Understanding Creditors Voluntary Liquidation
The Role of Creditors, Directors, and Shareholders in a Creditors' Voluntary Liquidation (CVL)
In a CVL process, several parties are involved, including the creditors, directors, shareholders, and the insolvent company.
Directors
The CVL process is initiated by the directors based on the company's financial position and their realisation that the business is insolvent and unable to repay its debts. They're responsible for calling a meeting with a licensed insolvency practitioner to discuss the situation and seek advice on the best way forward. If they agree that liquidation is the best solution, they will propose that shareholders pass a resolution for voluntary liquidation.
Subsequently, meetings of shareholders and creditors will be convened to ratify the decision to liquidate and appoint a liquidator. The directors must provide the insolvency ractitioner with all necessary information about the company's assets, liabilities, and overall business affairs.
Shareholders
The role of the shareholders is primarily to vote on the resolution for liquidation proposed by the directors. They do this at a shareholders' meeting or by written resolution. A majority of 75% (by value of shares) is required to pass the special resolution for voluntary liquidation. They will also pass an ordinary resolution (50% majority required) to appoint a liquidator.
Creditors
Creditors are provided with a report on the financial position of the company and invited to ratify the shareholders nomination of liquidator (or take steps to appoint another insolvency practitioner), and decide whether or not to form a liquidation committee.
Once appointed, the liquidator acts on behalf of the creditors to collect and sell the company's assets, agree creditor claims, then distribute the proceeds to the creditors in the order of priority set out by law. During the liquidation process, creditors can ask the liquidator about the conduct of the directors and the overall administration of the liquidation. The liquidator will need to obtain approval from creditors on certain matters including the basis of paying remuneration.
The Difference Between Creditors' Voluntary Liquidation (CVL) and Other Forms of Liquidation
In the UK, there are several forms of liquidation that a company can undergo. Among these, the most commonly encountered are Creditors' Voluntary Liquidation (CVL), Members' Voluntary Liquidation (MVL), and Compulsory Liquidation. Understanding the differences between them is crucial in determining the most suitable course of action for an insolvent or solvent company.
Creditors' Voluntary Liquidation (CVL)
As stated above, CVL is a formal insolvency procedure initiated by the company directors when they realise that the company is insolvent i.e., it cannot pay its debts as they fall due or its liabilities outweigh its assets. The company directors, with the advice of a licensed insolvency practitioner, propose a resolution for liquidation to the shareholders. A meeting of creditors is convened and the company formally placed into liquidation. Following this, the company's assets are sold, and the proceeds are distributed to outstanding creditors.
Members' Voluntary Liquidation (MVL)
Unlike a CVL, an MVL is a procedure for solvent companies. It is commonly initiated by directors when they want to retire, or if they have no further use for the company. In this case, the directors declare a 'Declaration of Solvency', which states that the company can pay its debts in full within a period not exceeding 12 months. After paying off all liabilities and realising assets, any surplus is distributed amongst the shareholders.
Compulsory Liquidation
Compulsory liquidation, as the name suggests, is not voluntary. It occurs when a creditor petitions the court for a company to be wound up to recover the money owed to them. The court will appoint an Official Receiver, who acts as liquidator and sells the company's assets to repay the creditors. This form of liquidation is generally considered the last resort and can have severe consequences for the directors involved.
While all these procedures result in the dissolution of a company, the circumstances, processes, and implications differ significantly. It's vital for company directors to fully understand these differences before deciding which route is most appropriate for their situation. Seeking advice from a licensed insolvency practitioner is highly recommended to navigate these complex procedures.
The Impact on the Company's Assets During a Creditors' Voluntary Liquidation (CVL)
In a Creditors' Voluntary Liquidation (CVL), a company's assets are significantly impacted. The central role of the liquidator is to take control of, realise, and distribute the company's assets to its creditors. Let's delve into this process more thoroughly.
