If you’re a director faced with creditor pressure, you may be researching voluntary insolvency.
In this article, we’ll explain how choosing insolvency, before it is forced upon you, can offer less restriction and a better result than waiting to be forced into liquidation.
Why Choose Voluntary Insolvency?
If your company is insolvent, or will be very soon, you’re in a tough situation. Perhaps you already have angry letters from creditors, or HMRC, piling up on the doormat.
In this situation, waiting or burying your head in the sand is the worst thing you can do. Rather, choosing voluntary insolvency is a way to stare the situation in the face, receive professional advice on consequences, and then begin the journey towards closing the company down.
Choosing voluntary insolvency, known as a creditors’ voluntary liquidation (CVL), means that once the liquidator is appointed, creditors deal with the liquidator and most enforcement against the company stops in practice. There is no automatic legal moratorium in a CVL. The company has no protection before the shareholders pass the winding-up resolution, and after it a creditor can still sue or petition unless the court stays the proceedings. Personal guarantees you gave as director are not affected. The appointed insolvency practitioner will notify all creditors of the situation, as well as taking over all communication with them.
Once the liquidator is appointed, your powers as director cease, unless the liquidation committee or the creditors sanction their continuing. The liquidation itself does not stop you taking employment. Nor does it stop you becoming a director of another company, unless you are later disqualified after the liquidator reports on your conduct. One restriction does bite, and it catches people who do not expect it: under section 216 of the Insolvency Act 1986, if you were a director or shadow director in the 12 months before the company went into insolvent liquidation, for five years you cannot be a director of, or involved in, a company or business that uses a name the liquidated company used in those 12 months, or a name so similar that it suggests a link with it, unless the court gives permission or one of the three exceptions in the Insolvency Rules applies. Breaching it is a criminal offence and makes you personally liable, jointly with the new company, for the debts it runs up while you are involved in managing it. Take advice before you reuse a trading name.
What’s the Process of Voluntary Liquidation?
- Directors Board Meeting – the directors resolve to propose a voluntary winding up and put a special resolution to the shareholders, either at a general meeting or, for a private company, as a written resolution.
- Shareholders and creditors are notified. The directors prepare a Statement of Affairs, usually with the Insolvency Practitioner’s help, listing the company’s assets, debts and liabilities, its creditors and any security they hold. They verify it by a statement of truth (for a company registered in England and Wales) and send it to creditors within 7 days after the day the winding-up resolution is passed, or by the business day before the creditors’ decision date if that is earlier.
- Liquidation Begins – Assuming the shareholders pass the special resolution, the liquidation will begin. At a general 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 of those eligible to vote. In this process, it’s the IP’s job to gather and sell company assets prior to repaying creditors all or a proportion of their debts.
- Directors Investigations – Part of the IP’s job is to investigate the actions of directors in the period running up to insolvency for wrongful or fraudulent trading.
- Dissolution – Once the money has been distributed and the liquidator’s final account is registered at Companies House, the company is dissolved three months later, unless the court defers the date. Dissolution means it no longer exists.
Advantages of Voluntary Liquidation
- You can avoid a public court case with creditors
- You nominate the insolvency practitioner, rather than having the official receiver take office automatically. The creditors decide, and can appoint someone else, but most nominations are unopposed
- You act rather than wait, which is what a later review of your conduct looks at. The investigation itself is no lighter in a voluntary liquidation — the liquidator must report on the directors’ conduct, just as the official receiver must in a compulsory liquidation
- You can show your customers that you chose to liquidate voluntarily rather than being forced into it
- Above all it’s a quick and easy way to close down your company, and once the liquidator is appointed creditors deal with the liquidator rather than you. There is no automatic legal bar on creditor action, and personal guarantees still stand
How Long Does it Take?
There’s no fixed timetable for putting the company into voluntary liquidation — it depends on how quickly the board and shareholders act, the notice periods involved, and the creditor decision procedure used. How long it takes to complete the entire process will then depend on the complexity of the assets which need to be sold.