Companies fall into financial trouble all the time and can find themselves in a position where they are unable to pay their creditors. Creditors can present a petition to the company to force it into compulsory liquidation.
But rather than a creditor forcing a company into insolvency, it can opt to use another mechanism. Creditors’ Voluntary Liquidations can protect directors and shareholders from financial demands by opting. The company may want to proceed with a CVL if it believes the debts exceed any realistic ability to pay them off.
A CVL gives the directors and shareholders greater control of the timeline and who the appointed liquidator will be. Once the directors appoint a liquidator, they will deal with all consequent legal matters on the company and its CVL.
How Are Liquidators Appointed to a Creditors’ Voluntary Liquidation (CVL)?
When a company enters into insolvency, the directors need to change their routine. Directors must shift the desire to protect their shareholders and focus instead on repaying their creditors.
The directors should prepare all legal and financial statements. The directors can then present these documents as evidence to their insolvency practitioner. The liquidator must be a licensed practitioner and be the first point of contact for the directors.
Missing or hidden evidence can cause the proceedings to focus on the directors. And directors that continue to trade in an insolvent company can become personally liable to the creditors.
The liquidator will counsel the directors on the best course of action. A liquidator will recommend the best type of insolvency for the business, its directors, and its creditors. The insolvency practitioner may even suggest a restructuring plan to make the debts more manageable.
It is common practice for the liquidator to control all the finances – prioritizing and paying off debts with any residual income.
What Is the Role of the Liquidator in a Creditor’s Voluntary Liquidation (CVL)?
Once the directors appoint a liquidator, they must follow that liquidator’s instructions on how to repay creditors.
A liquidator’s tasks will include, but may also go beyond: –
- Accessing and understanding all company financial records to get to the root of its failure.
- Collecting unpaid invoices, receipts from asset sales, and owed monies.
- Repaying creditors in order of priority: secured creditors, pre-appointment fees.
- Paying the liquidators fees and expenses. Then the residuals can go to the unsecured creditors, and finally, the shareholders.
- Pursuing dishonest directors. Some directors may have used company funds to support their families or buy non-conforming disposable goods.
Directors of a company often prefer a dividend-focused package with a large expenses account. This is tax beneficial to the director, but during a liquidation, all dividend payments and expenses should stop.
A director may have taken dividends for several years leading up to the liquidation. The liquidator can claw back these dividend payments for the benefit of the creditors. Since the directors must follow the instructions of the liquidator, they must remain on the board. the directors will recommend, inform, and conform to the liquidator.
The director’s company agreement may include personal guarantees. If this is the case, the director must also assist the liquidator in recovering these assets.
Note: Since December 2020, the HMRC debts have become preferential. The HMRC now sits in front of debts owed to unsecured creditors.
How Do You Place a Company into a Creditors’ Voluntary Liquidation (CVL)?
A CVL is an uncomplicated process under the guidance of a liquidation professional. Though unpleasant, a CVL is still a far more organised avenue for a business in severe financial trouble.
There are several steps to take when entering a business into voluntary liquidation. Each step must be done in order as below: –
- Enlist the skills of an insolvency practitioner to advise on the course of action and how to prevent further legal action.
- The directors should give a 14-day notice to the shareholders. The notice will state that they are calling an extraordinary general meeting to vote on a resolution to wind up the business and name a liquidator.
- For the wind-up resolution vote to win, there must be at least a 75-percent shareholder majority.
- During this 14-day voter notice period, the liquidator will use this time to notify all creditors. This notice includes the company’s wish to enter voluntary liquidation.
- Creditors are entitled to 3 business days’ notice of the company’s intention to enter a CVL.
- Creditors have this time to assess the liquidator appointment and whether they want to oppose them; a lack of engagement is a deemed consent.
- The directors must provide the liquidator – and creditors – with the relevant financial documentation. These documents will aim to justify the company’s decision to enter into a CVL.
- If a creditor has questions or concerns, they should be allowed to voice these to the liquidator via scheduled virtual meetings. The Liquidator must provide the details on how to be involved in such meetings and the times to do so.
- If the majority vote for the liquidation to proceed wins, the liquidator will file a notice to the Company’s Registration House. And then publish the intention of liquidation in The Gazette.
- Once the Liquidator is appointed, they assume the power to investigate the company’s finances. The liquidator can and should call on all sources of information to reinforce the documents given to them by the directors.
- The directors are under constant review during a CVL. And the liquidator will compile a report of their actions during the proceeding to the insolvency service for further review.
- Misconduct can lead to the disqualification of a director.
- After all sales of assets and settling of accounts to creditors, the liquidator can apply for a final cut-off.
- This requires the liquidator to advertise out to any other creditors. This allows for missed creditors to make a justified claim under the insolvency Act 1986. The liquidator can then finalise the accounts.
When all the steps are complete and agreed upon, the CVL will be deemed complete. The liquidator can then apply for the company to be struck off from the Companies Register House.
Further claims and debts are written off unless still under the personal guarantee of a director. In the case of a personal guarantee, the creditors can still pursue the guarantor.