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)
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:
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:
That the company be wound up voluntarily
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.
Creditors Decision Procedure
The creditors decision procedure enables the creditors to ratify the shareholders nomination of a liquidator or if they so select, for the creditors to request that a physical meeting be held in order to allow creditors to appoint a liquidator of their choosing.
The most common creditors decision procedure is by deemed consent. In this procedure creditors are given notice of the shareholders nominated liquidator and the nominated liquidators appointment is ratified automatically unless creditors object.
As an alternative to deemed consent creditors are given notice of a virtual meeting of creditors. This
can be conducted by teleconference or by video conference.
Notice of Creditors Decision Procedure
The company must send notice of the creditors decision procedure to all creditors, giving 3 business days notice. This notice must also be advertised in the London Gazette.
The decision procedure must be held within 14 days of the shareholders meeting at which the resolutions to wind the company up and appoint a liquidator were passed.
In practice the date of the decision procedure is usually the same as the date of the meeting of shareholders.
What happens next?
After the creditors decision procedure has been completed the appointed liquidator’s primary role is to realise the Company’s assets. Money raised from the realisation of assets will be used first to discharge the costs of the liquidation and then to pay the Company’s creditors. Secured and preferential creditors will be paid first. Unsecured creditors are paid on a pari passu basis i.e. each creditor will receive a dividend in proportion to the value of his debt.
The realisation of assets comprises not only physical assets such as stock and plant and equipment but also the recovery of any company assets / monies which had been dissipated by means of an antecedent transaction, typically a preference or a transaction at an undervalue.
The liquidator will also collect any debts owed to the Company including any amounts owed by the Directors under an overdrawn loan account. The liquidator also has a duty to report on the conduct of any Director of the Company in office within 3 years of the date of liquidation – see Implications for Director.
In a CVL the liquidator must submit a report of the conduct of anyone who has been a director of the company in the last three years.
The report is confidential and is submitted to the Department of Business, Innovation and Skills. The Department will assess the report and decide whether or not the directors in question should be allowed to act as directors of other limited companies in the future.
When preparing his report on the directors’ conduct the liquidator will look at a variety of issues, which include:
Non payment of crown debts
Taking customer deposits
Misuse of a debt factoring account
Personal benefits obtained by directors
The liquidator will also take into account:
The adequacy of the book keeping
Professional advice taken
Any evidence in support of insolvent trading
The Department has the power to ban directors from holding office for a period of 2 – 15 years.