When a company becomes insolvent and directors wish to close the business, they can enter into what is called a Creditors Voluntary Liquidation (CVL) process. This process is often preferable for directors rather than facing a winding up petition from creditors.
The benefit of a CVL is that directors of the insolvent company are able to nominate their preferred liquidator (insolvency practitioner) rather than the court appointing the liquidator.
The liquidator, or insolvency practitioner (IP) handling the Creditors Voluntary Liquidation process must be licensed to be able to deal with realising the assets of the company, distributing the proceeds to creditors, as well as handling all the formalities and paperwork to close the company.
Why opt for a Creditors Voluntary Liquidation process?
There are a variety of reasons why an insolvent company may enter into a Creditors Voluntary Liquidation process. These include:
- The company has received a statutory demand or winding up petition from a creditor. If they cannot pay the debt, which is often the case, the directors can choose a CVL.
- The company fails the balance sheet test and is considered insolvent. The directors may choose a CVL as continuing as a business may be deemed wrongful trading.
- The company is not able to pay the rent on their premises and therefore the landlord may appoint bailiffs to seize the company’s assets.
- The company has defaulted on a ‘time to pay’ agreement with HMRC and has been issued with a winding up petition.
- The company has suffered severe bad debt and being unable to meet their current liabilities, i.e. pay their debts, the directors will opt for a CVL process.
What is the Creditors Voluntary Liquidation process?
In most circumstances, the directors of a company will have instructed an IP when debt difficulties arise. The IP will work with the insolvent company’s directors to assess their options before a decision is made to enter a CVL. Once the liquidator has been appointed by the directors, there is a set process that IPs must follow, as laid out by the Insolvency Act 1986 and certain regulations must be adhered to.
Step 1 – Meeting with the board of directors
The directors hold a meeting to discuss entering a Creditors Voluntary Liquidation process and appoint a liquidator. If they have been working with an IP, they usually confirm them as the liquidator.
Step 2 – The shareholders meeting
A shareholders meeting is called by the directors. Confirmation that the company is insolvent must be agreed and a Consent to Short Notice should be signed by at least 75% of the company’s shareholders. If there is no agreement by the shareholders, there is a 14-day notice period before the meeting with shareholders can be held.
Step 3 – The creditors’ meeting
This meeting follows the shareholders meeting but is often held on the same day. The company’s creditors will receive 7 days’ notice of the meeting as a statutory minimum. However, most liquidators allow at least 14 days’, if not a month’s notice.
The liquidator will provide the creditors with an Estimated Statement of the Affairs about the insolvent company before the meeting takes place. This statement sets out the company’s financial position, includes any liabilities and assets, and provides an estimated value that could be realised. Also prepared is a report that gives an overview of the company’s trading history, a summary of their recent accounts and a deficiency account.
Currently, the creditors’ meeting does not need to be held in person unless this is requested by 10 creditors or 10% of creditors in number. Once the shareholders have agreed to the insolvent company entering a CVL, the liquidation process will start at 23.59 on the decision date.
Step 4 – The liquidation
The liquidator starts the Creditors Voluntary Liquidation process and will continue to liaise with the creditors. The company’s creditors are able to raise any queries related to their claims with the liquidator at any time throughout the process.
All the company’s assets are valued independently, marketed, and sold in accordance with legal requirements. In most cases, directors of the company have the option to purchase any assets on the grounds that the purchase is negotiated through the IP and are sold at market value.
The IP collects the company’s outstanding book debts, resolves any employee claims and submits the relevant reports to respective government agencies, like HMRC. Once the company’s assets have been sold and monies realised, available funds will be distributed to creditors.
In accordance with the Insolvency Act 1986, there is a set order of priority that must be followed by IPs when distributing realised funds. Once the IP’s fees have been paid, next in line are secured creditors that have a fixed charge, then preferential creditors (this includes staff wage arrears and HMRC), followed by secured creditors with a floating charge and unsecured creditors.
Any unsecured creditors, such as customers and suppliers, may find that because they are at the bottom of the priority order, there may not be sufficient funds to pay their debts in full; sometimes they don’t get paid at all.
As part of the liquidation process, the IP must investigate any actions that were taken by the directors of the company, including former directors over a three-year period. Should any directors be found guilty of not fulfilling their fiduciary duties when they knew the company was insolvent or carried on trading to the point that the creditors were not considered, it could be considered wrongful or fraudulent trading, or misfeasance.
This may result in the director or directors being held personally liable for all or some of the company’s debts. They could also be disqualified from being a director of a company for up to 15 years.
Step 5 – Closing the company
Once the liquidator has completed all the steps in the Creditors Voluntary Liquidation process, they arrange for the company to be struck off the Companies House register. The company will no longer exist and any liabilities that are still unpaid are written off. The only exception to this is when any debts were personally guaranteed by the directors. Any evidence accumulated of wrongful or fraudulent trading by the IP must also be submitted to the court at this point.
Company or individual insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has to recover. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.