Seizing Control of Assets
Once the CVL process has been initiated and a liquidator is appointed, the directors lose control of the company and its assets. The liquidator takes over to ensure that the assets are managed correctly and fairly for the benefit of the creditors.
Realising the Assets
The liquidator's job is to realise, or sell, the company's assets. This could include tangible assets like property, machinery, or inventory, as well as intangible assets like intellectual property rights or customer databases. The goal is to generate as much capital as possible. However, the actual amount raised can depend on a variety of factors, including the type of assets involved, their condition, and the state of the market.
Distribution to Creditors
After the assets have been realised, the liquidator will distribute the proceeds among the creditors. This distribution follows a specific order of priority set by UK law. Secured creditors with a fixed charge, like mortgage lenders, are typically paid first. Then, certain preferential creditors like employees owed arrears of wages or redundancy payments are paid. Next, if funds allow, secured creditors with a floating charge and then unsecured creditors, such as suppliers, HMRC, and contractors, are paid. Shareholders are the last to receive any remaining funds, which is rare in a CVL.
Post-Liquidation
After liquidation, the company ceases to exist. It is struck off the Companies House register.
It's important to note that CVL is a complex procedure that carries a lot of weight for a company's financial position and reputation. Therefore, expert advice from an insolvency practitioner should be sought before making any decisions.
The Role of the Insolvency Practitioner in a Creditors' Voluntary Liquidation (CVL)
An insolvency practitioner plays a central and multifaceted role in the process of a Creditors' Voluntary Liquidation (CVL). Below, we outline some of the key responsibilities of an insolvency practitioner during a CVL.
Initial Advice and Decision-Making Support
A company considering a CVL should consult a licensed insolvency practitioner at the earliest signs of financial distress. The insolvency practitioner will provide advice about the company's financial position, directors responsibilities, and the potential consequences of a CVL. They can also explore alternative insolvency procedures, such as administration or company voluntary arrangements, which may be more suitable depending on the company's situation.
Preparation for CVL
If a CVL is deemed the best course of action, the insolvency practitioner assists in preparing for the procedure. This includes organising and conducting meetings with directors, shareholders, and creditors, and ensuring all necessary resolutions are properly drafted and passed. The insolvency practitioner also helps the directors prepare their statement of affairs, which provides a snapshot of the company's financial position, showing the value of assets and liabilities by category.
Acting as Liquidator
Once the CVL is underway, the insolvency practitioner acts as liquidator and takes control of the company's assets with a view to maximising realisations for the benefit of creditors. Annual reports on his acts and dealings will be provided to creditors and details of receipts and payments submitted to Companies House.
Investigating Company Affairs
The liquidator is also responsible for investigating the conduct of the company's directors leading up to the insolvency. This is to ensure that there has been no wrongful trading or misconduct that could have contributed to the company's insolvency. If such actions are identified, the directors could be held personally liable for the company's debts.
Final Duties
At the end of the liquidation process, the insolvency practitioner will prepare a final report summarising the actions taken during the liquidation and detailing the distribution of assets. They also apply to Companies House for the formal dissolution of the company.
Given their crucial role, it's important that a company facing CVL chooses a trusted, experienced, and licensed insolvency practitioner to guide them through the process.
The Role of Companies House in a Creditors' Voluntary Liquidation (CVL)
Companies House, as the UK's registrar of companies, plays an instrumental role in the process of a Creditors' Voluntary Liquidation (CVL). It is the official channel through which necessary documents are filed, crucial information is disseminated to the public, and ultimately, the formal dissolution of the company is recognised. Here are the key aspects of the role Companies House plays in a CVL.
Public Record Keeping
Companies House maintains a comprehensive, publicly accessible register of UK companies. This includes important information regarding the financial status of companies, director details, and whether a company is undergoing liquidation proceedings such as a CVL.
Filing of Crucial Documents
During the CVL process, several important documents are required to be filed with Companies House. These documents will include the directors statement of affairs, notice of appointment of the liquidator, and any resolutions passed by shareholders or creditors. These filings are crucial for the CVL process as they establish a formal record of the liquidation procedure and are publicly accessible, ensuring transparency.
