A Creditors’ Voluntary Liquidation is a formal process for closing an insolvent company voluntarily. It starts when the shareholders pass a special resolution to wind up, usually on the directors’ recommendation. The directors must then ask the creditors to decide who the liquidator will be.
It’s often chosen by directors as a means of taking control in the face of continued creditor pressure and the imminence of a Winding up Petition.
First consultations are free of charge, and with no obligation.
A benefit of a CVL is that unlike in a Compulsory Liquidation, the company proposes its own liquidator rather than having one imposed on it: the shareholders nominate an insolvency practitioner when they pass the resolution to wind up. The nomination is not the final word. Creditors take the decision on who acts, and they can appoint a different liquidator. The Liquidator, once appointed, will deal with realising any assets of the company and making distributions to creditors.
Arrange Liquidation with Your Creditors
A licensed insolvency practitioner at AABRS® is able to act as Liquidator of a company in order to assist directors in the formalities of arranging liquidation to pay creditors and close the company.
It is important that company directors take advice at an early stage, as they need to understand their responsibilities. Once insolvency is likely, the directors must consider the interests of the creditors as a whole. From the point they know, or ought to conclude, that insolvent liquidation or administration cannot reasonably be avoided, they must take every step they reasonably can to minimise the loss to creditors. The failure to do so might lead to potential personal liabilities for the company directors in the future.
First consultations are free of charge, and with no obligation.
What is Voluntary Liquidation?
Voluntary Liquidation means the decision to close down a limited company, usually with the threat of insolvency looming.
When the shareholders vote to wind up, the winding up begins. The company is dissolved at the end of the liquidation, three months after the liquidator’s final account is registered at Companies House, unless the court defers the date. Voluntary liquidation means this is a company decision and not one forced upon by the court.
Voluntary Liquidation is also appropriate for solvent companies wishing to formally close their company, too. Members Voluntary Liquidation is the appropriate method of liquidating the assets of a solvent company, before it is dissolved and removed from the register at Companies House.
Why put a Company into Creditors’ Voluntary Liquidation (CVL)?
Here are the reasons for putting a company into Creditors Voluntary Liquidation:
- The company may have received a winding up petition or statutory demand from a trade creditor. Unable to pay its debts, it therefore wishes to place the company into a Creditors Voluntary Liquidation rather than a Compulsory Liquidation.
- The company may be insolvent on a balance sheet test, by virtue of its liabilities exceeding the assets of the company. As a result losses are only increasing and without a turnaround in the business’s fortune the Directors are conscious that continuing to trade might infringe on wrongful trading.
- The company is unable to pay its rent and as a result the landlord has appointed bailiffs to seize the assets of the company.
- The company has fallen behind on a time to pay agreement with HM Revenue & Customs and as a result the company has been issued a winding up petition.
- The company may have suffered a substantial bad debt and as a consequence is unable to meet its current liabilities which are now in arrears and trade creditors are now demanding payment.
- There could be a significant shift within a company’s industry to the extent that it impacts on the ability to trade. For example, a sudden change in industry standards or fluctuations within the market which renders a company’s current principal trading activity loss making.
It is, therefore crucial that steps are taken immediately to consult AABRS® once it is envisaged that the company is making losses and that it is uncertain as to the future of the business.
AABRS® offers a free initial consultation to discuss the financial position of the company and assess the current financial position. Please make contact with us via phone, email or live chat.
What is the Process for Creditors' Voluntary Liquidation?
The Companies Act 2006 provides the mechanism to convene a General Meeting of the shareholders in order to pass a Special Resolution to wind the company up. The process is initiated at a board meeting, which formally appoints AABRS®
to assist with the shareholders’ meeting and with the creditors’ decision.
The shareholders pass the resolution to wind the company up. The creditors’ decision on the appointment of the liquidator is then taken through a decision procedure, most commonly deemed consent or a virtual meeting, rather than the physical creditors’ meeting that was standard before the Insolvency (England and Wales) Rules 2016. A physical meeting is held if creditors representing the required threshold request one, or if deemed consent fails because creditors holding 10 per cent or more by value object. The shareholders’ general meeting normally needs 14 days’ notice, though enough members can agree to shorter notice. Creditors must get at least three business days’ notice, and their decision on the liquidator must normally be taken no later than 14 days after the resolution to wind up.
The board meeting will also grant the powers to AABRS® to instruct agents; contact the company’s bankers; liaise with HM Revenue & Customs; and obtain financial information from the company’s accountants in order to gather as much financial information about the company.
