Irwin & Company,
If your company is facing financial distress, a creditors’ voluntary liquidation (CVL) is the most effective way to wind up the business. Often referred to as a ‘voluntary winding-up’, a creditors’ voluntary liquidation results in the closing down of the business and the sale of its assets in order to pay its debts.
A CVL is a voluntary form of liquidation determined by the realisation that a business cannot pay its debt; it must be instigated by the company directors with the agreement of the shareholders. Since the start of the coronavirus pandemic, the UK has seen an overall rise in the number of creditors’ voluntary liquidations resulting from the negative economic climate. Official figures issued by the Insolvency Service show that 3,471 CVLs took place in Q3 of 2021. In comparison, 3,083 CVLs took place in Q3 of 2018.
If your company is concerned about paying its debts, the expert team at Irwin Insolvency is here to help. Contact our experienced insolvency practitioners for more information on creditors’ voluntary liquidations.
A creditors’ voluntary liquidation is a formal liquidation procedure whereby company directors, with the agreement of shareholders, choose to voluntarily bring the business to an end by appointing a liquidator.
The liquidator must be a licensed insolvency practitioner. Their primary objective is to organise the successful sale of company assets in order to pay its debts. At the end of the liquidation process, the company is dissolved and struck from the Companies House register.
Typically a company goes into CVL after its directors realise that its liabilities exceed its assets, or it cannot pay its debts as and when they fall due. It’s important to stress that a CVL is voluntary; this helps to differentiate it from a ‘winding-up’ order issued by the court, which forces a business into compulsory liquidation.
A director can propose a creditors’ voluntary liquidation if:
The result of a CVL is that the company will stop trading and be liquidated (‘wound up’). Because of the finality of the procedure, it’s only recommended when other insolvency measures have failed.
The CVL process starts with either the directors passing a special resolution to wind the company up, often at an extraordinary general meeting (EGM), or the directors asking an insolvency practitioner to step in before the meeting is held.
The timing of this varies depending on whether the directors believe there’s something worth salvaging from the company. The trigger is often the directors becoming aware that its liabilities exceed its assets or it cannot pay its debts, so legitimately cannot carry on its business.
The process, according to the legal framework laid out by the Insolvency Service, states that:
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 three steps you must follow:
A CVL should only be used as a last resort, as it results in the complete closure of a company.
Often, the trigger for a CVL can be quite sudden. Even though directors may have a feeling the business isn’t going as well as they hoped, the realisation that they cannot continue might come quite suddenly when creditors begin chasing payments.
In many cases, directors will look to save the firm rather than liquidating it, and at this point they start looking around for alternatives.
A licensed insolvency practitioner will be able to advise on the alternative options to CVL, which may include:
If you decide to go ahead with a CVL, you’re obliged to invite all creditors to attend a meeting within 14 days of the winding-up resolution being passed. This will not, however, be a physical meeting, unless requested by 10% of the creditors by value. Instead, 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 entails creditors returning a proxy or voting form by a given time and date, usually at 23.59 on a date specified. A decision-making process can include what is called a deemed consent procedure, whereby 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 seven days before it happens. If appropriate, it must also be advertised in The London Gazette in order to make the liquidation public knowledge.
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 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 distribute the proceeds to anyone who has a claim over those business assets.
There is a preferred order or distribution hierarchy that must be followed when funds from the sale of assets are handed over to creditors. This starts with secured creditors, then preferential creditors – which are predominately employee-related claims – and 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’ll 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 company directors.
If your debt is secured debt, you’ll be given priority in the distribution of funds available after the sale of business assets. Secured creditors commonly include banks or other moneylenders that issued secured loans to a company.
If you’re an unsecured creditor, you’ll often be at the end of the queue for the distribution of funds and may 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 vests with the liquidator.
Directors may be investigated by the liquidator as part of the liquidation process to ensure that they behaved correctly and 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’re found guilty of wrongful trading as a result of a post-liquidation investigation.
Often the hardest hit, employees find that once a company enters CVL their contracts of employment cease immediately. Ultimately, the closure of a business means that employees, staff and contractors all need to be let go.
Liquidators can and often do retain some staff to help during the liquidation process. In certain cases, members of staff may be kept on temporarily in order to ensure that the winding-up process is as smooth as possible, or may even be kept on if parts of the business are sold to new owners.
Employees do have certain rights when it comes to their pay, and they should ensure that they are given their correct allowances in terms of redundancy pay, outstanding salary, sick pay and holiday pay. An insolvency practitioner can advise on employee-related issues, too.
Or complete a contact form over on our contact page to list the nature of your CVL and your individual requirements in more detail.