Creditors Voluntary Liquidation (CVL)
Liquidation is the formal process by which a company’s affairs are dealt with, its assets realised and the proceeds distributed to creditors in a defined order of priority. When the process has been completed the company will be removed from the Companies Register and will cease to exist. There are three procedures by which a limited company may be liquidated. If the company is insolvent it can either be placed into Creditors Voluntary Liquidation or Compulsory Liquidation. If the company is solvent it can be placed into Members Voluntary Liquidation.
Creditors Voluntary Liquidation
Creditors Voluntary Liquidation (CVL) is the usual procedure by which a company will be placed into liquidation. This is because directors of an insolvent company have a duty to act in the interest of the company and its creditors and by placing the company into CVL, they are able to discharge that duty. It is in the directors interest to take action at an early stage in order to minimise the risk of personal liability, such as with Wrongful Trading, and also avoid the scrutiny of the Official Receiver should the company to be placed into Compulsory Liquidation.
The process is started by the company’s shareholders who pass resolutions placing the company into liquidation and appointing a liquidator. However, the liquidation is under the effective control of the creditors who can either accept the shareholders choice of liquidator or alternatively appoint a liquidator of their choice.
A summary of the procedure for placing a company into CVL is as follows:-
- The directors take professional advice from a Licensed Insolvency Practitioner and if liquidation is the best solution to the company’s problems, meetings of shareholders and creditors are convened.
- The meeting of creditors is advertised in two local newspapers and the London Gazette.
- The meetings must be convened on at least seven days notice with good practice being on at least fourteen days notice.
- The creditors meeting will usually take place 30 minutes after the shareholders meeting. (However, in rare circumstances it may be necessary to place the company into liquidation immediately without giving notice in which case the creditors meeting will take place up to fourteen days later.)
- At the shareholders meeting a Special Resolution is passed placing the company into liquidation and an Ordinary Resolution is passed appointing the liquidator.
- At the creditors meeting a statement of affairs and a report on the history of the company and causes of failure is presented to the meeting. Creditors may question the directors (although in practice it is now rare for many, if any, creditors to attend) and either confirm the liquidators appointment or very occasionally appoint their own choice. If sufficient creditors are present a Liquidation Committee may be formed.
- The liquidators duties are to realise the company’s assets, investigate the affairs of the company, agree creditors claims, distribute any funds and report to creditors on the conduct of the liquidation.
A Compulsory Liquidation is a liquidation which is ordered by the Court, usually on the petition of a creditor, but it may also be on the petition of the company, a shareholder or even the Secretary of State.
A summary of the procedure for placing a company into Compulsory Liquidation is as follows:-
- A Winding Up Petition is issued against the company, usually on the grounds of insolvency.
- A Court date will be set some weeks later at which the petition will be heard.
- The petition is served on the company and will be advertised in the London Gazette.
- During the period between the issuing of the petition and the Court hearing, the company has the opportunity to pay the petition debt and so avoid liquidation.
- At the hearing of the petition the Court will usually make the winding up order at which point the company will be placed into Compulsory Liquidation. (The Court may also adjourn the hearing or even dismiss the petition if it thinks fit.)
- Once the winding up order has been made the Official Receiver becomes liquidator and has a duty to investigate the affairs of the company, and report to creditors. The winding up order is advertised in the London Gazette and an appropriate newspaper.
- If there are sufficient assets the Official Receiver may convene a meeting of creditors to appoint an Insolvency Practitioner as liquidator in his place.
- If an Insolvency Practitioner is appointed as liquidator his duties are to realise the assets, agree claims and distribute any funds to creditors. The Official Receiver retains his responsibility for investigating the conduct of directors and other officers as well as any other investigation work required.
Members' Voluntary Liquidation
Where a solvent company is required to be liquidated, it is liquidated using the Members Voluntary Liquidation procedure. In a Members Voluntary Liquidation the liquidator is appointed by the shareholders and the creditors have no say as they will be paid in full, together with statutory interest, within a period of twelve months. The reasons for liquidating a solvent company could include the owners wishing to retire and release their capital or a group of companies may wish to close down a subsidiary which is no longer required.
Once the company is in liquidation the liquidators duties are to realise the assets, agree and pay creditors claims and distribute the remaining funds to shareholders.