Notification of Key Events
Another role of Companies House is to facilitate the notification of key events during the CVL process. For instance, upon commencement of the CVL, Companies House updates the company's status to 'in liquidation'.
Final Dissolution
The role of Companies House extends to the very end of the CVL process. Once all assets have been realised and the distribution to creditors completed, the liquidator submits a final report to Companies House. After a specified period, the company is formally dissolved and removed from the register, marking the official end of the life of the company and the CVL process.
In summary, Companies House plays a significant role in ensuring the transparency and integrity of the CVL process, providing a central repository for filings, maintaining a public register, and acknowledging the formal dissolution of companies undergoing CVL.
The CVL process
Making the Decision: Directors and Shareholders
The decision to enter into a Creditors' Voluntary Liquidation (CVL) is a significant one and is typically made by the directors and shareholders of the company. The steps leading up to this decision, as well as the roles played by directors and shareholders, are outlined below.
Recognising Financial Distress
The first step in the process involves company directors identifying the insurmountable financial difficulties their business is facing. If the company is insolvent and unable to pay its debts as they fall due, or if its liabilities exceed its assets, it may be time to consider a CVL.
Consulting an Insolvency Practitioner
Once financial distress is recognised, it is advisable for directors to consult a licensed insolvency practitioner. This expert can provide tailored advice based on the specific circumstances and financial position of the company, and guide directors on the best course of action.
Board Meeting
After consultation with the insolvency practitioner, the directors should convene a board meeting to formally discuss the company's situation. If the majority of directors agree that a CVL is the most suitable option, a resolution to that effect should be passed.
General Meeting of Shareholders
Following the board meeting, a general meeting of shareholders is convened. At this meeting, the directors present the situation and their proposal for a CVL. Shareholders must then vote on the proposal. For the resolution to be passed, a majority of 75% (by value of shares) is needed.
Notifying Companies House and Creditors
Once the decision to proceed with a CVL has been made, creditors must be notified and a meeting arranged. At this creditors meeting, the proposed liquidation and appointment of a liquidator are agreed. Companies House are sent a copy of the special resolution to wind up and the directors statement of affairs and notified of the appointment of a liquidator.
Role of the Shareholders
Whilst the shareholders have the right to vote on the resolution for liquidation, it's important to note that in the event of insolvency, creditors take precedence. Shareholders' role in a CVL is primarily to pass a special resolution to wind up the affairs of the company and and ordinary resolution to appoint a liquidator. Their nomination of liquidator is subsequently ratified or rejected by creditors.
Role of the Insolvency Practitioner
In a Creditors' Voluntary Liquidation (CVL) process, the role of a licensed insolvency practitioner is pivotal. Acting as the liquidator, the insolvency practitioner oversees the procedure to ensure a smooth and fair distribution of the company's assets. Here's a more detailed look at their key responsibilities:
Advice and Guidance
Prior to the CVL process, insolvency practitioners can offer advice to the directors of the company about its financial position. They evaluate the company's situation and suggest appropriate solutions, which may include a CVL if the company is insolvent and there are no viable alternatives.
Acting as Liquidator
Once the company decides to proceed with a CVL, the insolvency practitioner is formally appointed as the liquidator at the creditors meeting. The main role of the liquidator is to oversee the process of winding up the company.
Asset Realisation
The liquidator is responsible for identifying, collecting and selling the company's assets in order to raise funds for the repayment of creditors. This includes tangible assets such as property and machinery, as well as intangible assets like intellectual property.
Creditor Communication
Throughout the CVL process, the liquidator maintains communication with creditors, informing them about the progress of the liquidation. They will conduct a creditors meeting to outline the proposed liquidation, and then they distribute reports regularly to keep creditors updated.
Debt Repayment
The liquidator uses the funds raised from the sale of the company's assets to repay the costs of the liquidation and outstanding debts. Creditors are repaid in a specific order defined by law, with secured creditors being paid before unsecured creditors.
