With any voluntary or compulsory liquidation process for an insolvent company that’s being chased by creditors, the liquidator will call a creditors’ meeting. Once it has been agreed with the board of directors that a voluntary liquidation is the best route, the liquidator agrees a suitable date and time for the creditors’ meeting. This usually takes place 10-21 days after the decision has been made.
A creditor’s rights during liquidation
Whether the creditors are part of a voluntary or compulsory liquidation, unsecured and secured creditors have specific rights. For secured creditors, when it comes to the distribution of realised funds from the sale of company assets, there is a legal pre-determined hierarchy for payment. Therefore, some creditors, such as HMRC, will be paid before others.
It’s not always the case that unsecured creditors have no rights when it comes to a liquidation process. Creditors that have a fixed charge on a company’s asset, or assets, do have a right to receive a distribution from the sale of those assets.
Both forms of creditors have the right to challenge a liquidator’s allocation of distributed funds but have to pursue this with a court application.
The creditors’ liquidation meeting explained
As part of the liquidation process, be it voluntary or compulsory, there are two important meetings that take place: the shareholders’ meeting and the creditors’ meeting. To get a better understanding of the creditors’ liquidation meeting process, let’s briefly explain the shareholders’ meeting. It is worth noting that in the current coronavirus climate, both of these meetings, and any subsequent ones, are held remotely either by telephone or online.
With a compulsory liquidation, it is normally the shareholders that make the decision unless a creditor is granted a winding up order by a court. In this instance, the company is forced into liquidation. There are three key actions at the shareholders’ meeting:
- The shareholders will be presented with the director’s report and Statement of Affairs
- The resolution to place the company into liquidation will be passed
- A liquidator is nominated by the shareholders.
It is normal practice for the creditors’ meeting to take place on the same day as the shareholders’ meeting. A creditors’ liquidation meeting can take place in any of the following formats:
- The director and the liquidator meet to discuss creditors – there are no creditors present – or this can be done over the telephone
- A conference call takes place between the liquidator, a director of the company and a small group of creditors
- A large meeting via an online/virtual platform with the majority of the creditors involved.
The meeting is usually no longer than 40-50 minutes. However, should there be complex issues to resolve from the discussion, or the creditors have a lot of questions, it can be much longer. Creditors also have the rights to call a physical meeting at the company’s office, a meeting room or at the liquidator’s office. However, the majority of the creditors must have voted for this option for it to take place.
At least one director of the company must be present and will be responsible for chairing the meeting. In practice, it is usually the liquidator that conducts the meeting on behalf of the company. At the meeting, the following will be discussed:
- Should the liquidator have any relationship prior to this liquidation with the company, it must be disclosed to the creditors
- The creditors will be presented with the director’s report and Statement of Affairs
- The creditors are invited to ask any questions of the director/directors
- The creditors may ask the liquidator to investigate any specific areas
- The creditors are entitled to nominate a different liquidator
- The creditors are entitled to form a liquidation committee
- If no liquidation committee is formed, the resolution to agree the liquidator’s remuneration is passed.
The aim of the creditors’ meeting is to reach a balance between the directors and the creditors that all parties can agree on. Let’s look at some of the key areas in the creditors’ liquidation meeting procedure.
A creditor is entitled to ask the company’s director any questions. However, they must be relevant to the liquidation and the company. If the liquidator deems the question inappropriate, they will intervene. The creditors’ conduct is expected to be professional at all times; any threats, bad language or violence and that creditor will be dismissed from the meeting.
In some cases, a creditor or group of creditors may choose to have their insolvency practitioner or solicitor in attendance at the meeting to ask any questions on their behalf. The director of the company is also entitled to have their solicitor present.
A liquidator of an insolvent company has a responsibility to investigate the directors’ conduct. However, they can also be asked by the creditors to investigate any other matters that they raise. In general, creditors’ concerns can be answered straight away but sometimes, the liquidator will need to investigate further.
The creditors are entitled to nominate a different liquidator rather than accept the shareholders’ choice. Whilst this isn’t a common practice, the reasons why creditors may choose this route include:
- A contractual agreement may be in place in exchange for them being represented at the meeting
- They feel that their choice of liquidator has better experience or knowledge in a specific area and may increase their opportunity of realising their debt
- They feel that their liquidator would be more objective in the liquidation proceedings.
If an alternative liquidator is nominated, the liquidator with over 50% of the creditors’ vote at the meeting is appointed.
A liquidation committee
Although rare, if there are three or more creditors at the liquidation meeting, they are entitled to form a committee. The committee’s purpose is to:
- Represent all the creditors as a whole
- Agree and approve the liquidator’s fees on behalf of all the creditors
- Be a link for discussion between the liquidator and all the creditors, particularly if there are any issues on any liquidation matters.
Closing the creditors’ meeting
Once the resolutions have been agreed and approved, and the director has signed the relevant documents, the creditors’ meeting is closed. If the meeting was held remotely, any signed documents will be sent to the liquidator.
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 to recover. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.