It is important to note also that this Directors meeting does not necessarily have to be a physical meeting as it can be conducted by virtual means e.g. a skype or facetime meeting.
Whilst notices have gone to shareholders convening the general meeting, and to creditors seeking their decision by deemed consent or a virtual meeting, the company is still formally not yet in liquidation and the directors are still officers of the company. Once insolvency is likely, they must consider the interests of creditors as a whole and give them proper weight, which grows as the position worsens and becomes paramount when insolvent liquidation is unavoidable.
During this period of time it is imperative that the Directors assist AABRS® in obtaining as much financial information about the company as possible e.g. handover of accounting records. This feeds the report to creditors and the Statement of Affairs. Both go to creditors before the decision date, rather than being tabled at a meeting. The Statement of Affairs must reach them no later than the business day before the decision date.
If the company owns various fixed assets, professional agents will be instructed to provide a detailed valuation report on the company’s assets by providing forced sale and going concern values.
AABRS® will also help employees claim arrears of wages, holiday pay, redundancy pay and pay in lieu of notice from the Redundancy Payments Service. Those claims are made online using the case reference number, which begins CN, that we provide once the liquidation starts. Paper RP1 forms are no longer used.
Shortly prior to the shareholders meeting, the directors’ sign a Statement of Affairs which is a summary of the assets and the liabilities of the company. This statement is obtained from the financial figures contained within the management accounting records of the company and any valuation reports received from professional agents who would have valued the company’s assets.
The directors verify the Statement of Affairs with a statement of truth and send it to creditors. They must do so within 7 days after the winding-up resolution, and no later than the business day before the creditors’ decision date. The shareholders will either be in attendance at the shareholders meeting or alternatively would have sent a proxy form either agreeing or rejecting the proposed winding up resolution.
The winding-up resolution is a special resolution, so it needs at least 75 per cent of the votes actually cast by members entitled to vote, or 75 per cent of the total voting rights of eligible members if it is passed as a written resolution. At a meeting, members who do not vote are not counted against it. On a written resolution, members who do not reply effectively count against it. A further resolution nominates a liquidator from AABRS® . The creditors then decide who acts, and if they nominate someone else, their nominee acts unless the court orders otherwise.
Creditors decide who acts as liquidator, but since the Insolvency (England and Wales) Rules 2016 that decision is not taken at a physical meeting as a matter of course. It is taken either by deemed consent or by a virtual meeting, with a physical meeting only if enough creditors request one or deemed consent fails because of objections.
Before the decision, creditors receive a report prepared by AABRS®
setting out the company’s financial position. It contains the statutory information about the company, extracts from the accounts for the last three financial years, a trading history, the Statement of Affairs, a list of creditors and a deficiency account.
Under deemed consent, the proposed decision is treated as made unless creditors representing at least 10 per cent in value object. If they do, the directors must seek the decision at a physical meeting instead. It must be held not earlier than three business days after notice and not later than 14 days after the objections reach that level.
Creditors can also insist on a physical meeting, and the threshold is low: a request from 10 per cent in value of creditors, 10 per cent in number, or simply 10 creditors, requires one to be held.
Where the decision is put to a vote, creditors can nominate a different liquidator. The decision passes on a simple majority in value of the creditors who vote and whose claims are admitted for voting. Creditors also have the right to ask the liquidator to look into particular concerns, and can challenge a decision within the period the rules allow.
Once appointed, the Liquidator will deal with the formalities of appointment. For example, notifying Companies House and placing an advertisement in the London Gazette.
Depending on the nature and complexity of the case, the liquidator may have to deal with the following matters: –
- Having instructed professional agents, the liquidator will deal with the formal disposal of company assets
- An investigation into the company’s books and records, and a report on the directors’ conduct to the Insolvency Service within 3 months of the resolution to wind up, unless the Secretary of State allows longer
- Instructing other recovery agent specialists in relation to other assets of the company e.g. book debt agents
- Claims of former employees to the Redundancy Payments Service, made online using the CN case reference we provide
- Should funds be available, the Liquidator will agree creditors’ claims and deal with any distributions to creditors.
The process of the liquidation could take between 6 months to several years depending on the case.
The liquidator has a duty to send progress reports on an annual basis to all creditors and shareholders advising on the progress of the liquidation during that preceding year. These reports are also filed at Companies House.