Dissolution of the Company
Finally, once all assets have been realised and the debts repaid as far as possible, the liquidator will file a final return with Companies House and the company will be dissolved ie removed from the register and no longer exists as a legal entity.
Creditors and Shareholders Meetings
Creditors and Shareholders meetings are integral to the CVL process, facilitating communication between all involved parties, and playing a pivotal role in the decision-making processes. Here's a breakdown of these key meetings:
Shareholders Meeting
A shareholders meeting, also known as a general meeting, is the first formal step in the CVL process. The company directors, having decided that a CVL is the best course of action due to insolvency, convene this meeting to present their resolution for the voluntary liquidation of the company.
At this meeting, a majority (75% or more) of shareholders must agree to the resolution for the company to enter into a CVL. Once the resolution is passed, the company officially enters into liquidation. This is also where the insolvency practitioner is proposed to be the liquidator, pending the approval of creditors.
Creditors Meeting
Following the shareholders meeting, a creditors meeting is typically held on the same day, though it can be conducted up to 14 days later. This meeting gives creditors the opportunity to review and approve the proposed liquidation and the appointment of the liquidator.
Creditors are provided with a Statement of Affairs, outlining the financial position of the company, and they have the opportunity to question directors about the company's demise.
Traditionally, these were physical meetings, but the law now allows for virtual meetings or decision-making processes through other means, providing all creditors have a chance to participate. Creditors can insist that a physical meeting os convened.
In the creditors meeting, the creditors can either affirm the appointment of the liquidator proposed by the shareholders or appoint a different liquidator of their choice. They can also form a creditors committee to represent their interests throughout the CVL process.
In conclusion, both shareholders and creditors meetings are fundamental to the CVL process. They ensure that all parties involved have a say in the liquidation process, guaranteeing transparency and fairness throughout the procedure.
Implications of CVL
The implications of Creditors Voluntary Liquidation (CVL) are multifaceted and involve various stakeholders within a business. Here are some significant consequences of proceeding with a CVL:
For the Company
When a CVL occurs, the company ceases to trade and its assets are sold to repay creditors as much as possible. The company will then be removed from the Companies House register, thereby ceasing to exist as a legal entity.
For the Directors
The conduct of the company directors leading up to the insolvency is scrutinised. If found guilty of wrongful trading or other misconduct, directors could face disqualification, personal liability for company debts, or even criminal charges. However, in most cases, directors are not personally liable for the debts of a limited company.
For the Employees
Employees are made redundant when a company enters a CVL. However, they have rights to claim redundancy pay, arrears of wages, holiday pay and notice pay from the Redundancy Payments Office. Their claims are classed as preferential, meaning they will be paid before unsecured creditors.
For the Creditors
The order of payment to creditors is typically as follows: costs of the liquidation, preferential creditors, secured creditors with a floating charge (up to a limit), unsecured creditors, interest incurred on all unsecured debts since the liquidation, and finally, shareholders. However, in many instances, unsecured creditors may receive little or no return.
For Shareholders
In a CVL, shareholders are the last to be considered when assets are being distributed. In most cases, shareholders may not receive any funds as the creditors are prioritised.
For the Wider Market
A CVL could potentially affect the reputation of the company directors, particularly if they were found to be involved in wrongful or fraudulent trading. The ripple effect on business partners, suppliers, and the industry at large can be significant, as it could potentially erode trust and impact future business relationships.
Remember, seeking advice from a licensed insolvency practitioner or a financial expert is crucial when facing insolvency, as each situation can vary.
Conclusion
The complexities of a CVL underline the importance of sound financial management and a proactive approach to dealing with financial difficulties. Although insolvency may sometimes be unavoidable, early intervention and expert advice can provide a business with more options to resolve its financial problems and potentially avoid liquidation.
Remember, each business situation is unique, so if you are facing the possibility of a CVL, it is essential to consult a licensed insolvency practitioner to explore your options and understand the potential consequences.
