Being faced with putting a company into an insolvent liquidation is a difficult position for a director to find themselves in.
It can be tempting to bury your head in the sand and wait until one of the creditors forces the company into liquidation by presenting a winding-up petition to the court, it’s often better to take control and initiate a creditors’ voluntary liquidation.
You should note that a creditors’ voluntary liquidation is the route for an insolvent company: in law it is any voluntary liquidation in which the directors have not made a statutory declaration of solvency. If the company is solvent and the directors can make that declaration, a Members’ Voluntary Liquidation should be used.
So why should you consider a creditor’s voluntary liquidation over a compulsory liquidation?
Working with the Shareholders
A creditors’ voluntary liquidation normally begins with a special resolution of the shareholders. At a meeting it needs at least 75 per cent of the votes cast; as a written resolution it needs members holding at least 75 per cent of the total voting rights.
This will give you the opportunity as a director to explain the situation fully to the shareholders and receive any valuable input they may have relating to the process. It also allows you to show the shareholders that you are taking a pro-active approach to the company’s problems, which might help with future relations.
Time to Prepare
As you are initiating the liquidation process, you will have the time to prepare for it.
This means the ability to take actions to reduce the scope of creditors losses or to capitalise money on stock and assets in a timely manner that is more likely to yield a better return for the company.
By comparison, a compulsory liquidation can come at any time and once it’s commenced, complete control of the company is handed over to the liquidator.
Appointing the Liquidator
In a creditors’ voluntary liquidation the shareholders can nominate a liquidator, who must be a licensed insolvency practitioner, usually on the directors’ proposal; the creditors then decide. Under section 100 of the Insolvency Act 1986 the creditors are invited to make their own nomination through a decision procedure, and where the two differ theirs prevails, subject to any application to the court. Most nominations go through unopposed, so in practice you usually do get the practitioner you chose — but it is a nomination, not an appointment, and that is still a great deal more say than a compulsory liquidation gives you, where the official receiver normally takes office automatically.
As the liquidator takes control over all of the company’s property on appointment, the decision of which liquidator to appoint is an important one that should not be taken lightly.
In a compulsory liquidation, the official receiver normally becomes liquidator when the court makes the winding-up order (the exception is where the order follows an administration or is made while a CVA supervisor is in office, when the court may appoint the former administrator or the supervisor), and the directors have no say at all in who this will be.
Protection for Directors
Liquidators are obliged to investigate the conduct of the directors prior to the liquidation.
If you and any other directors take steps to put the company into liquidation at an early stage of the company’s insolvency, the investigation by the liquidator is less likely to uncover the types of misconduct for which a court can make you personally liable, or which might lead to you being disqualified to act as a director in the future.
The insolvency practitioner appointed as a liquidator will also be able to give you advice before the liquidation process starts as to how to prepare for any investigations.
Easing a Stressful Situation
When you are the director of a business that’s in trouble, it can be very stressful. You can find yourself in a situation where you are being chased by creditors on the phone, by letter and email to pay bills that the company cannot afford to pay.
Once the liquidator is in office, the directors’ powers cease, except so far as the liquidation committee (or the creditors, if there is no committee) sanction their continuing, and the liquidator deals with creditors’ claims against the company. That can save you a number of unpleasant conversations and letters before a compulsory liquidation is forced upon the company. There is no automatic stay in a creditors’ voluntary liquidation: legal action against the company stops only if the court orders it. Creditors can still pursue you personally on a personal guarantee or any other personal liability.
Limiting the Damage to Your Reputation
Insolvent liquidations are all a matter of public record but creditors’ voluntary liquidations receive less public coverage than compulsory liquidations.
A winding-up petition is advertised in The Gazette before the court hearing where the petition is heard, and the winding-up order is gazetted after it is made. It is therefore very clear to the public that a creditor has tried to force the company into liquidation.
In contrasting, a creditors’ voluntary liquidation does not require a court hearing. The fact that the decision was a voluntary one, taken by the shareholders on the directors’ recommendation, and not a hostile one forced by a creditor may have reputational benefits for you and the other directors.
Appeasing Creditors
As discussed above, if you seek a creditors’ voluntary liquidation, you will have more time to prepare the company before it goes into liquidation, which could mean a greater return for the company’s creditors than if the process was forced through a compulsory liquidation.
A creditors’ voluntary liquidation also puts your account of what happened in front of creditors properly. The report and Statement of Affairs that go out with the decision procedure set out the trading history and the reasons for the failure in your own words, and creditors can put questions to the office-holder. Where enough creditors ask for a physical meeting, you may face them directly. Either way, creditors hear a reasoned explanation rather than silence, which matters when conduct is later reviewed.
You do not have this opportunity with a compulsory liquidation.
Purchasing Assets
If you are considering setting up a new company with the same or a similar trade to the insolvent company, you may want to consider buying some of the company’s assets. This is not a pre-pack, which is a sale of the business made through an administration. A sale of assets before or during a liquidation is a different transaction, and a sale at less than its value can be challenged. You could discuss it with the insolvency practitioner prior to appointing them as liquidator.
It’s possible to purchase assets from the company with a compulsory liquidation but it’s a much lengthier and trickier process.
A Quicker Process
Once the Insolvency Practitioner has been instructed, the creditors’ decision date must fall no later than 14 days after the winding-up resolution under a Creditors’ Voluntary Liquidation (any time you spend preparing before the resolution is extra), whereas the process can be much longer in a compulsory liquidation. Since April 2017 that decision is taken by deemed consent or at a virtual meeting. A physical meeting is held if creditors meeting the statutory threshold (10% in value, 10% in number, or 10 creditors) request one. Under deemed consent, it is also held if creditors representing at least 10% in value object to the nomination of a liquidator. Both are exceptions, which is one reason the process moves faster.
A Cheaper Option
The fees for a compulsory liquidation are generally higher, in part as fees have to be paid to the Secretary of State – this is not required in a Creditors’ Voluntary Liquidation so overall the costs are lower.
Need Advice About Liquidation?
If you want to talk to a member of the team about a creditors’ voluntary liquidation and how it might solve your situation, call us on 0208 444 3400.