valuers whose valuations have been relied upon for the purpose of the statement of affairs and a summary of the basis of valuation adopted.
Any information should ordinarily be available not later than the business day prior to the decision date.
What Happens After The Liquidator Is Appointed? How can Creditors Voluntary Liquidation help?
In a Creditors Voluntary Liquidation, once the Liquidator has been appointed, he or she will typically issue a questionnaire to the Directors and collect from the Directors the company’s books, papers and records.
The Liquidator will undertake an Initial Assessment as to the results of their investigations into the company’s affairs and the reasons for it having entered into Creditors Voluntary Liquidation.
What Is The Initial Assessment Of A Liquidator?
The Initial Assessment of a Liquidator is a requirement under Statement of Insolvency Practice 2 (“SIP 2”) to undertake an assessment to consider if there could be any matters which could lead to recoveries for the company and as a result consider what investigations might be required to benefit that position.
What Matters Ought To Be Considered For Further Recoveries?
The matters referred to in SIP 2 are as follows:
- Conduct of management.
- Prior transactions susceptible to challenge.
- Consequences of possible criminal offences
Directors Conduct Report
Within three months of being appointed the Liquidator must complete a questionnaire for the Insolvency Service agency that considers Director Disqualification and in more serious cases they may consider opening a criminal investigation into the conduct of a company’s Directors.
The Liquidator needs to realise any assets and subject to costs of the liquidation then distribute any surplus to creditors before closing down the case.
This guide: What Is Creditors Voluntary Liquidation? is about how can Creditors Voluntary Liquidation help and it is not legal advice and not legal advice and not to be relied upon. It is provided for information purposes only and no liability is accepted for any reliance placed upon it. You may Contact Us for advice on your specific case.