Once all assets have been realised and after costs and expenses, distributions have been made to creditors, the liquidator sends members and creditors a final account, including the final receipts and payments account. It comes with notice that the liquidator will be released on vacating office unless a creditor objects in writing within eight weeks of the notice, or later if a creditor has asked for information or applied to court. Final meetings were abolished in England and Wales from 6 April 2017 by the Small Business, Enterprise and Employment Act 2015.
The company is dissolved three months after the final account is registered at Companies House, unless the court defers the date on application.
What the Advantages and Disadvantages of Creditors Voluntary Liquidation?
Advantages
- Directors have more control than in a compulsory liquidation
- Creditor pressure moves off the directors and on to the liquidator, though a CVL creates no automatic moratorium
- Reduced Risk of Wrongful Trading
- It may be possible to purchase back the assets
Disadvantages
- Any insolvent liquidation, including a CVL, brings with it an investigation into the directors’ conduct and dealings
- Any personal guarantees may be called in by the lender
- The insolvency will be advertised publicly in the London Gazette
- Shareholders are unlikely to receive any returns
What’s the job of a Liquidator in a CVL?
The law requires that the liquidator be a qualified and licensed insolvency practitioner. The liquidator is an office-holder with statutory duties, and must act in the interests of the creditors as a whole rather than for any one of them, or for the directors.
The liquidators principal role is to realise the company’s assets and distribute the proceeds to creditors.
The liquidator also has wide-ranging powers to investigate the conduct of the directors and, where appropriate, to pursue civil claims including wrongful trading or misfeasance. These are claims for a contribution to the company’s assets, not criminal charges: a liquidator does not bring charges. The liquidator must also report on the directors’ conduct to the Insolvency Service, which decides separately whether to seek a disqualification.
How Long does a Creditors Voluntary Liquidation Take?
Once the shareholders pass the resolution to wind up, the decision date for the creditors’ decision on the liquidator must normally be no later than 14 days after the resolution. The preparation before that resolution adds to the total time.
The liquidation process which follows – whereby the insolvency practitioner will realise the company assets – is likely to take considerably longer. Of course the time frames will depend on the size of the company and the complexity of its assets.
How Much Does it Cost?
For many directors, trepidation around the potential costs of voluntary liquidation may delay the process to the point where you are forced into compulsory liquidation by creditors, a significantly more challenging scenario in most cases.
The first thing to realise is that costs for a CVL are usually taken from the realisation of assets and need not come from the directors’ pockets.
A director who qualifies as an employee may also choose to use their own redundancy entitlement towards the fees.
Can you Reverse a Creditors Voluntary Liquidation?
Voluntary Liquidation is usually chosen as a course of action to prevent impending action by creditors, such as a Winding up Petition, which might lead to compulsory liquidation.
Reversing a liquidation is difficult and it is not a decision the directors can take themselves. Once the liquidator is appointed, the directors’ powers cease, except so far as the liquidation committee (or, if there is none, the creditors) sanction their continuance. Where circumstances genuinely change, an application can be made to court to stay the liquidation, and in a compulsory case to rescind the winding-up order, but these are court remedies granted on their own tests and they are not common. Take advice quickly, because what is realistically available narrows as assets are realised.
A company dissolved at the end of a liquidation can only be restored by a court order. Administrative restoration, an application to Companies House, is available only where Companies House struck the company off on its own initiative, for example as defunct. It is not available where the directors applied for the strike-off. A former director or member must apply within 6 years of dissolution.
Can Directors be Held Personally Liable?
Once an insolvency practitioner has been appointed to liquidate the company, there is no avoiding the fact that directorial conduct will be investigated in the period preceding insolvency. The IP is tasked with ensuring no wrongful or fraudulent activity took place, to the detriment of the creditors, and they will do their due diligence in examining the relevant facts.
If the liquidator finds evidence of misconduct, what follows depends on what the evidence shows, because these are separate regimes rather than a single penalty. Wrongful trading is a civil claim under sections 214 and 246ZB of the Insolvency Act 1986: the court can order a director to contribute to the company’s assets, and it requires no dishonesty. Fraudulent trading requires actual intent to defraud, and has both a civil form under section 213 and a separate criminal offence under section 993 of the Companies Act 2006. Misfeasance is a further civil route for recovering money or property a director has misapplied. Preferences and transactions at an undervalue can be reversed on their own tests.
Director disqualification is separate again. It is pursued by the Insolvency Service, it turns on unfitness, and it can result in a ban of up to 15 years. The court can also order a disqualified director to pay compensation to creditors whose losses the conduct caused. A disqualification does not by itself make a director liable for the company’s debts.