Company Voluntary Liquidation (CVL)
To choose to place his or her company into Creditors Voluntary Liquidation (CVL) is the ultimate sanction any Director or Shareholder can have.
It is a decision not to be taken lightly and should only be taken after first having sought independent professional insolvency advice.
If your company cannot pay its debts as and when they fall due and/or the value of its liabilities is greater than the value of its assets then as set out in S123 of the Insolvency Act 1986 your company is insolvent.
As a director of an insolvent company your focus and attention must be on the company’s creditors. If the company continues to trade the creditors position must not be made worse. You must also be mindful of the implications for you as a Director. Continuing to trade an insolvent company without proper planning and consideration puts you at risk of being liable for claims of wrongful trading or misfeasance. These claims are made against you personally and not the company.
Before taking the decision to place your company into a CVL there are some important questions
you must ask, such as:
- Can the business, if not the company, be saved?
- Are there steps which can be taken to return the company to solvency? E.g. cutting costs or increasing sales / prices?
- Is the company under threat from its creditors? E.g. has a statutory demand or winding up petition been served?
A CVL may be the solution to the company’s insolvency but other alternatives must and should not be ruled out before placing the company into a CVL, these include:
- An informal arrangement with creditors
- A formal arrangement with creditors (Company Voluntary Arrangement)
- Pre-pack Administration
We can help you to make the right decision.
If a company cannot pay its debts when they fall due i.e. it is insolvent, then the directors can take steps to place the company into Creditors Voluntary Liquidation (CVL).
The process starts at a formal board meeting of directors at which they resolve that the company be wound up voluntarily, that a liquidator be appointed, The Directors will also resolve that notices be sent to all shareholders calling a shareholders meeting at which the formal resolutions to place the company into CVL will be passed.
Fourteen days notice is required to call the meeting of shareholders. This period can be reduced under certain circumstances, for example, if there are assets in jeopardy.
In order to place the company into liquidation the resolution must be passed by a 75% majority of shareholders.
At the board meeting the Directors will also resolve that notice be given to the company’s creditors, bankers and employees. After the board meeting, if not before, the company should not incur any further liabilities and increase its indebtedness to its creditors.
Creditors are informed of the process for appointing the liquidator. This takes the form of Deemed Consent by virtual meeting or electronic voting, or at a physical meeting if requested by the creditors. A physical meeting can be requested under the 10/10/10 rule, that is by
10 creditors, 10% of the total number of creditors or by 10% of the value of the company’s unsecured debts.
As notice to the creditors and the shareholders is given at the same time it is usual for the shareholders meeting and the appointment process to happen on the same day.
Typically, on the appointed day, the shareholders resolutions will be passed formally placing the company into liquidation and appointing a nominated liquidator, this is followed by the appointment process, where the creditors can either ratify the decision of the shareholders or if they wish, nominate an alternative liquidator by requesting a physical meeting.
The alternative to Deemed Consent is a Creditors Decision Procedure which includes:
- Electronic voting
- Virtual meeting
Of the two alternatives, a virtual meeting is the more popular method of appointment.
After the board of directors has determined that the company be placed into a CVL, a general meeting of shareholders must be called, a period of 14 days notice is required for the general meeting. In exceptional circumstances when it is necessary to place a company immediately into a CVL the shareholders meeting can be held at short notice, provided 90% of shareholders agree to waive their entitlement to receive full notice of the meeting. At this meeting the following resolutions are passed:
- Special Resolution
- That the company be wound up voluntarily
- Ordinary Resolution
- That a liquidator be appointed
As set out in the Companies Act 2006, special resolutions must be passed by a 75% majority, so in reality, for the company to be wound up and a liquidator appointed 75% of the shareholders must agree.
Upon the passing of the resolutions the company is now formally in liquidation. Control of the company passes from the directors to the nominated liquidator. Upon the appointment of the liquidator the Directors’ executive powers cease.
If, for some reason it is not possible or impracticable to hold a meeting of shareholders, as an alternative, the shareholders can place the company into winding up and appoint a nominated liquidator by written resolution.