When a company becomes insolvent and is unable to pay its creditors, if all other efforts have been exhausted to save the company, it will enter a liquidation process. There are several types of liquidation, and one of the most common is a Creditors Voluntary Liquidation (CVL).
Because it is voluntary liquidation, the Creditors Voluntary Liquidation process is started by the directors of the company. They will notify the shareholders that the business is no longer viable and it must stop trading. From this point, there are a series of steps that must be undertaken to complete the process and close the company.
Reasons for liquidating a company
There comes a point when directors of a company need to consider voluntary liquidation. This might happen when:
- There aren’t the resources to pay creditors
- There is the potential to add yet more debt
- The company is no longer viable
- Creditors are threatening legal action or a winding up petition.
By entering into a Creditors Voluntary Liquidation process, pressure from creditors will cease. Once the liquidation process has been completed and the company is taken off the register at Companies House, it is no longer able to trade. However, former directors are able to become a director of another company as long as it is not under an identical or similar name.
Creditors Voluntary Liquidation Process
A CVL will be handled by a licensed insolvency practitioner and there is a specific series of steps that need to be followed, as set out below.
Step 1 – Directors’ Meeting
Once the decision has been made to liquidate the company and the shareholders have been notified, a board meeting is called. This is in accordance with the Companies Act 2006, to pass what is known as a Special Resolution to wind up the company. A licensed insolvency practitioner will be appointed by the shareholders who grant the insolvency practitioner with the authority to take over the liquidation process, with support from the directors.
Shareholder and creditor meetings are arranged for approximately 14 days later, which allows time for notices to be served to creditors. In the current coronavirus climate, these meetings take place virtually via an online platform. The directors assist the IP as much as possible at this stage as the company is not yet formally in liquidation.
If there are any fixed assets, the IP will instruct professional agents to value the assets and provide a detailed report. The assets will be sold at market value at a later date to raise funds to pay the liquidator fees and creditors.
At this point, the insolvency practitioner, or IP, will contact the company’s bankers and accountants to gather all the relevant financial information, as well as liaise with HMRC.
Employees of the company are able to submit RP1 forms to the Redundancy Payments Office with regard to salary arrears, redundancy pay, outstanding holiday pay and any pay in lieu of notice.
Step 2 – Shareholders Meeting
The directors will sign a Statement of Affairs document, which summarises the company’s liabilities and assets. Then the document is presented to the shareholders to either agree or reject the winding up of the company. For the winding up resolution to be passed, a minimum of 75% of the shareholders must agree to the notice. This resolution officially appoints a liquidator.
Step 3 – Creditors’ Meeting
The creditors’ meeting is usually held on the same day as the shareholders meeting. Prior to the meeting, a report will have been prepared that summaries the financial position of the company. This will include the Statement of Affairs document that lists all the creditors and a deficiency account.
Creditors are able to ask any questions of the directors and ask the liquidator to investigate any areas of concern they may have. Resolutions are proposed and ratified. Sometimes creditors will propose an alternative liquidator. However, the liquidator only needs 50% of the creditors to agree to their appointment.
Step 4 – The Liquidation Process
Once the shareholder and creditor meetings have been held, and the liquidator is formally appointed, the liquidator will continue with handling all the formalities of the liquidation process. This includes placing an advert in The Gazette and notifying Companies House of the company’s intended liquidation. The matters handled by the liquidator will include:
- Handling the sale of company assets
- Investigate the company’s financial records and submitting a report to the Insolvency Services within three months from their appointment
- Instructing recovery agent specialists to handle other assets, such as book debts
- Deal with creditors’ claims and distribute realised funds to creditors.
The Creditors Voluntary Liquidation process could take only around six months, or it could take a few years. It all depends on the size of the company and complexity of the liquidation process.
Throughout the process, the liquidator is required to send progress reports to the shareholders and the creditors. The reports are also filed with Companies House.
Step 6 – Liquidation Conclusion
Once the company’s assets have been realised, the liquidator’s fees have been paid and any VAT or other tax payments have been made to HMRC, any remaining funds are distributed to the creditors.
The liquidator arranges a meeting with shareholders and creditors in order to obtain release as liquidator of the company, and the final payments and receipts are agreed. Once the liquidator has been released, the company is dissolved at Companies House within three months.
Advantages and Disadvantages of CVL
Winding up an insolvent company is never an easy task. There are advantages and disadvantages to the process.
- With a voluntary liquidation, the directors of the company have more control than they would with a compulsory liquidation.
- A CVL relieves the pressure from debt and creditors.
- It is possible for the directors to buy back assets, as long as it is at the market value.
- It can reduce the risk of wrongful trading.
- Any liquidation process, voluntary or compulsory, will mean the directors’ dealings and conduct will be investigated by the liquidator.
- The company’s insolvent state will be publicly advertised in The Gazette.
- It is highly unlikely that shareholders will receive any financial returns.
- Any director personal guarantees will be called in by creditors.
Business insolvency is not something that any business 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 in recovering. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.