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Sometimes referred to as a ‘voluntary winding-up, this procedure is initiated by the directors and shareholders of a business. CVLs are determined by realisation that the business cannot pay debts as and when they fall due.
A creditors’ voluntary liquidation (CVL) is a process by which company’s directors choose to voluntarily bring the business to an end by appointing a liquidator (who must be a licensed insolvency practitioner) and the company assets are sold.
At the end of the process, the company is dissolved.
Typically, a company goes into CVL after its directors realise that its liabilities exceed its assets or it cannot pay its debts as they fall due and so the company cannot carry on its business and this helps to differentiate it from a ‘winding up’ order in which the Court forces the business to liquidate.
A director can propose a creditors’ voluntary liquidation if:
This means the company will stop trading and be liquidated (‘wound up’)
The process starts with either the directors passing a special resolution, often at an Extraordinary General Meeting (EGM), to wind the company up or the directors ask an Insolvency Practitioner to step in before the meeting is held.
The timing of this can vary depending on whether the directors believe that there is something worth salvaging from the company but the trigger is often that the directors become aware that its liabilities exceed its assets or it cannot pay its debts as they fall due and so the company cannot legitimately carry on its business.
The Gov.uk website says;
You must call a meeting of shareholders and ask them to vote.
75% of (voting) shareholders must agree to the winding-up to pass a ‘winding-up resolution’.
Once the resolution is made there are 3 steps you must follow.
Often, the trigger for a CVL can be quite sudden, as even though directors may have a feeling the business is not going as well as they hoped, the realisation that they cannot continue comes quite suddenly.
In many cases, directors will look to save the firm and at this point they start looking around for alternatives.
A licensed Insolvency Practitioner will be able to advise on the options which may include;
If you decide to go ahead with the CVL you are obliged to invite all the creditors to attend a meeting within 14 days of the winding-up resolution. This will not however be a physical meeting, unless requested by 10% of the creditors by value, it will be a “virtual meeting” or a meeting by correspondence, unless a “decision making process” (see below) is followed.
A virtual meeting may be by telephone conference call or Video conferencing facilities if available. A meeting by correspondence will entail creditors returning a proxy or voting form by a given time and date, usual 23.59hrs on a @date. A decision making process, can include what is called a deemed consent procedure where the shareholders nominated liquidator is automatically appointed unless creditors object.
At the virtual meeting, the following must be in attendance:
You must tell the creditors about the meeting, or the deemed consent procedure at least 7 days before it happens and if thought appropriate advertise it in The London Gazette
At a meeting the company’s creditors can:
The directors must present to creditors a statement of affairs of the company 24 hours before the meeting. The statement of affairs gives details of the company’s creditors and assets.
Creditors will be invited to provide the liquidator with details of their claim against the company (known as a ‘proof of debt’). Creditors will need to provide a proof of debt at the meeting. The chairman then assesses all proofs of debt and may either accept a claim in whole or in part/or reject it completely.
The liquidator must be a qualified insolvency practitioner; this is a legal requirement.
Their role will be to collect any outstanding debts, realise the best value possible for the company assets and then distribute the proceeds to anyone who has a claim over those business assets.
In most instances, the distribution hierarchy starts with secured creditors, preferential creditors, which are predominately employee related claims and then finally unsecured creditors.
Liquidator’s fees are typically paid as an expense of winding up the affairs of the company and are paid out of the company’s assets.
As a Creditor, you will be invited to attend a “virtual meeting” or a meeting by correspondence at which you have the power to vote on the appointment of the Liquidator and ask questions of the Directors of the business.
If your debt is a ‘secured’ debt then you will be given priority in the distribution of funds available after the sale of business assets.
As an unsecured creditor, you will often be at the end of the queue for the distribution of funds and often receive a ‘pence in the pound’ settlement or sometimes nothing at all.
Directors must prepare a statement of affairs of the company which must be presented to creditors 24 hours before the meeting. One of the existing directors must chair the meeting.
When a company enters CVL the director’s power ceases immediately and all power then vests with the liquidator.
Directors may further be investigated by the liquidator as part of the liquidation process to ensure that they behaved correctly and that any actions taken during the time the business was technically insolvent did not breach their legal and fiduciary duties.
Director’s liabilities in this respect are not limited and they may find themselves personally liable for some of the debt if they are found guilty of wrongful trading.
Often the hardest hit, employees find that once a Company enters CVL their contracts of employment cease immediately.
Liquidators can and often do retain some staff to help during the liquidation process however employees are often eligible for a redundancy payment.